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Feb 11, 2015

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Electricty market operation

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Electricty market operation

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In economic terms, electricity (both power and energy) is a commodity capable

of being bought, sold and traded. An electricity market is a system for effecting

purchases, through bids to buy; sales, through offers to sell; and short-term

trades, generally in the form of financial or obligation swaps. Bids and offers

use supply and demand principles to set the price. Long-term trades are

contracts similar to power purchase agreements and generally considered

private bi-lateral transactions between counterparties. Wholesale transactions

(bids and offers) in electricity are typically cleared and settled by the market

operator or a special-purpose independent entity charged exclusively with that

function. Market operators do not clear trades but often require knowledge of

the trade in order to maintain generation and load balance. The commodities

within an electric market generally consist of two types: power and energy.

Power is the metered net electrical transfer rate at any given moment and is

measured in megawatts (MW). Energy is electricity that flows through a

metered point for a given period and is measured in megawatt hours (MWh) [1].

Markets for energy-related commodities trade net generation output for a

number of intervals usually in increments of 5, 15 and 60 minutes. Markets for

power-related commodities required and managed by (and paid for by) market

operators to ensure reliability, are considered ancillary services and include such

names as spinning reserve, non-spinning reserve, operating reserves, responsive

reserve, regulation up, regulation down, and installed capacity. In addition, for

most major operators, there are markets for transmission congestion and

electricity derivatives such as electricity futures and options, which are actively

traded. These markets developed as a result of the restructuring of electric

power systems around the world. This process has often gone on in parallel with

the restructuring of natural gas markets.

Electricity is by its nature difficult to store and has to be available on demand.

Consequently, unlike other products, it is not possible, under normal operating

conditions, to keep it in stock, ration it or have customers queue for it.

Furthermore, demand and supply vary continuously. There is therefore a

physical requirement for a controlling agency, the transmission system operator,

1

the system across the transmission grid. If there are a mismatch between supply

and demand the generators speed up or slow down causing the system

frequency (either 50 or 60 hertz) to increase or decrease. If the frequency falls

outside a predetermined range the system operator will act to add or remove

either generation or load.

In addition, the laws of physics determine how electricity flows through an

electricity network. Hence the extent of electricity lost in transmission and the

level of congestion on any particular branch of the network will influence the

economic dispatch of the generation units. The scope of each electricity market

consists of the transmission grid or network that is available to the wholesalers,

retailers and the ultimate consumers in any geographic area. Markets may

extend beyond national boundaries.

1.1.

for any/some/all 15 minute time blocks in 24 hours of next day starting from

midnight. The prices and quantum of electricity to be traded are determined

through a double sided closed auction bidding process. The operations are

carried out in accordance with the Procedure for scheduling of collective

transactions issued by the Central Transmission Utility (PGCIL), CERC (Open

Access in Inter-State Transmission) Regulations, 2008, as amended from time to

time and the Bye-Laws, Rules and Business Rules of the Exchange.[2]

Trading Process Flow

Bidding

1. Participants enter bids for sale or purchase of power for delivery on the

following day. (T+1 day)

2. Bids for a total of 96 blocks of 15 minute each can be entered.

3. Bidding session: 1000 hrs. - 1200 hrs.

4. Bids can be single and/or block including linked bids:

a. Single bids: 15-Minute bids for different price and quantity pairs

can be entered through this type of order. Partial execution of the

bids entered is possible.

b. Block bids: Relational Block Bid for any 15-min block or series of

15-min blocks during the same day can be entered. Although no

partial execution is possible i.e. either the entire order will be

selected or rejected.

5. The bids so entered are stored in the central order book. The bids entered

during this phase can be revised or cancelled till end of bid call period

(i.e.1200 hrs. of trading day)

Matching

At the end of the bidding session, bids for each 15 minute time block are

matched using the price calculation algorithm. (available in IEX byelaws)

All purchase bids and sale offers are aggregated in the unconstrained

scenario. The aggregate supply and demand curves are drawn on PriceQuantity axes. The intersection point of the two curves gives the market

clearing price (MCP) and market clearing volume (MCV) corresponding

to price and quantity of the intersection point.

MCP and MCV are determined for each block of 15 minutes as a function

of demand and supply which is common for the selected buyers and

sellers.

Selected members are intimated about their partially or fully executed

bids and other trade related information.

By 1300 hrs, transmission corridor required to fulfill successful

transactions are sent to NLDC.

The example below illustrates price calculation. Assume the price tick as below:

For the sake of simplicity we assume only 3 portfolios are entered. The quantity

entered by each portfolio A, B and C for the specific price tick is as shown

below:

3

The algorithm will then add the entire purchase quantum and sell quantum after

the bidding session and look for a solution where the net transaction is zero i.e.

the buy quantum is equal to the sell quantum.

