On the stability of wholesale electricity markets under real-time pricing

Abstract

The paper proposes a mathematical model for the dynamic evolution of supply, demand, and clearing prices under a class of real-time pricing mechanisms characterized by passing on the real-time wholesale prices to the end consumers. The effects that such mechanisms could pose on the stability and efficiency of the entire system is investigated and several stability criteria are presented. It is shown that relaying the real-time wholesale electricity prices to the end consumers creates a closed loop feedback system which could be unstable or lack robustness, leading to extreme price volatility. Finally, a result is presented which characterizes the efficiency losses incurred when, in order to achieve stability, the wholesale prices are adjusted by a static pricing function before they are passed on to the retail consumers.