Electricity Markets and

Stochastic Producers

Salvador Pineda Morente

Assist. Prof. At University of Copenhagen
Tutorial 3: Electricity markets for renewable based energy systems
IEEE ISGT Europe 2013, Copenhagen, 6-9 October

Outline
Electricity markets: basic concepts
Electricity markets & uncertainty
Electricity markets & investment

Outline
Electricity markets: basic concepts
Electricity markets & uncertainty
Electricity markets & investment

What is a market?
People need certain products

People can produce such products

Place to trade the products

What is a market?
A market is any structure that allows buyers and
sellers to exchange any type of goods, services
and information.
Goods or services are exchange for money.
Market participants consist of all the buyers and
sellers of a good who influence its price.
The market facilitates trade and enables the
distribution and allocation of resources in a
society.
Markets allow any tradable item to be evaluated
and priced.
5

Why is electricity different?

Product

Stored

Transportation

PARIS (50Kg)

ROME (80Kg)

Demand

$4

$1

Electricity market
We need to know the characteristics of the players:
Large fuel-based units (economy of scale)
Technical constraints (required a schedule)
Far from consumption centers (transmission)

Demand level easily forecast

Known daily, weekly, and yearly patterns
High inflexibility

Day-ahead electricity market

We need to know the characteristics of the players:

Day-ahead market
Power producers submit offers to
sell electricity for the next 24
hours
The demand for the next day is
forecast
The cheapest offers are accepted
up to the forecast demand

Day-ahead electricity market

Day 1

Day 2

12 a.m.
Demand
4-5 p.m.
Unit

Cost

Offers

G1

200@10

G2

15

100@20

G3

25

100@30

Price

G3

Demand

G2

20
250 MW

G1

250MW

Power

Day-ahead electricity market

Day 1

Day 2

12 a.m.
Demand
Price

G3
G2

20
G1

250MW

Power

10

Day-ahead electricity market

Day 1

Day 2

12 a.m.
Demand
Price

G3

Demand = 250x20 = 5000$

G1 = 20x200 = 4000$
G2 = 20x50 = 1000$

This is called marginal pricing

G2

20
G1

250MW

Power

11

Day-ahead electricity market

What about the network?
300MW

G1
G2
Price

G3

225MW

G1
G2

250MW
Price

Demand

250MW

Demand

G3

G3

G2

20

G3

G2

G1

G1

Power

Power
12

Day-ahead electricity market

What about the network?
What should be the price?
Bus 1 = 20 $/MWh
Bus 2 = 30 $/MWh

225MW

G1
G2
Price

G3
250MW

Demand

Demand = 250x30 = 7500$

G3

G1 = 20x200 = 4000$
G2 = 20x25 = 500$
G2

G3 = 30x25 = 750$
2250$ extra!!

G1

Power
13

Day-ahead electricity market

What about the network?
225MW

G1
G2
Price

G3
250MW

Demand
G3
G2
G1

Power
14

Day-ahead electricity market

Large and inflexible units
Predictable demand
Day-ahead electricity market
Generating unit schedules determined 24h ahead
Electricity price equal to the marginal cost
Locational marginal prices if the network is
congested

15

Day-ahead electricity market

16

Day-ahead electricity market

17

Day-ahead electricity market

18

Day-ahead electricity market

19

Day-ahead electricity market

What about the wind?
Forecast wind = 30 MW
Price

Demand

G3
G2

20

G1
W
250MW

Power
20

Day-ahead electricity market

What about the wind?

Wind cannot be predicted 24-36 hours ahead!!

How do we deal with wind forecast errors?
Nowadays: balancing market
21

Balancing electricity market

Day 1

Day 2

12 a.m.
Wind forecast = 30 MW
Price

4-5 p.m.
Unit

Cost

Offers

30@0

G1

Demand

G3
G2

20

200@10
250 MW

G2

15

100@20

G3

25

100@30

Demand

G1
Power

W
250MW

22

Balancing electricity market

Day 1

Day 2

3 p.m.

12 a.m.
Wind forecast = 30 MW
Price

4-5 p.m.

