8’ International Conference on ProbabilisticMethods Applied to Power Systems, Iowa State University, Ames, Iowa,
September 12-16,2004
Impacts of Bulk Power System Reliability
Constraints on Power Market Price Volatility
Shi-Jie Deng A. P. Sakis Meliopoulos
Abslrncr-The paper presents a market simulation approach
for investigating the impacts of power system reliability
constraints on the volatility of electricity prices. A locational
markginal price @,MI?) based power market is considered under
a full AC power flow model with voltage Constraints and
postulated contingency tests. The paper outlines a formulation of
the security and reliability constrained AC optimal power flow
for modeling pool-based power market and provides a case study
examining how the volatility of LMF’s varies with uncertainties in
loads, voltage stability bounds and transmission outages on a 7-
bus system.
Index Term-Locational marginal price, price volatility, AC
power flow, voltage bounds, and contingency analysis.
1. INTRODUCTION
he spot pricing scheme for electric power systems is fust
Tpropo!ed by.Bo? et al: (1984). Under this scheme,
electricity pnce is established at each bus based on the
cost of accommodating one unit of loadgeneration deviation.
As the spot prices usually differ with the location of the buses
in a congested power transmission network, they are termed as
locational marginal prices (LMPs). The northeast US. power
markets such as the Pennsylvania-New Jersey-Maryland and
the New York power pools are implementations of the spot-
pricing scheme with LMPs. In these markets, LMPs serve as
the basis for power transaction settlements. Moreover, the
difference between LMPs at two bues is the payoff of the so-
called financial transmission right (FTR) for the pair of the
buses, which are designed for hedging transmission risks and
establishing correct market signals for resource allocation and
capacity investment introduced as illustrated in Hogan (1992).
In most asset valuation and risk management applications, it is
far from enough to only have a good forecast of the LMPs.
One would also need to accurately know the LMPvolatilily in
order to properly value financial instruments with payoffs
determined by the LMPs such as the option-type FTRs and
other financial options on electricity.
Shi-lie Jkng is with the School of Industrial and Systems Engineering,
Georgia lnstiNte of Tech”ology, Ailanta, GA 30332 USA. (Phone: 678-230-
3389; fax: 404-894-2301; e-mail: dena?%ve.eatech.edu).
A.P S k i s Meliopoulos is with the School of Electrical and Computers
Engineering, Georgia Institute of Technology, Atlanta, GA 30332 USA. (e-
mail: Skis.Meliowulosheceearech.edu).
Haibin Sun is with the School of Industrial and Systems Engineering,
Georgia ImtiNte of Technology, Atlanta, GA 30332 USA. (e-mail:
hsunhisve.eatech.edu).
Copyright Iowa State University, 2004
362
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Haibm Sun
In electric power markets with the spot pricing scheme, it has
been observed that the LMPs fluctuate tremendously over
time and across locations. The extraordinary price volatility
creates strong demands for financial instruments (such as
electricity forward contracts and FTRs) among risk-averse
buyers and sellers of electricity for hedging market and
transmission risks. However, the transaction volume of the
electricity fmancial instruments is so far quite limited
comparing to other energy commodities such as natural gas
and crude oil. One potential explanation of the relatively low
market liquidity is the hesitation in trading electricity due to
the lack of understanding about the drivers of the electricity
price volatility. While the supply and demand characteristics
directly influence the volatility of electricity LMPs, other
influential factors affecting the LMP volatility can be
attributed to system security constraints, reliability constraints,
and the transmission capacity constraints. The majority of the
existing literatures on modeling power markets are based on
the DC power flow approximation to an AC power system,
which is not capable of analyzing the impacts of power system
security constraints (such as voltage stability) on power price
behavior. We propose to investigate the drivers of the
eleclicity price volatility based on an AC power system
model. Specifically, we examine how the volatility of LMPs
is affected hy the system load fluctuation subject to voltage
bounds and transmission line outage contingencies.
This paper is organized as follows, First, we present an AC
power flow formulation of an economic dispatch problem
subject to system security constraints for simulating LMPs in
a pool-based power market. As the impacts by system
security and reliability constraints on power price volatility
can be quite system specific, we then provide a case study
with a 7-bus system examining how the volatility of LMPs
varies with uncertainties in loads, voltage stability hounds and
transmission outages. We conclude with some preliminary