Preliminary MCP and MCV are used to calculate the provisional

obligation of the selected participants and the provisional power flow.

Funds available in the settlement accounts of the participants are verified

based on the provisional obligation.

participant are deleted.

Required corridor capacity and provisional power flow is sent to NLDC

for scrutiny and corridor allocation is requisitioned based on availability.

By 1400 Hrs, NLDC reverts with actual transmission corridor availability

during all 15 minute time blocks across congestion prone bid areas.

Results

Based on the reserved transmission capacity intimated by NLDC, IEX

recalculates MCP and MCV as well as area clearing price (ACP) and area

clearing volume (ACV).

ACP is used for the settlement of the contracts. On receipt of final results,

obligations are sent to the Clearing Banks for Pay In from buying

Members at 14.30 hrs and the bank is asked to confirm the same.

Confirmation

Final results for confirmation and application for scheduling of collective

transactions are sent to NLDC.

NLDC sends the details of the schedule to respective SLDCs.

Scheduling

RLDCs /SLDCs incorporate Collective Transactions in the Daily

schedule.

A scheduled transaction is considered deemed delivery.

Deviations from schedules are dealt under UI or Deviation Settlement or

Imbalance Settlement regulations. The Regional Entities (those connected

at ISTS networks) are governed by CERC Regulations and Embedded

Entities (those connected to state transmission or distribution network)

are governed by respective State Commissions regulations.

1.2.

collecting purchase and sale bids for electricity through which the System

Operator (ELES) buys and sells electricity intended for the settlement of

imbalances in the electricity system. Trading on the Balancing Market is carried

out together with Intra-day trading, that is, one hour after the closure of the

latter and until actual supply of the product. All companies included in the

Balance Scheme of the electricity market and which acceded to trading on the

Balancing Market and Intra-day trading can participate in trading [3].

In order to ensure that enough balancing resources are available during the realtime operation of the power system, the system operator allocates reserve

capacity in advance. In practice, the procurement and scheduling of reserve

capacity implies operating the system at less than its full capacity, while its use

or deployment usually translates into the redispatch of units previously

committed in the day-ahead market, the voluntary curtailment of loads, and/or

the quick start-up of extra power plants to cover unexpected shortages of energy

supply in real time. There exist two schools of thought on how reserve should

be traded in electricity markets. On the one hand, reserve capacity may be

sequentially procured in a series of auctions run once the day-ahead energy

dispatch has been determined. These auctions are organized to procure reserves

with different activation times. The rationale behind this approach is that the

free capacity that has not been successfully placed in one market can then be

offered in the following auctions where the required activation time for the

traded reserve is not as demanding. Consequently, reserve capacity offers that

are successful in one market are not considered in the subsequent ones [4].

On the other hand, energy and reserve may be simultaneously procured in the

same auction using a co-optimization algorithm that captures the strong

coupling between the supply of energy and the provision of reserve capacity.

The following illustrative example serves to get a more intuitive understanding

of this coupling.

2.1.

Sequential Settlement

Consider an electricity market that solely includes two power producers, A and

B. Each of these producers runs a power plant with a capacity of 100MW.

Producer A offers to sell energy at $10/MWh, while producer B does it at

$30/MWh. A demand of 130 MWh is to be supplied. Additionally, with the aim

of dealing with unforeseen events, the system operator estimates that 20 MW of

reserve capacity are required. Producer A is willing to provide reserve at no

cost, whereas producer B offers reserve capacity at $25/MW.

To start with, let us suppose that energy and reserve capacity are sequentially

settled in this order. Thus, the energy-only dispatch is first determined as

follows

10 P A +30 PB

Min.

P A + P B=130,

s.t.

0 P A 100,

0 P B 100,

where

PA

and

PB

P A =

PB =

Once the energy dispatch is determined, the reserve capacity market is cleared

as follows

Min.

s.t.

0 R A +25 R B

R A +R B=20,

0 R A 100PA ,

7

0 R B 100PB ,

Where

RA

and

RB

and B, respectively. Note that the reserve scheduling takes the energy dispatch

{PA , PB }

= 0 and

RB

capacity in the energy market, reserve needs are entirely covered by producer B.

seq

Thus, the total system operation costs TC , including both the procurement

TC seq=10 PA +30 PB + 0 R A +25 RB

= $2400

The clearing (marginal) price for reserve capacity is $25/MW, which is the

value taken by the dual variable associated with the reserve requirement

constraint. Therefore, the profits made by producers A and B, respectively,

under the sequential market organization are calculated as follows

profit seq

A =( 3010 ) P A + ( 250 ) R A=$ 2000

profit seq

B =( 3030 ) P B + ( 2525 ) R B =0

2.2.

