  The coordinated operation of interconnected but locally controlled
electricity markets is generally referred to as a "coupling". In this paper we
propose a new mechanism design for efficient coupling of independent
electricity markets. The mechanism operates after each individual market has
settled (e.g. hour-ahead) and based upon the reported supply and demand
functions for internal market optimization (clearing), each market operator is
asked to iteratively quote the terms of energy trade (on behalf of the agents
participating in its market) across the transmission lines connecting to other
markets. The mechanism is scalable as the informational demands placed on each
market operator at each iteration are limited. We show that the mechanism's
outcome converges to the optimal flows between markets given the reported
supply and demand functions from each individual market clearing. We show the
proposed market coupling design does not alter the structure of incentives in
each internal market, i.e., any internal market equilibrium will remain so
(approximately) after coupling is implemented. This is achieved via incentive
transfers (updated at each iteration) that remunerate each market with its
marginal contribution (i.e. cost savings) to all other participating markets.
We identify a sufficient condition on a uniform participation fee for each
market operator ensuring the mechanism incurs no deficit. The proposed
decentralized mechanism is implemented on the three-area IEEE Reliability Test
System where the simulation results showcase the efficiency of proposed model.