observations obtained from the sample system.
11. RELIABILITY CONSTRAINED AC POWER FLOW AND
LOCATIONAL h4ARGINAL PRlCE
Locational marginal price (LMP) is the cost of
accommodating one unit of deviation in electricity supply or
demand at each bus in an electric power network taking into
consideration the network and security constraints of the
transmission system. LMPs are obtained from the optimal
power flow solution of an economic dispatch problem.
 A. Economic Dispatch: a Security Comtrained Optintal AC
Power Flow
We consider a pool-based power market where the LMPs are
set by the solution of an economic dispatch problem. The
power flow solution of an economic dispatch problem is
called the optimal power flow (OPF). The objective of an
economic dispatch problem is usually to minimize the total
generation costs of serving system loads or to maximize the
total social welfare by dispatching all the loads and generators
optimally. Several recent papers (Jacobs 1997, Hao 1998, and
Alonso 1999) discuss the rationales for choosing various
objectives for the economic dispatch problem and the
respective implications on the suppliers and consumers. We
define the economic dispatch objective to be minimizing total
generation cost of satisfying all loads.
Generation and load are modeled as aggregate power injection
and withdrawal at the respective nodes (or, buses) in the
power system. Only native loads are considered here although
market loads are straightforward to be incorporated into the
formulation. Generators are characterized by the generation
cost functions. A bilateral or multilateral transaction can he
incorporated into nodal generation and load hy breaking it into
a set of power injections and withdrawals at one or multiple
pairs of source and sink nodes.
A security constrained OPF (SCOPF) is a solution to an
economic dispatch problem with additional power system
constraints corresponding to a set of contingency scenarios.
The SCOPF dispatch solution is feasible in a power network
that is either normal or subject to any contingency in the
contingency set, thus a more reliable and secure economic
dispatch solution.
Given present system operating condition, a system operator
determines the optimal system dispatch by solving the
following SCOPF problem.
A4in iC(p,)
I=I
Subject to:
FEq(X,p,q,LA)=O
F'"'"x,p,q,L,A,T)< 0
F F q(x', p , q, L, A ) = 0
F'"'~((x', p , q,L, A, T )S 0
generation cost function, either a
generation cost function of output level, or a supply
acquisition cost function determined hy the supply
bid curve.
vector of real power generation outputs,
p = [p,l i = 1,2,...1 .
total number of generation units.
equality constraint set.
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F'""(.) inequality constraint set
X vector of state variables
x' vector of post-contingency state variables
4 vector of reactive power generation outputs,
q = [q, 1 i = 1,2,. .. I
L vector of load quantities, L = [L, 1, j = 1,2, '.. J
J total number of loads
A system admittance parameter determined by all
transmission lines and transformer branches, etc.
A,, m = 1,2,...M
M total number of circuitltransformer components
Specifically, the equality constraints cover power flow
equations G ( x , p , p , L ) =0 and the control variable set
points such as the slack bus voltage magnitude and phases.
The inequality constraint set includes the transmission line
-
capacity constraints T ( x )2 T I where Tis the loading
1
capacity of circuit T = [T, k = 1,2,. ..K with K being the
total number of circuits; the voltage magnitude constraints
- -
-V 2 v 5 V , where v and 41 are the respective upper and
lower bounds; the generator real power output constraints
- -
p S p 5 p ,where p and -p are upper and lower bounds of
-
the real power generation level, respectively; and the reactive
power feasible region constraints
~ = f ( p ) 2 q < i = J ( p where), - and
f() 7(.)
are
functions of p which reflect the characteristics of each
generator. Note that the state variable vector XI is associated
with the post-contingency scenarios. Therefore, the last two
sets of constraints stem from contingency tests.
The objective function representing total generation costs is
determined hy the marginal cost functions and/or the supply
bids of the generation units. Locational marginal price at each
bus is imputed from the incremental generation cost caused by
one unit of load deviation at that bus. The value of a financial
transmission right can be readily computed from the locational
price differences behveen the two underlying buses.
B. Economic Dispatch under Sj~sleniUncertainties
System uncertainties due to fluctuating system loads, outage
of a transmission line or transformer branch can be
incorporated into formulation (1) by replacing certain
parameters with random variables as follows.
hfin i ~ ( p ,
.,=I ~ .
(2)
S,,bject to:
FQ(x,p,q,L",A")=0
---
F""q(x, p , q, L , A , T )< 0
~~9 (xr,p,q,L",A")= 0
 - A-, T- )s 0
F'neq( Y , p ,q , L , 65 w
1
where 0 0411024 3 100

