A Semi-Lagrangean Approach for price discovery in markets with Non-convexities
Abstract:
From standard economic theory, the price for a commodity is set by the market at the point where the demand curve and the supply curve intersect. Convexity is a property that economic models require for a competitive equilibrium, which is efficient and well behaved and provides equilibrium prices. However, some markets present non-convexities due to their cost structure or due to some constraints needed to be addressed. This is the case for electricity markets where the electricity producers incur cost for shutting down a generating unit or, and, then bringing it back on. Non-convex cost structure can be a challenge for the price discovery process, since the supply and demand curve may not intersect, or if they intersect, the price found may not be high enough to cover the total cost of production.
This research is focused on finding an equilibrium price, for the electricity market in particularly, where non-convexities are present not only in the cost structure but also in the technology constraints.