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An Efficient and Incentive Compatible Mechanism for Wholesale Electricity Markets

Xu, Yunjian and Low, Steven H. (2017) An Efficient and Incentive Compatible Mechanism for Wholesale Electricity Markets. IEEE Transactions on Smart Grid, 8 (1). pp. 128-138. ISSN 1949-3053. doi:10.1109/TSG.2015.2483523.

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Being widely used in many deregulated wholesale electricity markets, the locational marginal pricing (LMP) mechanism is known to achieve social optimality in a competitive market. When profit-maximizing generators act strategically to manipulate prices; however, LMP may lead to high loss of economic efficiency. In this paper, we apply the Vickrey-Clarke–Groves (VCG) mechanism to wholesale electricity markets. We show that the VCG mechanism minimizes the total cost at a truth-telling dominant strategy equilibrium. We establish an important comparative result that the VCG mechanism always results in higher per-unit electricity prices than the LMP mechanism under any given set of reported supply curves. Numerical results show that the difference between the per-unit prices resulting from the two mechanisms is negligibly small (about 4%) in the IEEE 14-bus and 30-bus test systems. Finally, we apply the VCG mechanism to a day-ahead setting with start-up cost (of conventional generators) and intermittent renewable generation. We show that the VCG mechanism induces the truth-telling behavior of conventional generators in dominant strategies and yields each conventional generator a non-negative expected profit.

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Low, Steven H.0000-0001-6476-3048
Additional Information:© 2015 IEEE. Manuscript received January 13, 2015; revised April 24, 2015 and July 14, 2015; accepted September 23, 2015. Date of publication October 13, 2015; date of current version December 21, 2016. This work was supported in part by the Massachusetts Institute of Technology-Singapore University of Technology and Design International Design Center under Grant IDG21400103, in part by the National Science Foundation (NSF) NetSE under Grant CNS-0911041, in part by the NSF as part of the NSF/Department of Homeland Security/Department of Transportation/National Aeronautics and Space Administration/National Institutes of Health Cyber-Physical Systems Program under Grant 1545096, in part by the Advanced Research Projects Agency-Energy under Grant DE-AR0000226, in part by the Southern California Edison, in part by the Skotech grant, and in part by the Resnick Institute. Paper no. TSG-00046-2015.
Group:Resnick Sustainability Institute
Funding AgencyGrant Number
Massachusetts Institute of Technology-Singapore University of Technology and Design International Design CenterIDG21400103
NSF NetSECNS-0911041
Southern California EdisonUNSPECIFIED
Resnick Sustainability InstituteUNSPECIFIED
Subject Keywords:Locational marginal pricing (LMP), power networks, Vickrey–Clarke–Groves (VCG) mechanism, wholesale electricity markets
Issue or Number:1
Record Number:CaltechAUTHORS:20170111-125209937
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Official Citation:Y. Xu and S. H. Low, "An Efficient and Incentive Compatible Mechanism for Wholesale Electricity Markets," in IEEE Transactions on Smart Grid, vol. 8, no. 1, pp. 128-138, Jan. 2017. doi: 10.1109/TSG.2015.2483523 URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:73427
Deposited By: Tony Diaz
Deposited On:21 Jan 2017 01:48
Last Modified:11 Nov 2021 05:16

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