On the efficiency of local electricity markets

We formulate two coordination mechanisms between local and centralized electricity markets. The first one is a centralized mechanism ruled by the national market operator and formulated as a standard constrained optimization problem. The second one is a decentralized mechanism, governed by local market operators that interact with a central market operator. In both cases, conventional generators submit block quantity offers subject to inter-temporal constraints while anticipating the outcome of the market clearing(s). The decentralized coordination mechanism can be interpreted as a Stackelberg game that we formulate as a bilevel mathematical programming problem. We prove that in case of simple bids, the Stackelberg game admits a unique subgame perfect Nash equilibrium and extend this result to block quantity offers using Complementarity Theory. Through a case study we determine that the decentralized design is as efficient as the centralized one with high shares of renewables, using the Price of Anarchy as performance measure, and that imperfect information has a limited impact on the performance of the decentralized market design.