Comparison of different auction pricing rules in the electricity market

Abstract

The objective of this study is to investigate the impact of different auction pricing rules on the market performance in the context of the competitive electricity market. In pursuing this objective, a simplified model of auction based electricity market has been designed and three distinctive pricing rules are analyzed: uniform pricing, pay-as-bid pricing and the Vickrey-Clarke-Grove pricing. Using agent-based modeling approach, generators have been modelled as agents submitting price-quantity bids to the market. The Simulated-Annealing Q-learning algorithm has been adopted as the learning mechanism for the agents so they can maximize their profit using strategic bidding. The computer simulation is used to test the effect of the different pricing rules on the total dispatch cost, bid price and generators' profit. In addition, the generating capacity of one of the competing agents is altered to a significantly larger size to evaluate the effect of the relative market share on total dispatch cost and agents' welfare. This study concludes that the pay-as-bid auction can complicate the way bidders learn and react about each other's strategy. While uniform pricing results in high and volatile total dispatch cost in the market and pay-as-bid pricing induces truthful bidding leading to low dispatch cost, Vickrey pricing seems to provide a good balance between controlling the total cost and its stability. The theoretical and practical contributions of this study are also discussed in the paper.