Price Consistency and Uplift in Wholesale Electricity Markets

The non-convex technical constraints governing power production have led wholesale market operators to implement alternative pricing schemes intending to ensure that market participant incentives are aligned with socially optimal commitment and dispatch decisions. To date, however, these pricing schemes have neglected the role of operational uncertainty in determining optimal commitment and dispatch. In static models without uncertainty, \ac{CHP} is seen as a gold standard, minimizing the need for out-of-market uplift payments to align incentives. In this study, we situate the price formation problem in a more realistic operational setting, in which decisions happen sequentially under uncertainty, and define a version of \ac{CHP} implementable in this setting. Employing a simplified model of the \ac{NYISO} system, we assess the interaction of uncertainty and uplift across three approaches for uncertainty management and two different pricing schemes. Our results indicate that the choice of pricing scheme has a negligible effect on prices and ex post uplift, with the choice of operational policy driving nearly all of the differences in pricing outcomes. We conclude with suggestions for approaching non-convexity and uplift in ways that promote greater transparency and, by extension, a more efficient market design.