A new market clearing mechanism, based on comprehensive welfare allocation, considering participants’ optimality, efficiency, and extent of transmission use Mohammadreza Baghayipour and Asghar Akbari Foroud * ,† Semnan University, Semnan, Iran SUMMARY This paper develops a new approach to fairly clear the market and assess the amount of each participant’s revenue in a deregulated power system, through modifying the system nodal prices. This approach equalizes the economic profit of each participant group to its fair and rational value. Transco behavior is modeled as an independent entity without direct supervision of an independent system operator, causing the possibility of either making profit or incurring a loss for it. With this method applied, three main results for better system design and operation are produced: (1) The rational and acceptable profit/loss values for all participant groups (producers, customers, and Transco) are determined through fair apportionment of total system profit among them based on their optimality and contribution of profitability to the whole system. (2) The profit/loss value for each of producers and consumers in the system is allocated according to their proportional efficiency and extent of transmission use. (3) Transmission revenue assessment is performed through defining a criterion for evaluating the transmission network optimality. So this approach can correct wrong and unfair economic signals in the previous electricity pricing and participants’ revenue assessment methods, presenting such a fairer mechanism for it that each participant’s action will be oriented in maximizing the system’s total economic efficiency. Copyright © 2012 John Wiley & Sons, Ltd. key words: market clearing mechanism; social welfare allocation; revenue assessment; reference transmission network; nodal prices 1. INTRODUCTION In recent years, deregulation has resulted in some major changes in the economic behavior of the electricity industry. These changes should be directed, such that the whole system act improves to attain the optimality as well as nondiscriminatory use for all participants, namely producers, consumers, and a monopolistic transmission company (Transco). In these systems, the private ownership manners of these entities and their relevancy have special importance. These relations are usually controlled via an independent system operator (ISO). Here, three basic questions are posed: (1) What are the rational revenue value and its evaluation mechanism for each participant group in the system? (2) How are the answered revenues between the constituents of each participant group in the system (such as each of producers or consumers) shared, such that it is fair and nondiscriminatory from their viewpoints? *Correspondence to: Asghar Akbari Foroud, Semnan University, Semnan, Iran. † E-mail: aakbari@semnan.ac.ir Copyright © 2012 John Wiley & Sons, Ltd. EUROPEAN TRANSACTIONS ON ELECTRICAL POWER Euro. Trans. Electr. Power (2012) Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/etep.1661