Simultaneous Trading

Let us now consider that energy and reserve capacity are simultaneously traded

in the same auction. To this end, both commodities are jointly dispatched using

optimization problem below, which minimizes the total system operation costs.

Min.

10 P A +30 PB +0 R A +25 R B

s.t. P A + P B=130,

R A + R B=20 ,

8

P A + R A 100, P A 0, R A 0

PB + R B 100, PB 0, R B 0

MWh, and

RB

PA

= 80 MWh,

RA

= 20 MW,

PB

= 50

are calculated as

TC =10 PA +30 PB + 0 R A +25 RB =1080+3050+ 0+0=$ 2300

Prices for energy and reserve capacity, defined as the dual variables of

constraints 1 and 2 respectively, are $30/MWh and $20/MW in that order.

Therefore, the profits made by producers A and B under the simultaneous

market clearing of energy and reserve are given by

profit A=( 3010 ) P A + ( 200 ) R A=2080+ 2020=$ 2000

profit B= (3030 ) PB + ( 2025 ) RB =05050=$ 0

Which turn out to be the same as the profits made by both producers in the

sequential setup However, the simultaneous dispatch of energy and reserve

captures the coupling existing between these two commodities, thus reducing

the total costs by $100 Actually, in this illustrative example, the interaction

between energy and reserve is inferred from the following results

1. Producer A cannot sell as much energy as it might do otherwise. Indeed, this

producer is committed to producing 80 MWh of energy, so that it can provide its

spare capacity (20 MW) as reserve. Reserve requirements are thus satisfied.

2. On the contrary, producer B, which runs a more expensive power plant, has to

produce more energy in order to meet the electricity demand.

3. The price for reserve capacity in the simultaneous arrangement ($20/MW)

does not correspond to any of the reserve offer costs submitted by the

producers. It is, in fact, given by the difference between the marginal energy

costs of producer B ($30/MWh) and A($10/MWh). This is so because a 1-MW

increase of the reserve needs in constraint is covered by producer A. To this end,

this producer must decrease its energy production by 1 MWh, while producer B

9

must increase it by the same amount. This action does not involve any

additional reserve cost, but increases the cost of the energy dispatch by $20.

2.3.

Probabilistic Approach

Consider again the electricity market described in Example. Recall that this

market is a duopoly made up of producers A and B, in which reserve

requirements are estimated by the system operator at 20 MW. The reason for

this estimate is that the electricity demand may increase from 130 MWh to 150

MWh without prior notice, and the system operator decides to protect the

electrical infrastructure against this unexpected growth of consumption by

scheduling 20 MW of reserve capacity in advance. The probability of this

happening is, though, relatively small, specifically 0.05. Let us now rethink this

problem using a probabilistic approach. For this purpose, note that, in response

to a sudden increase of load, three different balancing actions may be taken,

namely

1. Producer A may increase its production from

increase

rA

PA

to

RA

P A +r A

. The energy

scheduled beforehand

2. Similarly, producer B may increase its production from

energy increase

rB

PB

to

PB +r B

. The

RB

shed

3. A part of the load increase, L

, may be simply not supplied. This action,

Based on these three possible balancing measures, the energy-reserve dispatch

problem can be reformulated as follows

shed

s.t. r A +r B + L =20,

10

10

r A R A , rB R B ,

P A + R A 100,

PB + R B 100, Lshed 20,

P A , PB , R A , R B , r A , r B , L

PA

shed

0,

RA

= 80 MWh,

PB

= 20 MW,

= 50

shed

= 0. Therefore,

L

obtained from problem are the same as those resulting from problem in

previous Example This is just pure coincidence. Actually, these two models are

different inasmuch as the following

1. This Market-clearing problem takes into account explicitly both the

probability of occurrence of the 20-MWh demand increase and its potential

impact on system operation costs through the utilization of balancing resources.

s h ed

Indeed, the expression 0.05 ( 10 r A +30 r B +1000 L ) represents the expected cost

incurred at the balancing stage. This cost component is, in contrast, ignored in

previous dispatch model

2. The reserve dispatch yielded by market-clearing model is directly determined

based on how valuable this reserve is to consumers by including the cost of the

expected load not served in objective function, where this cost appears as

0.05 ( 10 r A +30 r B +1000 Ls h ed ) . For the particular instance solved above, this cost

reserve capacity that can be deployed to satisfy a potential consumption

increase, if needed. In contrast, if the probability of occurrence of the 20-MWh

demand growth is small enough, say 0.005, or the value of lost load is

sufficiently low, e.g., $100/MWh, no reserve capacity is dispatched, i.e.,

s h ed

= 20

3. While the 20-MW reserve requirement enters previous dispatch model as an

input in constraint, reserve needs are an outcome of market-clearing in this

11

11

Instead, we enforce constrain, in which all the variables involved, namely,

r A , rB

and

s h ed

We will get to the answer of this question in due time.

