With the increased level of distributed generation and demand response comes the need for associated mechanisms that can perform well in the face of increasingly complex deregulated energy market structures. Using Lagrangian duality theory, we develop a decentralized market mechanism that ensures that, under the guidance of a market operator, self-interested market participants: generation companies (GenCos), distribution companies (DistCos), and transmission companies (TransCos), reach a competitive equilibrium. We show that even in the presence of informational asymmetries and nonlinearities (such as power losses and transmission constraints), the resulting competitive equilibrium is Pareto efficient.
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