Economic Inefficiencies and Cross-Subsidies in an Auction-Based Electricity Pool

This paper compares two contrasting yet often used electricity market-clearing procedures: an auction-based algorithm including congestion management and transmission loss cost allocation and an optimal power flow. The suction procedure produces a single-period unit commitment and, hence, can be compared directly to an optimal power flow solution. These algorithms are compared in terms of the economic efficiency of the solution attained, and in terms of cross-subsidies among generators and demands. The purpose of this comparison is to quantify the actual cost to market participants of using a simple, seemingly transparent procedure, such as an auction-based algorithm, versus an integrated but computationally intensive one, such as an optimal power flow.