12

12

Unknown data abound in decision-making problems in the real world. This lack

of perfect information is common in problems belonging to different knowledge

areas such as engineering, economics, finances, etc. Decision-making problems

in electricity markets are no exception. In fact, uncertainty is present in most

decision-making problems faced by electricity market agents. For example,

electricity prices are unknown when agents have to submit their offers or bids to

the pool. Similarly, at the time of procuring the energy needed to supply client

loads, retailers do not know precisely the electricity demands of these clients.

However, decisions need to be made even with lack of perfect information. This

is what motivates the use of stochastic programming models for decision

making under uncertainty [5].

Most decision-making problems can be adequately formulated as optimization

problems. If the input data of an optimization problem are well-defined and

deterministic, its optimal solution (decision) is achieved by solving the problem.

The decision is then implemented to attain the best outcome. However, more

often than not, the input data are uncertain but describable through probability

functions. In such a situation, it is not clear how the decision-making problem

should be formulated. One possibility is to substitute the uncertain input data

(describable through probability functions) by their corresponding expected

values, which results in a well defined and deterministic optimization problem.

However, solving such a problem may lead to a solution that once implemented

does not result in the best outcome. Alternatively, the probability distribution of

input data can be approximated by a collection of plausible sets of input data

with associated probabilities of occurrence. For instance, three sets of input data

with three values of probability of occurrence adding to 1.

Then a stochastic optimization problem can be formulated implicitly weighting

(with the probabilities of occurrence) the individual solutions associated with

each set of input data to achieve a single solution that is the best in some sense

for all sets of input data. That is, we achieve a solution that is adequately pre13

13

positioned with respect to all the sets of input data, but not to any one of them

particularly. As a result of the uncertain input data being described by a

collection of different sets of data, the resulting objective function is uncertain

and needs to be characterized as a random variable. Since such objective

function is not a real-valued function but a random variable, the problem of

establishing a specific objective for the decision-making problem arises. One

alternative is to maximize the expected value of the objective function, other

one, to maximize the expected value of such function but limiting its variance,

etc. Implementing the solution obtained by solving the stochastic problem

above pre-positions the decision-maker in the best possible manner if

considering all possible input data sets duly weighted by their respective

probabilities. This solution is not the best for each individual set of input data

but it is the best if all of them, weighted with their probabilities of occurrence,

are simultaneously considered. The price to be paid for using a stochastic

programming approach is a dramatic increase in the size of the problem to be

solved, which if handled without care may lead to intractability.

Illustrative example from [5]:

An electricity consumer is facing both uncertain electricity demand and price

for next week. For simplicity, we consider that both price and demand are

uncertain but constant throughout the week. Scenario data pertaining to demand

and price are provided in Table. Additionally, this consumer has the possibility

of buying up to 90 MW at $45/MWh throughout next week, by signing a

bilateral contract before next week, i.e., before knowing the actual demand and

pool price it has to face. The decision-making problem of this consumer can be

formulated as a two-stage stochastic programming problem. At the first stage,

the consumer has to decide how much to buy from the contract, and the second

stage reproduces pool purchases for each of the three considered demand/price

realizations (scenarios).

14

14

problem is as follows

15

15

C

Variable P represents the power bought through the bilateral contract, while

variables

P1

P2

, and

P3

faced by the consumer to supply its uncertain demand. Powers are multiplied by

the number of hours in a week (168) to obtain the energy consumed throughout

the week. The first three constraints enforce energy supply for the three

scenarios, while the remaining constraints are the contract bounds and nonnegativity declarations for all the variables. Note that the variables of this

problem are associated with the nodes of the scenario tree and so the

denomination node-variable formulation. The solution to this problem is

C

P

= 80, P1 = 30, P2 = 20, P3 = 0, which means that, before the week, the

consumer buys 80 MW using the bilateral contract, and during the week, 30, 20

or 0 MW for demands (prices) 110 (50), 100 (46) or 80 (44) MW ($/MWh),

respectively.

3.1.

