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# DURHAM UNIVERSITY - SCHOOL OF ENGINEERING - ENERGY MARKETS AND RISKS

PowerWorld Simulation
Exercise
Economic Dispatch, Optimal Power Flow and
Locational Marginal Pricing
Ariel Villalón Monsalve
18/03/2011

## PART 1 – OPTIMAL DISPATCH ........................................................................................................ 3

I.1 CONSTANT MARGINAL COSTS .............................................................................................. 3
I.2 VARIABLE MARGINAL COSTS ................................................................................................ 9
PART II: LOCATIONAL MARGINAL PRICING (LMP)....................................................................... 21
II.1 BASE CASE – UNIFORM PRICING (TRANSMISSION CONGESTION NEGLECTED)........... 21
II.2 COMPETITION IN QUANTITIES............................................................................................ 25
II.3 COMPETITION IN PRICES ................................................................................................... 33
II.4 LOCATIONAL MARGINAL PRICES: congestion included ...................................................... 37
References ...................................................................................................................................... 42

## Ariel Villalón M. – MSc NRE 2010/2011 Page 2

PART 1 – OPTIMAL DISPATCH

## Table 1. Generation Costs

Generator 1 6 2 4 7
Incremental Cost (£/MWh) 2 4 6 10 12
Min MW 0 0 0 0 0
Max MW 400 500 500 200 600

## Figure 1. Configuration of the seven-bus system

For the configuration shown in the figure 1, the output of each of the generators is:

## Table 2. Output of the generators

Generator 1 6 2 4 7
Output MW 102 200 170 95 888

The total cost per hour for the seven-bus system is 17,092 £/h.

## Merit Order – manual action

Manually, all the generators but 7 were set to their maximum output, in order to minimize the total cost
of generation per hour in the seven-bus system.

Having done that, the results are summarized in table 3 and figure 2:

## Table 3. Outputs of the generators

Generator 1 6 2 4 7
Output MW 400 500 500 200 -51

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Figure 2. Seven-bus system. Merit Order – manual action

The total cost per hour for the seven-bus system is 10,645 £/h. Increasing the generation for cheaper
generators will decrease the total cost per hour for the whole system.

The latter mentioned fact does not assure an optimum solution from the economic point of view,
considering the whole seven-bus system. Just the optimum may be found following the equimarginal
costs principle.

## Table 4. Economic dispatch with transmission losses neglected

Generator 1 6 2 4 7
Output MW 400 500 500 134 0

Figure 3. Economic dispatch with transmission losses neglected for the seven-bus system

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1. Check the economic dispatch calculated by the program and compare it with your manual
economic dispatch. Are there any differences?

By diminishing the power output of some generators, in this case, the generator 4, that has a marginal
cost of 10 £/MWh, the economic dispatch allows to achieve a lower total cost per hour for generation
in the whole seven-bus system.

In this case, the total cost per hour is 10,597 £/h, for a generation of 1,534 MW, and a demand of
1,406 MW (128 MW of losses).

2. Which generator is at the margin (i.e. is partly loaded and supplies the last MW of demand)
and why? What value has the system lambda? Why?

The generator 4 is the marginal generator because is partly-loaded (output 134 MW of maximum
output of 200 MW), mainly due to its marginal cost which is the highest of the loaded generators.

For this case the system lambda corresponds to the marginal cost of the marginal generator, being 10
£/MWh. This system lambda is the same for the whole system because there are no constraints for
transmission lines.

## Table 5. Economic dispatch with transmission losses included

Generator 1 6 2 4 7
Output MW 400 500 500 148 3

Figure 4. Economic dispatch with transmission losses included for the seven-bus system

3. How have the generation cost and transmission losses changed? Compare with the case
when transmission losses were neglected.

## Considering the net injection at node k, Ik as:

Where Pk and Dk are the generation and demand at the node k, respectively.

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Thus, we have the following minimization of the total cost of producing energy in a network of infinite
capacity with losses included (Kirschen, 2004):

## With Ck = cost of generation at node k (£/h);

Ik = net injection of power at node k (MW);
L = losses of power in the branches of the network (MW);
n = slack bus of the network

## Rearranging the first and the second condition, we get:

So, the Lagrange multiplier, represents the marginal cost of marginal benefit of an injection of power

at the slack bus, and the Marginal Cost of Injection of power at bus k is .

From the economic dispatch calculated in PowerWorld, lambda is 11.86, so the generation costs have
to be considered as nodal prices for each of the nodes.

