Incentive compatible pool-based electricity market design and implementation: A Bayesian mechanism design approach

Under conditions of imperfect competition, the issue of asymmetric information, which has not been effectively managed and settled until now, has been one of the most significant problems of the pool-based electricity market, both in theory and practice. Electricity generation companies expect to maximize their profits and control the market price by strategically bidding and their offers will necessarily deviate from the true marginal costs. These practices would result in great losses of market efficiency and incur much more payments from the consumers than actually needed. Therefore, this paper uses the analytical paradigm of economic mechanism design theory to deduce and design a customized pool-based market mechanism, which simultaneously satisfies three major properties of mechanism design theory: incentive compatibility, individual rationality and payment cost minimization. Then, several issues associated with the operational principle and implementation of this innovative mechanism are discussed and examined in detail. Finally, the results of numerical examples and case study validate the effectiveness of the proposed mechanism, which can encourage truthfulness and eliminate tacit collusion, even when there is a tight market or transmission congestion with pivotal suppliers.