In deregulated electricity markets, an auction mechanism is used to select supply bids for energy and ancillary services. Currently, most independent system operators in the US use an auction mechanism that minimizes total supply bid costs. This "bid cost minimization" auction causes an inconsistency between the minimized bid costs and the consumer payments that are calculated based on market clearing prices (MCPs). This gives rise to "payment cost minimization," an alternative auction mechanism that directly minimizes consumer payments. This presentation summarizes mathematical formulations for the bid cost and payment cost minimizations for simultaneous optimal auctions in the ISO/RTO markets and the newly developed solution methodology using augmented Lagrangrian relaxation and surrogate optimization to solve the payment cost minimization. The testing result demonstrates significant potential savings for electricity consumers if the payment cost minimization is implemented in the ISO/RTO markets. Importantly, the presentation will address economic implications of the objective function choice, including whether maximizing social welfare should be one of objectives of electricity industry deregulation. We conclude that such an objective which is to maximize social welfare, even if it were determined to be desirable, is not achievable based on current bidding rules after moving from traditional vertical integrated utilities into a market approach, and is certainly not achieved through the bid cost minimization approach in use today. Other implications of bid cost minimization, such as the inconsistency between the actual payment and cost function minimized and impacts on bidding behaviors, are also discussed.
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