Exploring the Vickrey-Clarke-Groves Mechanism for Electricity Markets*

Control reserves are power generation or consumption entities that ensure balance of supply and demand of electricity in real-time. In many countries, they are procured through a market mechanism in which entities provide bids. The system operator determines the accepted bids based on an optimization algorithm. We develop the Vickrey-Clarke-Groves (VCG) mechanism for these electricity markets. We show that all advantages of the VCG mechanism including incentive compatibility of the equilibria and efficiency of the outcome can be guaranteed in these markets. Furthermore, we derive conditions to ensure collusion and shill bidding are not profitable. Our results are verified with numerical examples.