Challenges in Designing Electricity Spot Markets

Electricity markets have drawn significant attention due to their size, their importance for the economy, and the intricacies in their design. Nonconvexities in the valuation and cost functions render the allocation and pricing problems computationally difficult, and lead to non-existence of equilibrium in general. In addition, these markets need to consider power flows on the electricity network, which further distinguishes them from many other markets. Increasing levels of renewable energy sources such as wind and solar lead to new requirements. The integration of renewable energy sources such as wind and solar, particularly important for the energy transition needed to meet climate targets, necessitates further advances. In particular, the volatility of renewable supply requires attention. We discuss some of the central issues in the design of electricity spot markets and possible solutions that were discussed in the recent literature.