A recovery mechanism with loss-related profits in a day-ahead electricity market with non-convexities

In wholesale electricity markets, unit commitment costs and capacity constraints create non-convexities which may bring about losses to some of the participating generation units. To keep the losing units in the market, a recovery mechanism that makes them whole is needed. In this paper, we present a recovery mechanism which compensates the units that incur cost-based losses with recovery payments, in order to ensure that they end up with positive profits. The profits resulting from the recovery payments are loss-related. More specifically, a losing unit will receive recovery payments to end up with final net profits that are set to a percentage, say α, of the losses. We evaluate this mechanism with a simulation-based methodology for certain values of the regulating parameter α, and the results show that this mechanism produces relatively low uplifts. We also comment on the pros and cons of this design and provide directions for further research.