Electricity market-clearing prices and investment incentives: The role of pricing rules

a r t i c l e i n f o Pricing rules in wholesale electricity markets are usually classified around two major groups, namely linear (aka non-discriminatory) and non-linear (aka discriminatory). As well known, the major difference lies on the way non-convexities are considered in the computation of market prices. According to the classical marginal pricing theories, the resulting market prices are supposed to serve as the key signals around which capacity expansion revolves. Thus, the implementation of one or the other pricing rule can have a different effect on the investment incentives perceived by generation technologies, affecting the long-term efficiency of the whole market scheme. The objective of this paper is to assess to what extent long-term investment incentives can be affected by the pricing rule implemented. To do so, we propose a long-term capacity expansion model where investment decisions are taken based on the market remuneration. We use the model to determine the optimal mix in a real-size thermal system with high penetration of renewable energy sources (since its intermittency enhances the relevance of non-convexities), when alternatively considering the aforementioned pricing schemes. Wholesale electricity market restructuring has been ongoing since the original liberalization processes of electric power sectors started back in early eighties in Chile. Yet, the unavoidable complexities of electricity generation have led to many different market designs and many associated regulatory questions (many of which remain open). In general , each design includes various markets to represent different timescales in which energy and ancillary services are traded (Batlle, 2013). This sequence of markets could be classified into long-term markets, day-ahead markets (DAM) and intraday plus balancing markets (in the EU) or real-time markets (in the US). The core of wholesale markets is commonly the DAM, whose purpose is to match generators' offers and consumers' bids to determine electricity prices for each time interval of the following day. However, this can be achieved in a number of different ways and, as mentioned, DAMs evolved very differently in each system. An essential difference lies in the way generators can submit their offers. As explained in detail in Batlle (2013), in the majority of European Power Exchanges, market clearing is built upon simple bids (i.e. generators submit quantity-price pairs per time interval). Although some additional semi-complex conditions can be added to the bids (as for instance block bids linking bids in consecutive time intervals), this approach does not …