Wind power= 20 MW
Demand

DA Schedule
Unit

MW

30

G1

200

G2

20

G3

G3
G2

20

G1
Power

W
250MW

23

Balancing electricity market

Day 1

Day 2

3 p.m.
Wind power= 20 MW
Price

4-5 p.m.
DA Schedule

Demand

Balancing market

Unit

MW

UP

DOWN

30

G1

200

G2

20

10@25

G3

20@35

G3
G2

20

G1
Power

W
250MW

24

Balancing electricity market

Day 1

Day 2

3 p.m.
Wind power= 20 MW
Price

4-5 p.m.
DA Schedule

Demand

Balancing market

Unit

MW

UP

DOWN

30

G1

200

G2

20

10@25

G3

20@35

G3
G2

20

G1
Power

W
250MW

25

Balancing electricity market

Day 1

Day 2

3 p.m.
Wind power= 20 MW
4-5 p.m.
DA Schedule

Balancing market

Unit

MW

UP

DOWN

30

G1

200

G2

20

10@25

G3

20@35

26

Balancing electricity market

Day 1

Day 2

3 p.m.
Wind power= 20 MW
4-5 p.m.
DA Schedule
Unit

MW

20

G1

200

G2

30

G3

27

Balancing electricity market

Lets check the profits
4-5 p.m.
Unit

DA market

B market

Fuel cost

Total

20x30=600

-25x10=-250

350

(20-0)x20=400

G1

20x200=4000

5x200=1000

3000

(20-5)x200=3000

G2

20x20=400

25x10=250

15x30=450

200

(20-15)x30=150

G3

28

Balancing electricity market

Lets check the profits
4-5 p.m.
Unit

DA market

B market

Fuel cost

Total

20x30=600

-25x10=-250

350

(20-0)x20=400

G1

20x200=4000

5x200=1000

3000

(20-5)x200=3000

G2

20x20=400

25x10=250

15x30=450

200

(20-15)x30=150

G3

Wind producers are paying for forecast errors!!

29

Balancing electricity market

Day 1

Day 2

3 p.m.
Wind power= 40 MW
Price

4-5 p.m.
DA Schedule

Demand

Balancing market

Unit

MW

UP

DOWN

30

G1

200

G2

20

10@25

10@15

G3

20@35

G3
G2

20

G1
Power

W
250MW

30

Balancing electricity market

Day 1

Day 2

3 p.m.
Wind power= 40 MW
Price

4-5 p.m.
DA Schedule

Demand

Balancing market

Unit

MW

UP

DOWN

30

G1

200

G2

20

10@25

10@15

G3

20@35

G3
G2

20

G1
Power

W
250MW

31

Balancing electricity market

Day 1

Day 2

3 p.m.
Wind power= 40 MW
4-5 p.m.
DA Schedule
Unit

MW

40

G1

200

G2

10

G3

32

Balancing electricity market

Lets check the profits
4-5 p.m.
Unit

DA market

B market

Fuel cost

Total

20x30=600

15x10=150

750

(20-0)x40=800

G1

20x200=4000

5x200=1000

3000

(20-5)x200=3000

G2

20x20=400

-15x10=150

15x10=150

100

(20-15)x10=50

G3

20x250=5000

5000

20x250=5000

33

Balancing electricity market

Lets check the profits
4-5 p.m.
Unit

DA market

B market

Fuel cost

Total

20x30=600

15x10=150

750

(20-0)x40=800

G1

20x200=4000

5x200=1000

3000

(20-5)x200=3000

G2

20x20=400

-15x10=150

15x10=150

100

(20-15)x10=50

G3

20x250=5000

5000

20x250=5000

Wind producers are paying for forecast errors!!

34

Balancing electricity market

Is this fair?
Is it necessary to clear the market 24-36h ahead?

24-36h ahead

Shorter horizon

Low values of wind penetration!!

35

Balancing electricity market

What would happen if wind capacity increases?
Wind forecast = 100 MW
Price

4-5 p.m.
Unit

Cost

Offers

100@0

G1

200@10

Demand

15

100@20

G3

25

100@30

G3
G2

250 MW
G2

Demand

G1

10
W

250MW

Power
36

Balancing electricity market

Demand

Wind

Prices

37

Balancing electricity market

What would happen if wind capacity increases?
Day 1

Day 2

12 a.m. Wind forecast = 100 MW

Price
4-5 p.m.

