Incentive Mechanism for Clearing Energy and Reserve Markets in Multi-Area Power Systems

TLDR

Renewable integration has increased the need for interchange trading in multi‑area power systems, yet the commonly used marginal‑pricing mechanism suffers from inefficiencies caused by strategic bidding that can block inter‑area power exchange. The authors propose a Vickrey‑Clarke‑Groves auction‑based incentive mechanism to elicit truthful bids from generators and ensure optimal operation of multi‑area power systems. They formulate a two‑stage economic dispatch model for joint energy and reserve clearing over hybrid AC/DC links, use VCG payments that reveal each unit’s externality, and implement a decentralized algorithm based on optimality‑condition decomposition to preserve area autonomy. Case studies on a 2‑area 60‑bus and a 3‑area 354‑bus system show that the proposed mechanism improves market efficiency and operational performance.

Abstract

The increasing integration of renewable energy has highlighted the importance of interchange trading in multi-area power systems (MAPS). In some existing multi-area electricity markets, the marginal-pricing (MP) mechanism is adopted. However, this mechanism is known to lose market efficiency when profit-maximizing units strategically bid to manipulate electricity prices. To elicit truthful bids from generators and guarantee the optimality of MAPS, we propose an incentive mechanism based on Vickrey-Clarke-Groves (VCG) auction. A two-stage multi-area economic dispatch model for joint energy and reserve clearing is formulated with hybrid AC/DC links. We illustrate that when settled by the MP mechanism, thermal units have incentive to strategically bid on reserve prices, thereby preventing inter-area power exchange. The VCG-based mechanism sets up the payment to a unit as other generators' incremental costs after removing it in the market clearing process, which reveals the externality induced by this unit and thus incentivizes truthful bids. To preserve each area's autonomy, a novel decentralized algorithm based on improved optimality condition decomposition is developed. Case studies based on a 2-area 60-bus system and a 3-area 354-bus system demonstrate the effectiveness and efficiency of the proposed mechanism and method.