On the Stability, Economic Efficiency and Incentive Compatibility of Electricity Market Dynamics

TL;DR

This paper models electricity market dynamics as a system that ensures stability, efficiency, and incentive compatibility, analyzing participant behavior and proposing mechanisms to prevent destabilization in real-time bidding environments.

Contribution

It introduces a dynamical system framework for electricity markets, characterizes conditions for stable convergence, and designs regularized dynamics to maintain stability under misaligned incentives.

Findings

Market dynamics can be stabilized with saddle-based design.

Misaligned bidding can destabilize the system.

Regularized dynamics restore stability and performance.

Abstract

This paper focuses on the operation of an electricity market that accounts for participants that bid at a sub-minute timescale. To that end, we model the market-clearing process as a dynamical system, called market dynamics, which is temporally coupled with the grid frequency dynamics and is thus required to guarantee system-wide stability while meeting the system operational constraints. We characterize participants as price-takers who rationally update their bids to maximize their utility in response to real-time schedules of prices and dispatch. For two common bidding mechanisms, based on quantity and price, we identify a notion of alignment between participants' behavior and planners' goals that leads to a saddle-based design of the market that guarantees convergence to a point meeting all operational constraints. We further explore cases where this alignment property does not hold and observe that misaligned participants' bidding can destabilize the closed-loop system. We thus design a regularized version of the market dynamics that recovers all the desirable stability and steady-state performance guarantees. Numerical tests validate our results on the IEEE 39-bus system.