This thesis investigates the application of marginal cost based spot pricing techniques to the short run coordination of decentralised, and potentially competitive, electricity markets. A Dispatch Based Pricing philosophy is proposed which requires that the dispatcher of a power system determine spot prices which are consistent with both the observed power system dispatch and the offers and bids issued by market participants. Whereas previous research has involved determining prices corresponding to an optimised power system dispatch, Dispatch Based Pricing is more flexible, requiring no such optimality assumption while generating incentives which encourage efficient dispatch. Pricing relationships are formed, and the resulting incentives analysed, by applying duality theory to mathematical programming formulations of the dispatch problem.

A detailed theoretical description of a dispatch based pricing model, based on an Optimal Power Flow formulation, is presented. This model is an extension of the ex post pricing model of Hogan (1991). As well as presenting a more general representation of dispatch variable relationships, we demonstrate the underlying mathematical relationships which drive the economic interpretation of this model. In addition, we explore the behaviour of transmission flow constraints in cyclic networks, and describe the modifications needed to price for security requirements consistent with current operational practices in New Zealand.

We explore the extension of Dispatch Based Pricing to situations beyond the scope of the Optimal Power Flow problem, and even to situations which are strictly incompatible with a pure marginal cost based analysis. We develop a "best compromise" pricing approach which, for (seemingly) economically inconsistent dispatches, minimises the side payments required to account for the difference between the market clearing spot prices and the offers and bids of the market participants. We develop and discuss methods for determining dispatch based prices which are consistent with primal inter-temporal constraints, uncertainty, and integer variables.