Fair pricing mechanism for coalitions in rural areas

The constant expansion of Renewable Energy Source (RES) installations results in increasing the price of electricity in an unsustainable way due to the Feed-In-Tariff (FIT) policy currently being used. The challenge is to create a more liberalized market mechanism without, however, deterring further small scale RES investments, which remain costly. In the current paper, we consider the local electricity market in a given country or geographical area (rural, island, or other), where a certain portion of demand is asked to be covered from DERs. As DERs tend to be to some extend isolated from the main grid, it is possible and desirable for a group of DERs in a geographical area to be organized in a static local association that acts as a multi-plant organization. If the DERs (being small and many, thus "price takers") negotiated as individual units with the market operator, they would achieve a price that is close to their marginal cost, which would be very small, much smaller than their average total cost. In this paper, we provide an algorithm that allows the coalition to offer its electricity production units at a higher price than normal market price without endangering their market share. The price they achieve is higher than if they participated in a complete liberalized market, but less than the tariff of the FIT policy. Interestingly, we find that the coalition has an optimal price at which its profits are maximized. Finally, we observed that if there are limited participants (coalitions) in the local electricity market, an upper bound needs to be set by a regulator, otherwise, the coalition will set the price at will.