An Incentive Compatible Mechanism for Market Coupling

The term market "coupling" refers to mechanisms used to price and allocate the available transmission capacity between interconnected electricity markets. In this paper, we propose a market coupling mechanism that is guaranteed to provide the necessary incentives for identifying the efficient allocation of interconnection capacity. Each individual area (or market) operator participates in this coupling mechanism by iteratively submitting bids for trading energy across interties and the prices for interconnection capacity is adjusted as a function of excess demand. The mechanism is scalable as the informational demands placed on each market operator at each iteration are limited. We show that the mechanism's outcome converges to the optimal intertie flows when market operators are truthful. We devise incentive transfers based on the individual area contribution to total operational cost savings that guarantee truthful participation is an approximate Nash equilibrium, i.e., no individual market operator has an incentive to manipulate bids on energy import/export over interties if all other market operators are truthful. We identify a sufficient condition on a uniform participation fee ensuring the mechanism incurs no deficit. The proposed decentralized mechanism is implemented on the three-area IEEE Reliability Test System where the simulation results showcase the efficiency of proposed model.