Spot market mechanism design for the electricity market in China considering the impact of a contract market

Abstract

To promote the reformation of the electricity market in China, a market mechanism that can support collaboration between the contract market and the upcoming spot market was designed in this paper. The focus of this paper was to develop a mechanism to institutionally stabilize the market by way of disciplining market power abuse through limiting arbitrage opportunities generated from multi-markets. To quantitatively describe the arbitrage opportunity, the arbitrage opportunity function (AOF) was defined. Based on inferences of the no-arbitrage principle and the AOF, a cost-based decomposition algorithm for contracts that could improve contract coverage was proposed. The incentive compatible settlement rule for the uncovered generation on the spot market was designed to properly manipulate the arbitrage opportunity. The decomposition algorithm and the settlement rule constituted the designed market mechanism. To verify the applicability and effectiveness of the proposed mechanism, the principles of incentive compatibility, individual rationality, and payment cost minimization were employed to test the designed market mechanism based on the concept of dominant policy equilibrium. This test was conducted on a fictitious case based on the IEEE-14 system. The analysis and results may provide valuable insights on market design in China based on the functional correlation between the contract market and the spot market.