The Cost of Anarchy in Self-Commitment Based Electricity Markets

With the advent of restructured electricity markets a contentious market design issue has been whether unit commitment decisions should be made centrally by the system operator or by individual generators. Although a centrally committed market can, in theory, determine the most efficient commitment, they have been shown to suffer some equity and incentive problems. A self-committed market can overcome some of these incentive issues, but will generally suffer efficiency losses from not properly coordinating commitment and dispatch decisions between individual generators. This paper examines the issue of dispatch efficiency raised by the design of markets based on central versus self-commitment by determining a set of ‘competitive benchmarks’ for the two market designs. Comparing the total commitment and dispatch costs of the two markets provides a bound on the productive efficiency losses of a self-committed market.