Demand

DA Schedule
Unit

MW

100

G1

150

G2

G3

G3
G2
G1

10
W

250MW

Power
38

Balancing electricity market

What would happen if wind capacity increases?
Day 1

Day 2

3 p.m. Wind power = 50 MW

Price
4-5 p.m.
DA Schedule

Demand

Regulating market

Unit

MW

UP

DOWN

100

G1

150

G2

10@25

G3

20@35

G3
G2
G1

10
W

250MW

Power
39

Balancing electricity market

What would happen if wind capacity increases?
Day 1

Day 2

3 p.m. Wind power = 50 MW

Price
4-5 p.m.
DA Schedule

Demand

Regulating market

Unit

MW

UP

DOWN

100

G1

150

G2

10@25

G3

20@35

G3
G2
G1

10
W

250MW

Power
40

Balancing electricity market

What would happen if wind capacity increases?
Day 1

Day 2

3 p.m. Wind power = 50 MW

4-5 p.m.
DA Schedule

Regulating market

Unit

MW

UP

DOWN

100

G1

150

G2

10@25

G3

20@35

Wind 50MW
lower than
expected

Only 30MW
up power

20MW of
load
shedding
41

Balancing electricity market

What would happen if wind capacity increases?
Day 1

Day 2

3 p.m. Wind power = 150 MW

Price
4-5 p.m.
DA Schedule

Demand

Regulating market

Unit

MW

UP

DOWN

100

G1

150

G2

10@25

10@15

G3

20@35

20@25

G3
G2
G1

10
W

250MW

Power
42

Balancing electricity market

What would happen if wind capacity increases?
Day 1

Day 2

3 p.m. Wind power = 150 MW

4-5 p.m.
DA Schedule

Regulating market

Unit

MW

UP

DOWN

100

G1

150

G2

10@25

10@15

G3

20@35

20@25

Wind 50MW
higher than
expected

None down
power

50MW of
wind
spillage
43

Balancing electricity market

Low wind power penetration

24-36h ahead

Shorter horizon

44

Balancing electricity market

High wind power penetration

24-36h ahead

Shorter horizon

45

Electricity market: basic concepts

Day-ahead
market
Balancing

Day-ahead
market

Balancing

46

Outline
Electricity markets: basic concepts
Electricity markets & uncertainty
Electricity markets & investment

47

Market design solutions

Coordination between day-ahead and balancing
Conventional MC

Stochastic MC

Day-ahead dispatch
compute disregarding
balancing operation

Day-ahead dispatch
takes into account
balancing operation

Day-ahead

Balancing

Day-ahead

Balancing

48

Market design solutions

Coordination between day-ahead and balancing
Conv MC
Price

Forecast=100 MW
Wind(30%)=130 MW
Price

Demand

Stoc MC
Demand

G3

G3

G2

G2

G1

10

G1

W
250MW

Power

250MW

Power
49

Market design solutions

Coordination between day-ahead and balancing
Conv MC

Stoc MC

50

Market design solutions

Coordination between day-ahead and balancing

Expensive
but flexible

Cheaper than
G1 but inflexible

Unit

G1

G2

G3

Pmax (MW)

100

110

50

C ($/MWh)

35

30

10

C_up ($/MWh)

40

C_do ($/MWh)

34

P_up (MW)

20

P_do (MW)

