Achieving economic efficiency in the electricity markets through internalizing negative externalities

Author:

Hacopian Dolatabadi Sarineh1,Latify Mohammad Amin1ORCID,Karshenas Hamidreza1,Sharifi Alimorad2

Affiliation:

1. Department of Electrical and Computer Engineering Isfahan University of Technology Isfahan Iran

2. Department of Economics University of Isfahan Isfahan Iran

Abstract

AbstractEconomic efficiency is the ultimate goal of all markets, including the electricity market. Several technical and pecuniary restrictions known as externalities in economics literature can significantly affect the economic efficiency of the electricity market. Negative externalities resulting from the operational restrictions of generation units are inherent to electricity markets. In this paper, after reviewing the effects of externalities on the day‐ahead electricity markets' economic efficiency using a unit commitment‐based model, an innovative and theoretically efficient service‐based procedure aimed at internalizing negative externalities in the day‐ahead electricity markets is presented. In this way, a new service procured by the energy storage system to provide energy interchange possibilities in the electricity market is introduced. The proposed service uses both price and quantity adjustment methods to internalize externalities. A new discriminatory method for pricing the service and a bi‐level optimization problem for determining the capacity of the energy storage system required to provide the service are considered. The consideration of the proposed method facilitates reaching the first‐best optimal market solution by alleviating negative externalities existing in the sub‐optimal second‐best solution in the presence of generation sector operational constraints. Numerical case studies demonstrate the functioning of the proposed externalities internalization scheme.

Publisher

Institution of Engineering and Technology (IET)

Subject

Electrical and Electronic Engineering,Energy Engineering and Power Technology,Control and Systems Engineering

Reference39 articles.

1. Design of Efficient Generation Markets

2. Economic inefficiencies of cost‐based electricity market designs;Francisco D.M.;Energy J.,2018

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