Nodal, uniform, or zonal pricing: distribution of economic surplus

Competitive markets for electricity determine either a uniform marginal price (UMP), a set of nodal marginal prices (NMPs), or a smaller set of zonal marginal prices (ZMPs). In theory, the NMP system is best, as it correctly accounts for transmission constraints (and losses in some versions), but critics allege that the large number of prices is confusing. Since the UMP or ZMP solution must be adjusted to account for transmission constraints and losses, it is reasonable to consider a market design in which actual dispatch corresponds to an NMP model that accounts for losses, and if a UMP or ZMP model is used at all, it is only to compute prices for settlements and compensation for constrained-on or -off generation or load. We prove that, if used in this way, the UMP or ZMP models a) do not affect the total economic surplus, b) redistribute the surplus among generators and loads at the different nodes, and c) give perverse incentives for generation expansion. We illustrate on a realistic system.