*5.4. Settlement*

Finally, a market operator should settle transactions to guarantee the delivery of commodities. The design variables are: (1) the *method* to deliver a commodity; (2) the *pricing direction* when settling deviations; and (3) *risk-hedging tools* to deal with market uncertainties.

*Settlement method*: The settlement method defines the way a commodity is delivered. It is: (1) physical, if the commodity must be delivered in real time; or (2) financial, when cash payments are sufficient [66]. A physical settlement guarantees supply security (typically with penalties for non-delivery), but the limited market liquidity may invite market power. A financial settlement yields higher liquidity thanks to arbitrageurs and is preferable in forward markets for risk hedging [34].

*Settlement pricing directions*: The settlement pricing direction defines whether the deviation of a contract is settled at different prices for long and short positions [67]. It affects incentive-compatibility and investment incentives. The one-price settlement acknowledges the equal position of flexible generation, demand response and storage. However, their dispatching costs are different in real time, so we may consider a two-price settlement to make payments incentive-compatible.

*Risk-hedging tools*: A DCDS has high operational uncertainty that risks the reliability and market efficiency. Such uncertainty stems from generation availability, load fluctuation, wholesale markets, bidding behaviour, among others [68]. Since high uncertainty distorts market efficiency and prosumer welfare, a DCDS market should offer risk-hedging tools, such as forward markets [69], options [70], or stochastic clearing with risk measures [61].