The proposed pricing scheme is illustrated next using the three-node system

sketched in Fig. 1. Line reactances and capacities are all equal to 0.13 p.u. and

100 MW, respectively. The system includes three conventional generators (G1,

G2, and G3) and one wind power plant (WP). Data for the conventional units

are provided in Table I. Note that, comparatively speaking, unit G1 is cheap, but

inflexible; unit G2 is relatively cheap, but flexible; and unit G3 is expensive, but

16

16

flexible. The wind plant is located at node 2. Its uncertain power output is

modeled by means of three scenarios, which are referred to as medium (35

MW), high (50 MW), and low (10 MW), with probabilities of occurrence equal

to 0.5, 0.2, and 0.3, in that order. The power block offered by the wind producer

is assumed to be equal to its forecasted power production (i.e., 30.5 MW). The

three-bus system also includes an inelastic load (L3) of 200 MW located at node

3, with a value of lost load equal to $1000/MWh [6].

The market is cleared based on this information. Market outcomes related to

dispatched quantities and deployed reserve are collated in Table II. The

scheduled wind power production

balancing prices are shown in Table III. Note that electricity prices are the same

at all nodes in the system, because the network does not become congested in

any of the three considered wind power scenarios. Given the energy and

balancing prices in Table III and the dispatched quantities in Table II, the

payments to market participants per scenario can be computed. For instance, the

payment to generator G3 in scenario low is given by

$30/MWh, the profit that it makes in scenario low is 117030 40=30 $ / Mw h

. Table IV provides the benefit obtained by market participants both per scenario

and in expectation. Observe that the profit made by generator G3 is indeed a

random

variable

whose

expected

Generator G3 can be seen then as the marginal unit in a stochastic sense. The

randomness of its profit is inherited from the uncertain character of the reserve

deployment service, which in turn depends on the actual wind power

realization. The proposed market settlement guarantees cost recovery for

generating units in expectation, but this does not prevent generator G3 from

incurring economic losses in scenarios medium and low (see Table IV).

17

17

18

18

To reduce the risk of negative profits faced by market participants that are

willing to make real-time adjustments, reserve capacity bids can be introduced

in the proposed market settlement as stated in Section II-A. Consider that

generator G2 offers both downward and upward reserve capacity at a cost of

$1/MW, while generator G3 does it at a cost of $2/MW. Table V shows the dayahead schedule and the real-time redispatch in this case. The wind power

production scheduled at the day-ahead stage is 20 MW again. Likewise, Tables

VI and VII list, respectively, the clearing prices and the profit made by market

participants per scenario and in expectation when the aforementioned reserve

capacity bids are taken into account to clear the market. As an example, observe

that the benefit of generator G3 in scenario low is now given by

40 3040 30=$ 0

capacity bids inasmuch as the provision of reserve capacity does not entail

specific costs to generators. Note, indeed, that generator G3 does not incur

economic losses in any of the three considered scenarios. Furthermore, its

19

19

expected profit is equal to 60, i.e., greater than 0. Therefore, the possibility of

bidding reserve capacity serves to competitively reward the capability of and

the willingness to make real-time adjustments, thus promoting the flexibility of

market participants in an efficient manner.

20

20

21

21

4. Case Study 1

The pricing scheme described in Section II-B is further illustrated using a 24bus system based on the single-area version of the IEEE Reliability Test System

1996 [8]. For simplicity, the generating units of this well-known system are

grouped by node and type. The only purpose behind this grouping is to facilitate

the presentation and analysis of the simulation results. Thus, the simplified

system consists of 34 lines, 12 generating units, and 17 loads. On the

assumption of a perfectly competitive electricity market, the energy offers

submitted by generating units represent their marginal costs of energy

production, which are indicated in [8, Table VI]. We assume that nuclear and

hydro power producers offer their energy production at zero prices. The amount

of reserve capacity that each generating unit is willing to provide, either

downward or upward, is listed in Table IX. We assume that the nuclear and

hydro generators are not technically able to provide reserve. No reserve capacity

costs are considered.

Two wind farms comprising 2.5-MW wind turbines Nordex N80/2500 with a

hub height of 105 m are located at nodes 7 and 8. The power curve of this

turbine model is publicly available in [9]. Wind speeds at both wind sites are

described by means of the same Weibull distribution with scale and shape

parameters equal to 9.7 and 1.6, respectively. This probability distribution for

wind speeds, in combination with the considered wind turbine model, results in

a capacity factor for both wind farms of approximately 40%. This capacity

factor has been estimated using the Wind Turbine Power Calculator provided in

[9]. Besides, wind speeds at both wind sites are assumed to be correlated with a

correlation coefficient of 0.5. Correlated samples are then obtained by using the

sampling procedure described in [10]. An original set of 10 000 samples is first

generated and subsequently reduced to 100 by applying the scenario reduction

technique proposed in [11] and [12]. Selecting the right number of scenarios

constitutes a tradeoff between model accuracy and tractability. We believe that

current computational machinery allows considering a large enough number of

scenarios. Note that the number of scenarios should be large enough so that

adding any additional scenario does not change the market outcomes

(preferably) or minimally changes them. We assume that wind power producers

offer their forecast production at zero prices. Note that nowadays this offering

22

22

electricity markets.

