An Efficient Market Design for Electricity Networks with Strategic Users Possessing Local Information

We consider electricity wholesale markets with multiple strategic users that possess localized information about the electricity network and can be either producers or consumers. The objective is to design a mechanism that maximizes the social welfare (the sum of the users’ utilities) and has the following additional features. It satisfies the users’ informational constraints along with the constraints imposed by the lines’ thermal capacity limit and the network's physical laws (Kirchhoff's laws); furthermore, it is budget balanced, individually rational, and price efficient. Using ideas from the theory of local public goods and auctions, we construct a social welfare maximizing mechanism that possesses all of the above-mentioned features at equilibrium. We present an intuitive interpretation of the mechanism and discuss possible extensions of the model considered in this paper.