A motivating mitigation mechanism for generators on condition of coordinated regulation of emission and electricity market

Applying supply function equilibrium (SFE) and the first sealed bidding auction, this paper designs a motivating mitigation mechanism for generators based on coordinated regulation of emission market and electricity market. The mechanism separates emission market as two parts: initial emission market and secondary emission market. It begins with electricity regulator and environment regulator promulgating regulatory information. Then generators participate in initial emission market bidding for emission allowances. Based on allocated emission allowances, generators participate in electricity market bidding for load and set emission secondary trade for profit maximization. The mechanism divides generator's bidding decision into two dynamic and coordinated stages: firstly in initial emission market, then in electricity market. We depict generator's decision making as two stochastic parameter linear programming models. Solving these models, generator's optimality demand function in initial emission market, optimality supply function in electricity market, and equilibrium of each market are achieved. We found that under the new mechanism, (i) both bidding price and bidding quantity in each market are ordered based on generators' operation advantages from higher to lower respectively and (ii) the pricing and allocation rules in each market can effectively motivate generator to mitigate its CO2 emission. The new mechanism is truly an effective way to coordinate emission market and electricity market. Finally, we present a simulation to test its validity, and these results are fit well to the theoretical conclusions. (C) 2011 Elsevier Ltd. All rights reserved.