Payment minimization auction for deregulated electricity markets considering transmission capacity constraints

Standard market design for deregulated electricity markets adopts locational marginal pricing mechanism to manage transmission congestion. Currently independent system operators who run the electricity markets determine the power schedule by minimizing the total supply offer costs in auctions, but use marginal prices for payment in the subsequent settlement process. This inconsistence between the auction mechanism and the settlement mechanism has been pointed out, and payment minimization auction that minimizes the payment costs in the settlement process has been suggested as an alternative auction mechanism in recent papers. For payment minimization auctions, market settlement prices become decision variables in the auction process. As a result, how to define those prices is a key issue in the payment minimization auction. Transmission capacity constraints play an important role in determining the market prices. With transmission capacity constraints, locational prices are used to reflect transmission congestion. In this paper, locational prices and transmission congestion prices are defined through locational price decomposition formula and locational price-offer price inequalities. Payment minimization auction considering transmission capacity constraints is then formulated by incorporating the decomposition formulas, locational price-offer price inequalities, transmission capacity constraints, and other constraints. A Lagrangian relaxation and surrogate optimization framework is developed to overcome the inseparability of the resulting problem. Variable adjustment is applied in the solving subproblems to avoid local minimums. Examples are both analyzed and tested to illustrate the formulation and the solution methodology.