On the Stability, Economic Efficiency, and Incentive Compatibility of Electricity Market Dynamics

This article studies the operation of an electricity market that accounts for participants who bid at a subminute timescale. To that end, we model the market clearing process as a dynamical system, called market dynamics, which is temporally coupled with the grid frequency dynamics and is thus required to guarantee system-wide stability while meeting operational constraints. We characterize participants as price-takers who rationally update their bids to maximize their utility in response to real-time schedules of prices and dispatch. For two common bidding mechanisms, based on quantity and price, we identify a notion of alignment between participants’ behavior and a grid planner’s goals, leading to a saddle-based design of market dynamics that guarantees convergence to an operating point achieving economic efficiency and incentive compatibility subject to all operational constraints. We further explore cases where this alignment property does not hold and observe that misaligned participants’ bidding can destabilize the closed-loop system. We thus design a regularized version of market dynamics that recovers all the desirable stability and steady-state performance guarantees. Numerical tests validate our results on the IEEE 39-bus system.