An implementation pathway for price formation mechanisms in local electricity markets

The European Union is leading the shift towards a sustainable future, promoting the role of consumers as prosumers through renewable energy generation, energy communities, and Local Electricity Markets (LEMs). While LEMs have been studied in simulations and pilot projects, real-world adoption remains limited. This paper explores how three price formation mechanisms – system-determined, auction-based, and negotiation-based – can support LEM implementation, considering stakeholder preferences and LEM market conditions. The methodology considers the alignment with stakeholder preferences by applying Multi-Criteria Mapping, which maps the system operators, the public sector, market sector, cooperative sector, and academic sector. Analysis of stakeholder sectors shows a preference split between auction-based and system-determined mechanisms, both supporting fair and transparent price formation. System-determined mechanisms are additionally valued for their conceptual simplicity. However, concerns persist regarding their effectiveness under market power and low liquidity conditions in LEMs. A real-life case study simulation assesses the performance of all three price formation mechanisms using implementation pathway indicators identified through Multi-Criteria Mapping, notably the Market Concentration index and transactions per clearing interval. Combining stakeholder preferences and simulation outcomes, a four-phase implementation pathway is proposed as a framework for the large-scale deployment of LEMs.