Equilibrium Prices in Power Exchanges with Non-convex Bids

We show uniform, linear prices in power exchange markets, such as in the Amsterdam Power Exchange (APX) DayAhead market or the Nord Pool Elspot market, that allow nonconvex, “fill or kill” block bids by market participants may not result in an equilibrium in an economic sense, nor do they maximize surplus to market participants. We propose, as an alternative, a multi-part, discriminatory pricing mechanism that results in a market equilibrium in an economic sense and maximizes surplus for market participants. These multi-part prices do not require proceeds from outside the market to be implemented. In addition, we propose algorithms to ensure the use of linear prices for market clearing where feasible, and if not feasible, prices that minimize deviations from linear prices. We also describe a simple pro rata method for implementing the discriminatory multi-part prices, and discuss the degrees of freedom in pricing offered by the prices proposed through the use of simple examples.