E(.) uncertain generation cost function, either a primitive

generation cost function of output level, or a supply
acquisition cost function determined by the supply hid
curve which varies with market conditions.
I

L vector of loads quantities, L = [E,], j = 1,2, '..J .

-
A
-
uncertain system admittance parameter determined by
A , of all circuithansformer components, where
200
I

A, = A , . u , , m=1,2,...M .
-
T vector of loading capacity under possible transmission
I I
2mUG
0 04tj0.24
2
cwG
line or transformer branch outage, T = [Tm.un]. Fig 1. A 7-BusSystem

U, a 0/1 variable with value 0 corresponding to The cost function of the generation units is defined as
circuitltransformeroutage. C ( p )= k . (o+b . p + c . p 2 )
The effect of market uncertainties on network topology is where C(.) is the generation cost measured in dollars, p is
I

reflected by network parameters A and T" . In-the objective the output level in M4' and ( k , a , b , c ) are generator-
function, the generation cost function becomes c(.)
since the
specific parameters given in Table 1.
generation costs and supply bids have random variables in Typical uncertainties arising in an electric power system are
their parameters. due to (hut not limited to) the following facts.
a. The load forecasting techniques cannot predict loads
111. VOLATILITYOF LMPS: A 7-BUS SYSTEM CASE STUDY precisely thus the load forecast uncertainty arises.
Since the impacts of load, voltage and transmission outage on b. The failure rate of a transmission line or a generating unit
market price volatility can he quite system specific, we present is a function of physical characteristics, capacity size,
a preliminary analysis based on a case study with a 7-bus test design, location, and operating environment. Thus, with a
system taken from the sotbare Powerworld Simulator minimum number of circuits and a fined generation
(Powerworld Corporation). The system topology of the test resewe margin, supply interruption (for both real and
system is illustrated in Figure 1. We provide a short reactive power) risks abound.
description of the system and then present the computational In the next two sections, we examine through simulation bow
results. the power price (i.e. LMP) volatility varies with different
voltage bound constraints and transmission line loss scenarios.
A . System Description
The test system consists of seven buses. Five generators are B. Effects of Voltage ConsIrainis on LMP Volatility
located at buses 1,2,4, 6, and 7. Six loads reside at buses 2,3, In an electric power system, the voltage levels at all buses
4, 5, 6, and 7. Bus 7 is selected as the system slack bus with are controlled to stay within certain lower and upper hounds
its voltage magnitude kept at unit value. In Figure 1, the MVA to maintain the system stability. Such voltage level
capacity of a circuit is marked above or to the left of the requirement constitutes an important part of the inequality
circuit while the per-unit-value of the series constraints in the security constrained economic dispatch
resistancdreactance is marked below or to the right of the problem. To illustrate how the voltage constraints influence
circuit. Load quantities in unit ( M V + jMVar ) are market price volatility, we assume that the system loads
underscored. The shunt admittances are neglected in our fluctuate uniformly between 85% and 115% of the normal
computations. level. While keeping all other factors fined, we change the
lower and upper voltage hounds from (0.9, 1.I) times the unit
value to (0.98, 1.02) times the unit value. For every feasible
BUSID I k a b C voltage region, we calculate the LMP volatility at each bus
1 I 2.035 373.5 7.62 0.002 induced by the fluctuating loads. As shown in Figure 2 (we
2.061 403.6 7.52 0.00136 use buses 1, 2, 3, 4, and 6 in the following figures and tables
2.093 253.2 7.84 0.00134 to label all buses of the system), a change in the voltage
2.139 388.9 7.57 0.00131 constraints in terms of making the voltage bounds a little
2.574 194.3 7.77 0.00194 tighter does not have much effect on market price volatility
when the voltage feasible regions are relatively large at all
buses. However, if the voltage constraints become tighter