The results reported below correspond to one single period characterized by a

total system demand of 2850 MW. This demand is geographically distributed

among nodes as specified in [8, Table V]. Loads are assumed to be inelastic

with a value of lost load equal to $2000/MWh. Results for two different wind

penetrations levels, 12.3% and 26.3%, are presented. The wind penetration level

is given as the ratio of the installed wind capacity to the total system demand.

The number of wind turbines in the farms at nodes 7 and 8 that are required to

achieve these penetration levels are 40 and 100, and 100 and 200, respectively.

The market-clearing problem has been solved using CPLEX 9.0.2 under GAMS

on a Windows-based personal computer Intel(R) Core(TM) i5 with four

processors clocking at 2.4 GHz and 6 GB of RAM. The required computational

time is around five seconds.

For low wind penetration levels, such as 12.3%, there is enough room in the

transmission network to accommodate the energy transactions settled at the

market stage plus the subsequent energy redispatches in the form of deployed

reserve without the occurrence of congestion events. Therefore, the wind energy

injected at nodes 7 and 8 is able to reach every node in the system and as a

result, no differences in prices exist among nodes. In particular, for a wind

every node. Likewise, the probability-removed balancing prices under the

highest and lowest wind production scenarios, which will be denoted,

respectively, by

n w

w

and

n w / w

in that order, irrespective of the node under consideration. These probabilityremoved balancing prices are obtained by dividing each dual variable

its associated probability

nw

by

removed balancing prices are of the same order of magnitude. Further, the

balancing prices so transformed are dual optimal for the real-time market model

that results from problem (1) once the wind power uncertainty is disclosed and

first-stage variables (scheduled quantities) are fixed to their optimal values. On

the contrary, for high enough wind penetration levels, e.g., 26.3%, network

23

23

example, Table X shows, for this wind penetration level, the values of the

energy price and the probability-removed balancing prices under the highest and

lowest wind production realizations at some selected nodes. In light of these

prices, the following three observations are in order

1. In the scenario of highest wind power production, the balancing

prices are zero at the nodes where the wind farms are connected,

namely, nodes 7 and 8. The reason for this is that any marginal

increment of load at these nodes is satisfied, in this scenario, by the

wind energy production that would be otherwise spilled due to the

network congestion.

2. The balancing price in the scenario of lowest wind power

production is node-independent. This is so because, under this

scenario, the network does not become congested.

3. Even though the scheduled productions do not cause network

congestion at the market stage, the energy price differs among

nodes. This highlights the coupling between energy and balancing

prices induced by the two-stage stochastic programming approach.

Intuitively speaking, the energy price anticipates probable network

bottlenecks during the real-time operation of the power system.

The payments to market participants under the proposed pricing scheme are

indicated in Table XI for the two considered wind penetration levels. While the

system operator makes payments to producers, it receives payments from

consumers. This is why the payments to loads in this table are expressed in

negative numbers. Observe that if the wind penetration level grows, the

payments to conventional producers diminish, whereas the payments to wind

producers increase. Logically, there is a transfer of revenues from conventional

generators to wind producers at the same time that the payments from loads are

reduced due to the free character of the wind energy. In either case, revenue

adequacy in expectation is guaranteed. In fact, for a wind power penetration

level of 26.3% (condition such that network congestion events are probable) the

system operator is expected to incur a financial surplus of $728.1.

Lastly, Tables XII and XIII provide, respectively, the expected profits achieved

by conventional and wind producers under the proposed pricing scheme.

24

24

Observe that all the participants recover their production costs in expectation,

thus making an expected profit greater than or equal to zero. In general, the

Expected profits of conventional producers decrease as they are displaced from

the energy supply by an increasing wind power penetration. Only generating

units 3 and 4 see their expected profit increased due to the fact that they get

more involved in the deployment of reserve with the increment in wind power

penetration.

25

25

4.1.

producers, characterized by their variability and unpredictability. This

constitutes no harm to conventional producers.

26

26

2. This pricing scheme is marginal and results in both cost recovery for

producers and revenue reconciliation, both in expectation.

3. Two sets of marginal prices are derived: pool prices that reflect energy

scheduling and balancing prices that reflect system operation.

4. The proposed prices are derived from the solution of an LP problem.

Thus, they are obtained in an easy and robust manner.