40

0
51

Market design solutions

Coordination between day-ahead and balancing
Conv MC
Agent

Day-ahead

G1

G2

86

G3

50

WP

34

Stoc MC

Rest of the units

dispatched following
least-cost merit order

Wind dispatched to its

expected production

52

Market design solutions

Coordination between day-ahead and balancing
Conv MC

Stoc MC

Agent

Day-ahead

Agent

Day-ahead

G1

G1

40

G2

86

G2

70

G3

50

G3

50

WP

34

WP

10

Rest of the units

dispatched following
least-cost merit order

Wind dispatched to its

expected production

G1 dispatched
out-of-merit

Wind dispatched below

its expected production

53

Market design solutions

Coordination between day-ahead and balancing
Conv MC
Agent

Day-ahead

G1

Stoc MC

Balancing

Agent

Day-ahead

G1

40

G2

86

G2

70

G3

50

G3

50

WP

34

WP

10

High

Low

Balancing
High

Low

54

Market design solutions

Coordination between day-ahead and balancing
Conv MC
Agent

Day-ahead

G1

G2

Stoc MC

Balancing

Agent

Day-ahead

G1

40

86

G2

70

G3

50

G3

50

WP

34

16

WP

10

High

Low

Balancing
High

Low

55

Market design solutions

Coordination between day-ahead and balancing
Conv MC
Agent

Day-ahead

G1

G2

Stoc MC

Balancing

Balancing

Agent

Day-ahead

G1

40

-40

86

G2

70

G3

50

G3

50

WP

34

16

WP

10

High

Low

High

Low

56

Market design solutions

Coordination between day-ahead and balancing
Conv MC
Agent

Day-ahead

G1

Stoc MC

Balancing

Agent

Day-ahead

High

Low

20

G1

G2

86

G3

50

WP

34

16

Balancing
High

Low

40

-40

G2

70

G3

50

WP

10

57

Market design solutions

Coordination between day-ahead and balancing
Conv MC
Agent

Day-ahead

G1

Stoc MC

Balancing

Agent

Day-ahead

High

Low

20

G1

G2

86

G3

50

WP

34

16

Balancing
High

Low

40

-40

G2

70

G3

50

WP

10

Day-ahead cost

3080

Day-ahead cost

4000

Balancing cost

320

Balancing cost

-816

Load curtailment

320

Load curtailment

Total

3720

Total

0
3184
58

Market design solutions

Coordination between day-ahead and balancing
Conv MC
Agent

Expected

G1

Stoc MC

Per-scenario

Agent

Expected

High

Low

1320

3300

G1

G2

G3

1000

1000

WP

-900

1020

Per-scenario
High

Low

24

174

-200

G2

1000

G3

1000

1000

1000

-3780

WP

916

1326

300

Higher profit of wind producers under Stoc MC

Flexible units may incur losses under Stoc MC

59

Market design solutions

Coordination between day-ahead and balancing
Conv MC

Day-ahead

Balancing

Stoc MC

Day-ahead

Balancing

- DA dispatch: cheaper go first

- DA dispatch: out of merit-order

- Balancing operation not included

- Balancing operation included

- Minimizes day-ahead cost

- Minimizes total cost

- Higher imbalance cost

- Reduces imbalance cost

- All units obtain profits

- Flexible units may incur losses

60

Outline
Electricity markets: basic concepts
Electricity markets & uncertainty
Electricity markets & investment

61

Expansion of stochastic units

Power producer
Decide new units
Maximize profit
Capacities
& location

Dispatch
& prices
Market operator
Decide dispatch
Minimize total cost
62

Expansion of stochastic units

Power producer

Bilevel programming

Market operator
Solve replacing lower-level
problem by its KKT conditions
63

Expansion of stochastic units

?
Power producer

Power producer

Decide new units

Decide new units

Maximize profit

Maximize profit

Capacities
& location

Dispatch
& prices

Capacities
& location

Dispatch
& prices

Market operator

Market operator

Decide dispatch

Decide dispatch

Minimize total cost

Minimize total cost

64

Expansion of stochastic units

?
Power producer

Power producer

Decide new units

Decide new units

Maximize profit

Maximize profit

Capacities
& location

Dispatch
& prices

Capacities
& location

Dispatch
& prices

Market operator
Decide dispatch

Day-ahead
market

Balancing
market

Minimize total cost

65

Expansion of stochastic units

Low wind

High wind

Cheap balancing

Expensive balancing
Bus 1

Bus 2

Where would you locate new wind generating units?

What about wind forecast errors?

We need to model both day-ahead and balancing markets

Will the coordination between DA-B affect investment?

66

Expansion of stochastic units

Investment
under Conv MC

Investment
under Stoc MC

Power producer

Power producer

Decide new units

Decide new units

Maximize profit

Maximize profit

Capacities
& location

Dispatch
& prices
Market operator

Day-ahead

Balancing

Capacities
& location

Dispatch
& prices
Market operator

Day-ahead

Balancing

67

Expansion of stochastic units

Investment
under Conv MC

Investment
under Stoc MC

Bilevel model

Bilevel model

Maximize profit

Maximize profit

Investment constraints

Investment constraints

Market operator

Market operator

Day-ahead

Balancing

Day-ahead

Balancing

68

Expansion of stochastic units

Bus1

Bus2

Capacity factor = 0.39

Conv MC

Capacity factor = 0.49

Stoc MC

69

Expansion of stochastic units

Bus1

Capacity factor = 0.39

Bus2

Capacity factor = 0.49

70

Expansion of stochastic units

Investment model

Investment model
Maximize profit

Day-ahead

Investment (Conv MC)

Maximize profit
Day-ahead

Balancing

Maximize profit

Day-ahead

Balancing

Investment (Stoc MC)

<

Maximize profit
Day-ahead

Balancing

71

Thanks for your attention!

Questions?

72