Essays on Average Incremental Cost Pricing for Independent System Operators

In a series of essays, we introduce average incremental cost (AIC) pricing and present examples to help understand its advantages. In non-convex markets, AIC pricing is the rough equivalent to marginal cost pricing in convex markets. We present a qualitative comparison of current ISO pricing methods and the AIC approach. We argue that AIC better … Read more

One-Pass Average Incremental Cost Pricing

Since the inception of ISOs, Locational Marginal Prices (LMPs) alone were not incentive compatible because an auction winner who offered its avoidable costs could lose money at the LMP. ISOs used make-whole payments to ensure market participants did not lose money. Make-whole payments were not public creating transparency issues. Over time, the ISOs employed methods … Read more

A Unified Approach to Solve Convex Hull Pricing and Average Incremental Cost Pricing

This paper introduces a unified approach to solving convex hull pricing (CHP) and average incremental cost (AIC) pricing problems. By developing a convex hull and convex envelope formulation for individual resources, a CHP model that minimizes uplift can be solved by linear programming (LP) using relaxation of the binary terms of the security constrained unit … Read more