5. The pricing scheme described in this paper does not embody nonconvexities (e.g., start-up costs or minimum power output constraints).

Future work is needed to incorporate such non-convexities.

5. Case study 2

Results from a case study based on the single-area version of the IEEE

Reliability Test System1996 [8] are discussed in this section. For simplicity,

generating units are grouped by type and node. This way, just one binary

variable is required to determine the on/off status of each group of units.

Further, the nuclear and hydro generators are considered must-run units. These

simplifications have no purpose other than to alleviate the computational burden

involved in obtaining the results presented in this case study. By appealing to

the assumption that the electricity market is perfectly competitive, offers

submitted by generating units correspond to their marginal costs of energy

production, which are listed in [8, Table 6]. The generation mix of the power

system also includes two wind farms located at nodes 7 and 8. The same

Weibull distribution, with scale and shape parameters, and, equal to 9.7 and 1.6,

respectively, is used to model wind speed at both sites. The two wind farms are

comprised of 2.5-MW wind generators, model Nordex N80/2500 with a hub

height of 105 m. The power curve of this turbine model can be found in [9].

According to the Wind Turbine Power Calculator provided in this reference, the

estimated capacity factor of both wind farms is approximately 40%. We

consider a system demand of 2850 MW, distributed among nodes as indicated in

[32, Table 5]. Loads are assumed to be inelastic. Therefore, the maximization of

the social welfare in the market-clearing formulation [7] boils down to the

minimization of the operating costs.

Next, we suppose a correlation coefficient between wind farms equal to 0.8 and

we assess the impact of the wind power penetration level on LMPs in terms of

means and standard deviations. For this purpose, we use 10000 samples of the

wind farm power outputs in the simulation process. This number of samples is

high enough to provide estimates for means and variances (the square of

27

27

estimates expressed in percentage) below 1.10 and 2.94%, respectively, for all

the simulations carried out in this case study. In average values, these numbers

drop up to 0.46 and 1.01% in that order. Fig. 2(a) and (b) shows the evolution of

the mean and standard deviation of LMPs at nodes 7, 8, and 20 as the

penetration level of wind generation in the 24-node system increases. Note that

the wind power penetration level is expressed as a percentage of the total

system demand (2850 MW) and is augmented by increasing equally the number

of wind turbines installed in the two wind farms. The choice of the nodes for

analysis is not arbitrary. Nodes 7 and 8 are those where the two considered wind

farms are placed, while node 20 can be seen as representative of those buses

electrically far from the nodes where the wind generation is injected into the

power network. First, the wind power production is used to displace part of the

energy supplied by the groups of 197-MW and 100-MW units placed at nodes

13 and 7, respectively. Then, for a wind penetration level around 17.5%, the

power produced by the wind farms in some scenarios is high enough to keep the

units at node 13 shut down, provided that the group of 12-MW units at bus 15 is

started up. These units are the most expensive ones in the system and as a result,

their utilization pushes the LMPs up and causes the sudden increase that can be

observed in Fig. 2(a). If the wind penetration level is increased a little more, up

to 21%, the percentage of scenarios in which the 12-MW units at node 15 need

to be used drastically decreases and the average values of LMPs start to drop

again as a consequence. Moreover, the exclusion of these small units from the

energy dispatch also justifies the sudden fall in the standard deviations of LMPs

that can be appreciated in Fig. 2(b). In addition, for low wind penetration levels

1% , the wind energy injected at nodes 7 and 8 is able to reach every bus in the

system and consequently, the means and standard deviations of LMPs are all

very similar. The existing differences stem from the loss component of LMPs.

However, from a wind power penetration level higher than 21%, the curves

represented in Fig. 2 start to diverge in a significant manner. The different

behaviors exhibited by the means and standard deviations of LMPs from this

point on are mainly due to the fact that situations in which the network becomes

congested begin to happen, or statistically speaking, begin to be probable. In

such situations, the network caps the amount of wind energy that can be

transferred from nodes 7 and 8 to the rest of buses in the system and as a result,

the effect of wind generation on LMPs becomes locally accentuated. This effect

is twofold: on the one hand, the probability of loads at nodes 7 and 8 being

28

28

supplied by free wind energy increases, with the consequent sharp decrease in

the means of the corresponding LMPs; on the other hand, the energy supply

from wind sources is inherently uncertain and such an uncertainty is passed on

to the LMPs in the form of a considerable increase of their standard deviations.

In general terms, the impact of a growing wind generation on LMPs translates

into a decrease of their means, but an increase of their standard deviations. For

instance, the coefficients of variation of LMPs at nodes 7, 8, and 20 (defined as

the ratio of the standard deviation to the mean) go from 0 for a 0% wind

penetration level to 96, 77, and 21%, respectively, for a 50% wind penetration

level.

