Regulation and double price mechanisms in markets with friction

In previous work we modeled the real-time power market as a dynamic system and presented an “efficiency-volatility” trade-off theorem stating that in markets with supply friction, an efficient market must have volatile prices. In this paper we introduce a novel market mechanism for power markets where there are two prices: one for the real-time power market for suppliers who have friction and another for frictionless ancillary supply with a marginal cost higher than that of regular suppliers. We show that for a given level of acceptable price volatility the double price system with the ancillary supplier is more efficient than the single price system without the frictionless ancillary supplier.