A Smart Market for the Spot Pricing and Pricing of Transmission Through a Power Grid

This chapter illustrates a mechanism capable of competitively allocating power through an electricity network in which "loop flow" and the unusual economic phenomenon caused by loop flow are anticipated and integrated into the competitive process. At the base of the complexity is Kirchoff's law governing electricity flow through power grids. This physical law creates a form of externalities throughout a power transmission network and these externalities must be incorporated into any efficient and decentralized pricing mechanism. The mechanism developed here is a special, continuous double auction in which buyers and sellers are in essence buying and selling differentiated products in the sense that they wish to purchase and sell power at different locations, but the purchasing and selling activities are technically related through resource limitations and the physical law of electricity flow.