Additionally, can be said that the penalty factor for bus k, Pfk, is:

## Ariel Villalón M. – MSc NRE 2010/2011 Page 6

Table 6. Nodal prices for each of the buses for the seven-bus system
Marginal Loss Marginal Cost of Penalty Factor
Bus Factor for bus Injection of Power at at Bus k
k Bus k (£/MWh) (£/MWh)
1 0.353 7.67 1.546
2 0.281 8.52 1.392
3 0.186 9.65 1.229
4 0.185 9.67 1.226
5 0.044 11.34 1.046
6 0.225 9.19 1.291
7 0.000 11.86 1.000

## 4. Which generators have changed their outputs and why?

Comparing the output in table 4 with the outputs from table 5, the generators that changed their
output were number 4 and 7, from 134 to 148 MW to generator 4, and from 0 to 3 MW to generator 7.

In this case, the penalty factor for the generator connected to the bus 4 is the smallest penalty factor
of the generators (generators 1, 2, 4, 6, and 7), without considering that the generator connected to
the bus 7 corresponds to the marginal generator (marginal cost equal to the system lambda).

Thus, can be said that the generator 4 has the smallest loss for generating the demanded power, so,
it changed its power output.

5. Which generators are at the margin, i.e. operate at equal generalised lambda = (incremental
cost) x penalty factor)?

The generator 7, which is connected to the slack bus, works as the marginal generator, being the
nodal price for bus 7, 11.86, the value for the seven-bus system lambda as the incremental cost is
defined by:

## Ariel Villalón M. – MSc NRE 2010/2011 Page 7

Optimal power flow

## Figure 5. Optimal Power Flow for the seven-bus system

Table 7. Nodal prices for the optimal power flow and marginal cost of generation, output and power
demand for the seven-bus system
Marginal
Nodal Output
Cost Demand at
Bus Price Bus k Generator
Generator bus k (MW)
(£/MWh) (MW)
(£/MWh)
1 2.00 2.00 136 0
2 6.00 6.00 143 74
3 13.86 - 0 204
4 12.66 10.00 200 148
5 14.55 - 0 241
6 8.12 4.00 500 370
7 12.00 12.00 446 370

The difference in nodal prices compared with pure economic dispatch can be seen in the following
table:

Table 8. Comparison of nodal prices between pure economic dispatch and optimal power flow
Economic dispatch - losses
Optimal Power Flow -
included Marginal Cost of
Bus Losses included Nodal Price
Injection of Power at Bus k
Bus k (£/MWh)
(£/MWh)
1 7.67 2.00
2 8.52 6.00
3 9.65 13.86
4 9.67 12.66
5 11.34 14.55
6 9.19 8.12
7 11.86 12.00

## Ariel Villalón M. – MSc NRE 2010/2011 Page 8

I.2 VARIABLE MARGINAL COSTS

6. Note the values of coefficients of cost function. The general form of the cost function is
cubic but what is the actual form of the generator input-output costs and incremental costs
taking into account the actual values of coefficients?

## Table 9. Values of coefficients of cost function for the generators

Coefficients of Cost Generator Generator Generator Generator Generator
Function 1 6 2 4 7
A 761.94 831.92 831.84 530.03 500.08
B 7.62 7.57 7.52 7.84 7.77
C 0.0013 0.00131 0.00136 0.00134 0.00194
D 0 0 0 0 0
Unit Fuel Cost
2.04 2.139 2.061 2.093 2.574
(£/MBtu)

In the simulator of the software PowerWorld, the following cubic relationship is used to determine the
cost associated with operating a generator:

## Ci(Pgi) = ai + ( bi Pgi + ci (Pgi)2 + di (Pgi)3 ) * unit fuel cost £/Hour

where Pgi is the output of the generator at bus i in MW. The values ai, bi, ci, and di are used to model
the generator’s input-output (I/O) curve. This curve specifies the relationship between how much heat
must be input to the generator (expressed in MBtu per hour) and its resulting MW output (PowerWorld
Corporation, 2009).

So, for the generators, the total cost and the marginal cost respectively are:

## Ariel Villalón M. – MSc NRE 2010/2011 Page 9

Figure 6. Total cost curve and marginal cost curve, generator 1

## Ariel Villalón M. – MSc NRE 2010/2011 Page 10

Figure 10. Total cost curve and marginal cost curve, generator 7

## Figure 11. Supply curve for the seven-bus system

Economic dispatch without including loss penalty factors into the dispatch

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7. Make sense out of the results. Check the values of generators incremental costs IC, to see if
they indeed satisfy the condition of economic dispatch. Are all the incremental costs the
same?

The outputs of the generators and the corresponding marginal costs are presented in the following
table:

## Table 10. Power output and marginal cost of the generators

Power output Gen MW Marg.
Generator
(MW) Cost (£/MWh)
1 276.75 17.01
2 270.07 17.01
4 107.6 17.01
6 146.4 17.01
7 1.89 20.02

As can be seen in table 10 and figure 13, all the generators but the generator 7 that is connected to
the slack bus, produce power until they equal the marginal cost, that for this case corresponds to
17.01 £/MWh. This equimarginal condition for the economic dispatch is given by the power outputs
that can be seen in the table 10, or alternatively, in figure 13.

