Pricing sequential forward power contracts

Pricing mechanisms for multistage power procurement under uncertainty are studied in this paper. We first consider the most natural pricing mechanism in which the power at each stage is priced uniformly at the temporal marginal price. Under the truth-telling assumption, we show that this mechanism is price equivalent, efficient and flexibility subsidizing. Motivated by the observation that this mechanism is vulnerable to misreporting, we propose an alternative mechanism termed dynamic marginal contribution pricing, for which periodic ex post incentive compatibility is proved. Case studies illustrate the theoretical results obtained in this paper.