An Incentive Compatible Iterative Mechanism for Coupling Electricity Markets

The coordinated operation of interconnected but locally controlled electricity markets is generally referred to as a “coupling”. In this paper we propose a new decentralized market mechanism for efficient coupling of independent electricity markets. The mechanism operates after each individual market has settled (e.g. hour-ahead). Based upon the reported supply and demand functions for internal market optimization (clearing), each market operator is asked to iteratively quote the terms of energy trade (on behalf of the agents participating in its market) across the transmission lines connecting to other markets. We show the mechanism’s outcome converges to the optimal flows between markets given the reported supply and demand functions from each individual market clearing. In light of incentive compatibility issues that result from pricing power flows across interconnection lines with locational marginal prices, the mechanism features incentive transfers (updated at each iteration) that compensate each given market with its marginal contribution, i.e. the cost reduction to all other participating markets. We show that these transfers imply truthful participation in the mechanism is a Nash equilibrium. The proposed decentralized mechanism is implemented on the three-area IEEE Reliability Test System where the simulation results showcase the performance guarantees of the proposed mechanism.