Market Performance Assessment in Locational Markets with Non-Convexities
We extend the competitive benchmark pricing model of Borenstein et al. (2002) to locational-pricing markets. We further extent this model to account for transmission network security constraints as well as technical constraints on thermal power plants that introduce non-convexities in their operating cost functions. We apply both models to assess the performance of the Italian wholesale electricity market for the year 2018. Hourly competitive benchmark locational prices that ignore the impact of non-convexities in generation unit operation fail to provide credible estimates for the intra-day benchmark price profile. Augmenting the model to account for transmission network security constraints and non-convexities resolves this issue. We find that the average day-ahead market-clearing prices throughout the day are close to average competitive benchmark prices throughout the day during 2018. However, accounting for the cost of the re-dispatch market that makes final schedules from the day-ahead financial market physically feasible, raises the average hourly cost of serving demand. Our preferred competitive benchmark pricing model implies annual market inefficiencies in the range of 1 to 2 billion Euros in the actual annual cost of serving load in 2018 in ltaly.