Pricing Non-Convexities in an Electricity Pool

Electricity pools are generally cleared through auctions that are conveniently formulated as mixed-integer linear programming problems. Since a mixed-integer linear programming problem is non-continuous and non-convex, marginal prices cannot be easily derived. However, to trade electricity, prices are needed. Thus, a relevant question arises: how does one generate appropriate prices? This paper addresses this important issue and proposes a primal-dual approach to derive efficient revenue adequate uniform prices that guarantee that dispatched producers are willing to remain in the market. Such prices may not significantly deviate from the marginal prices obtained if integrality conditions are relaxed in the original mixed-integer linear programming problem. Two case studies illustrate the functioning of the proposed pricing scheme.