The equilibrium analysis and potential modifications on the China pilot electricity spot market

The rapid development of the electricity industry reform in China has been witnessed in recent years, and one of the iconic achievements could be the establishment and trial operation of the electricity spot markets. However, even though the market clearing model for electric energy is identical to that adopted in the mature markets in the U.S., which has been widely confirmed to respect the principle of incentive compatibility, some special features are instead observed regarding the offering behaviors of generators, indicating the inconsistency with the principle of incentive compatibility. Therefore, an in-depth study on the causes for the observed features is of urgent significance, and corresponding potential modifications on the market mechanism are anticipated. This paper first establishes an equilibrium analysis model for the electric energy and frequency regulation ancillary service (FRAS) markets, based on the real-world practice in China. By providing the optimal offering strategies of the generators at the equilibrium point, the equilibrium analysis could shed light on the causes for the observed features of the offering behaviors. Then, the paper proposes potential modifications on the market mechanism considering the real institutional and operational characteristics in China, with proposing a multi-objective optimization model and a decentralized algorithm for market clearing, as well as giving full consideration to the availability of FRAS. Finally, the feasibility and effectiveness of the proposed model and algorithm are justified by case studies. The results demonstrate that the proposed modifications could achieve the identical objective of realizing the minimum system costs as the existing market mechanism adopted in the U.S., and be more adaptive to the real institutional and operational characteristics in China. Policy recommendations are also presented for the establishment and operation of the electricity spot markets in China.