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 than certain threshold level, namely the voltage feasible
regions are compressed to small enough domains, then the
smaller the feasible voltage regions are the more volatile the
LMps become.
+Bus1 +Bus2 +Bus3 +Bus4 +Bus6
0.25
I r:
As WO
of FcarLk Vokage V&s
Fig 2. Volatilities of LMP at Specific Buses vs. Voltage
Constraints as System Load fluctuates
For a transmission line ij connecting bus and bus j with
series resistance R , reactance X , real power flow CJ,and
IeactivePower flow Qg ( i to J ), the difference
hemeen bus j and bus j is computed as
v, = ( R +j X ) .(qJ+ jQ, /v . ), eJ4 where and
are voltage magnitude and phase angle at bus i, respectively.
When the R of a transmission line is high, as it is often the
case in a system with low voltage levels and/or long
transmission lines, the real power flow P greatly affects the
voltage differences between the terminal buses of all
transmission lines. For a system with a fKed real power flow
P , a higher value of R would imply a larger voltage
difference between the terminal buses of a transmission line.
As the voltage differences between terminal buses increase,
more and more voltage bound constraints become binding.
Consequently, the power price volatility increases. To
illustrate this effect, we change all series resistances R 's in
the 7-bus system proportionally to their respective base values
while keeping the rest parameters fixed and simulate the
locational power prices. With the proportion of the resistance
R ranging from 0.5 to 4, the voltage hounds being (0.9, 1.1)
times the unit value, and the system loads fluctuating
uniformly between 85% and 115% of their normal levels, we
calculate the LMP volatilities at all buses and plot them in
Figure 3. Generally speaking, the higher are the R values,
the larger is the impact by voltage constraints on the LMP
volatility. When the R values exceed certain threshold level
(2 times the base values in the 7-bus sample system), the LMP
volatilities increase significantly as R values increase.
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k 0.15
-0 ~ ~~~~~
. -
0.5 1 1.5 2 2.5 3 3.5 4
A ResltanccRV&cs h r s s s
Fig 3. LMP Volatilities as System Load fluctuates vs. Resistance
with Fixed Voltage Constraints
Skk&
On the other hand, assuming that the R values are fired, we
investigate the effect of varying real power flow on the LMP
volatility. By fixing the voltage constraints at (0.9, I . 1) times
the unit values and increasing - the base case system load level.
the volatilities of market prices resulting from the fluctuating
load are calculated and given in Table 111. Table 111 w n f i m s
the intuition that the L?% volatility increases with the base-
case system load. One other observation is that when the load
reaches certain level at which the voltages are extremely hard
to maintain, the power price volatilities increase dramatically.
8, TABLEm VOLATlLlTES OF Lh@ VS INCREASING SYSTEM LOAD
WITH FIXEDVOLTAGE CONSTRANS
I /+IO% /+IS% 1+20% 1+2j%
Following a similar argument, for a system with high series
reactance X , the reactive power flow Q has a significant
impact on market price volatilities as well. We conclude that
the voltage constraints generally increase the LMP volatility
and such effect is amplified in a system with either ( P ,R ) or
( Q ,X ) being high.
C. Effects of Conlingencjl Tests on LA4P l'olaiiliry
Contingency analysis is a vital part of any power system
analysis effort. Usually, a contingency list is formed to include
probable events such as the openinglclosing of a transmission
line or transformer, the losthewvery of a particular generator,
and switching of a control device, which could potentially
affect the reliability and security of the power system
operations. A ( N - 1 ) test rule is usually the practical norm
adopted in industry for contingency analysis. We assume that
the system loads fluctuate uniformly between 85% and 115% of
the base levels. We expand a contingency list from the initial
case of no line-outage to a list consisting of 5 cases by adding 4
cases of line 6-7 outage, line 3-4 outage, and line 4-5 outage one
at a time. We then compute the volatilities of market prices at
all buses resulting from the fluctuating loads during each step
365
 of the contingency list expansion. The results are plotted in Again, the system-wide LMP volatility goes up and down
Figure 4 where the x-axis represents the number of cases in a without following any trend as the contingency list expands.
contingency list. One potential explanation for the declining volatility when a
contingency list is expanded is that, as the contingency list
n.ll~ B ! x I + B ! x ~ + B ! x ~ * B I E I~ + + + B ~ ~ expands, the dispatch solution becomes more and more
conservative, and the LMP at a bus depends more or less on
generators adjacent to that bus. Therefore the LMP shall closely
approximate the marginal costs of the generaton and yield little
volatility.
IV. CONCLUSION
This paper studies the impacts of reliability and voltage stability
constraints on power market price volatility. In simulating
power price in the form of LMP in a pool-based power market,
a security constrained AC power flow formulation that
incorporates the power system reliability and security
Fig 4. LMP Volatilities at Chosen Buses vs. Reliability constraints is adopted for solving the economic dispatch and
Contingency List as System Load fluctuates setting the market prices. System operating conditions and
system parameten are sampled to investigate the impact of
In Figure 4, as the contingency test list expands, the LMP system reliability and stability constraints on market prices.
volatilities either increase or decrease without any general Specifically, we examine the effects of load flumations,
monotonicity. Therefore, there is no direct connection between voltage constraints and transmission line-outage contingencies
the size of contingency list and the power price volatility at a on power price volatility. We illustrate the significance of the
specific bus. impacts by these constraints on power price volatility through a
case study with a 7-bus test system. We observe that the power
In addition, to inspect the impact of contingency tests on the price volatilities increase with both the real and reactive system
dispersion of market prices at all buses within the system, we load base case levels. Voltage constraints also affect the power
define the volatility of the system-wide LMPs to he price volatility. In particular, the market prices have higher
'"''.'"I = 2(LhfP, -E)',
8 4
where n is number of
volatilities as the voltage constraints become more stringent to
satisfy. The significance of such effect of voltage constraints
depends on the system resistanceheal power flow and
buses in the system, L h f e is the locational marginal price at reactanceireactive power flow. However, the effects by circuit-
outage contingency tests on the market price volatility depend
bus i , and E = -.1 "
LMP, . We repeat the above on the exact contingency assumption and the corresponding
system topology.
experiment and calculate the V'"'""' resulting form the ACKNOWLEDGEhENT
fluctuating system loads. The results are illustrated in figure
This research is partially supported by a grant from the Power
5.
System Engineering Research Center (PSERC) and the NSF
grant ECS-0134210. These supports are greatly appreciated.
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