This subsection is intended to illustrate that correlation among wind sites can

have a significant impact on LMPs and therefore should not be ignored when

assessing the economic repercussions of wind integration. To this end, we

consider that the number of 2.5-MW turbines installed in the wind farms at

nodes 7 and 8 is 140 and 200, respectively. Therefore, the total wind capacity

connected to the power grid is 850 MW, which represents a wind penetration

level of almost 30%. Fig. 3(a) and (b) represents, respectively, the means and

the standard deviations of LMPs at nodes 7, 8, and 20 as a function of the

correlation coefficient between wind farms. The dashed lines have been

obtained by linear regression, and their only purpose is to stress the general

trends exhibited by the simulation outcomes. In accordance with the results

provided in the previous subsection, a wind penetration level of 30% is high

enough to produce eventual network bottlenecks and hence the remarkable

differences existing among means and standard deviations of different LMPs.

Note that the correlation between wind farms has a minor impact on the means

and standard deviations of LMPs at nodes 7 and 20, but a considerable effect on

the mean and standard deviation of the LMP at node 8. In numbers, if the

correlation coefficient is augmented from 0 to 0.95, the mean of such an LMP

experiences a reduction of 10.3%, whereas its standard deviation suffers an

increase of 30.7%. Logically, power output fluctuations from wind farms fed

with uncorrelated winds cancel out and as a result, the overall wind generation

variability diminishes.

Moreover, due to the occurrence of network congestion, which particularly

affects the transmission line connecting buses 7 and 8, the impact of the

29

29

appraised. In this line, the average value of the LMP at node 8 decreases as this

coefficient approaches 1, because the percentage of scenarios in which the

power produced by the wind farm at this node is spilled increases considerably

from 10.07% ( =0

to 23.36% (

=0.95

which the price at node 8 is zero, specifically from 12.51% ( =0 to 27.13%

( =0.95 . In contrast, the mean of the LMP at node 7 slightly increases with

the correlation coefficient between wind farms, because the average power

generated by the thermal units at this bus also increases from 66.4 MW (

=0

to 87.7 MW ( =0.95 .

30

30

5.1.

Conclusion

impact of an increasing integration of wind power on electricity LMPs. The

impact on both average values and volatilities is analyzed. An increasing

amount of wind power integration results in lower LMPs throughout the

network until bottlenecks appear, which makes local the LMP reduction

inherent to increasing wind power integration. A high correlation among wind

plants has an important impact on LMP volatilities and a reduced impact on

LMP average values. This is a consequence of the fact that no-correlation

originates the statistical cancelling out of wind fluctuations and thus stable

average values. The methodology proposed in this paper allows visualizing the

above phenomena and, which is more important, calculating their actual

numerical impacts. As future works, we intend to contrast the results provided

by the proposed methodology with the empirical analysis of real measurements

from diverse power markets, and to extend the simulation algorithm to account

for inter-hour complexities such as the temporal correlations of wind speed

series and the ramping capabilities of generating units.

31

31

References

[1] http://en.wikipedia.org/wiki/Electricity_market

[2] http://www.iexindia.com

[3]

https://www.borzen.si/en/Home/menu2/Power-Market

Balancing-Market/2Izravnalni-trg-en-US

Operator/The

Renewables in Electricity Markets - Operational Problems, Springer Verlag

[5] Morales JM, Conejo A, Madsen H, Pinson P, Zugno M (2014). Decision

making under uncertainty in Electricity markets - Operational Problems,

Springer Verlag

[6] Morales, J.M., Conejo, A.J., Liu, K., Zhong, J.: Pricing electricity in pools

with wind producers. IEEE Trans. Power Syst. 27(3), 13661376 (2012)

production on locational marginal prices, IEEE Trans. Power Syst., vol. 26, no.

2, pp. 820828, May 2011.

[8] Reliability Test System Task Force, The IEEE reliability test system 1996,

IEEE Trans. Power Syst., vol. 14, no. 3, pp. 10101020, Aug. 1999.

32

32

[Online]. Available: http://guidedtour.windpower.org/en/tour/wres/pow.

[10] H. Heitsch and W. Rmisch, Scenario reduction algorithms in stochastic

programming, Comput. Optim. Appl., vol. 24, pp. 187206,2003.

[11] J. Dupaov, N. Grwe-Kuska, and W. Rmisch, Scenario reduction in

stochastic programming: An approach using probability metrics, Math.

Program., vol. 95, Ser. A, pp. 493511, 2003.

[12] P. Pinson, C. Chevallier, and G. N. Kariniotakis, Trading wind generation

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