Thus, in this case, the ED is accomplished minimizing the cost of generation constrained to a certain
balance between generation and demand by the following relationship:

I.e. when the incremental costs of all generators are the same and equal to λ.

In this case the total cost of economic dispatch per hour is 16,618 £/h.

## Ariel Villalón M. – MSc NRE 2010/2011 Page 12

8. Without doing simulations, how can you predict what the total cost of economic dispatch
will be if demand increases by 10 MW? Validate your prediction by increasing demand in node
2 by 10 MW and checking the resulting increase in the costs.

To the total cost of economic dispatch presented in figure 12, 16,618 £/h, it has to be summed the
corresponding increment in demand, considering a marginal cost of 17.01 £/MWh.

## Figure 14. Increasing demand in 10 MW in node 2

Can be seen that increasing the demand in node 2 in the software PowerWorld, we obtain a total cost
of the economic dispatch of 16,787 £/h.

9. Check the values of penalty factors. Currently the influence of losses is not taken into
account but later on, you will include transmission losses in the dispatch. Make a prediction
about which generator you expect to increase its output and which decrease when the
influence of losses is included.

The values of penalty factors for all the buses (and the generators connected to them) are equal to 1,
as losses are not included.

It is more likely that generator 1 diminishes its output due to its marginal cost function has a bigger
slope, though all the generators are similar in this aspect.

Additionally, it is likely that generator 6 increases its output, mainly due to its closeness to bigger
loads, as generator 1 has to deliver its energy just using the branches 1-3 and 1-2, aspect that will be
reflected in the penalty factors when the losses during transmission are considered.

Additionally, can be mentioned that there is a total generation output of 802.72 MW for a demand of
760.00 MW, and the losses reach a value of 42.72 MW.

## Ariel Villalón M. – MSc NRE 2010/2011 Page 13

Economic dispatch with transmission losses included

## Figure 15. Economic Dispatch with transmission losses included

10. Why have results changed? Make sense out of them, i.e. check the values of generation
outputs and the overall cost of dispatch. Check the validity of your prediction about

As was mentioned in question 9, the biggest penalty factor is for the generator connected to bus 1
(table 11), because it has to dispatch energy through branches 1-3 and 1-2, because there is no
feeder connected to the bus 1, and the impedances in the branches, eventually, are higher. In this
way, there are more transmission losses, aspect that is reflected in a bigger incremental loss factor.

The generator 6 increased its output from 146.4 MW for the situation with ED without losses to 248.9
MW for the situation of ED including losses to minimize the overall generation cost. As can be seen in
table 11, the penalty factor is the second smaller of the whole seven-bus system.

Additionally, there is an overall generation of 788.04 MW for a demand of 760 MW, fact that makes to
have losses of 28.04 MW, value that is smaller than the value of losses for the ED when transmission
losses were not considered.

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11. Check how the operating points moved. How and why has the overall generation cost
changed? Calculate the savings in both dispatch and losses. Check the values of incremental
costs, penalty factors and lambdas for each generator. Check that the equal lambda criterion,
modified by loss factors, still holds.

Figure 16. Incremental costs for all generators in Economic dispatch, transmission losses included

Table 11. Power output, penalty factor, marginal loss factor, and nodal prices for each bus of the
seven-bus system
Bus 1 Bus 2 Bus 3 Bus 4 Bus 5 Bus 6 Bus 7
Power output (MW) 140.38 248.59 - 150.19 - 248.88 0
Penalty factor 1.2152 1.1719 1.1372 1.1475 1.0316 1.1256 1
Loss MW Sens 0.1771 0.1467 0.1207 0.1285 0.0306 0.1116 0
Nodal Price (£/MWh) 16.29 16.90 17.41 17.26 19.19 17.59 19.80

The lambda, λ, for the whole system is 19.80 £/MWh and is related to the nodal prices for the
following relationship1:

## With Ck = cost of generation at node k (£/h);

Ik = net injection of power at node k (MW);
L = losses of power in the branches of the network (MW);
n = slack bus of the network

The overall generation cost changed from 16,618 £/h for the ED without losses, to 16,447 £/h for the
ED considering losses. The overall cost diminished, because now the seven-bus system has different
nodal prices which reflect more accurately the real situation, making some generators increase their
output and others, decrease their output, according to its location in the network, taking into account
the impedances of the transmission lines, physics phenomena that may make or not, more
competitive in marginal costs a generator, pursuing a more competitive electric market.

The fact of consider the penalty factors for the generators, related to each of the buses, makes that
the economic dispatch minimize the overall cost of generation by considering the transmission losses
as well, as they were not considered in the ED without considering transmission losses, leading to
save losses and maximize the social welfare for the whole electrical market considered (Kirschen,
2004).

1
Check question 3 for more detailed explanation of the relationship

## Ariel Villalón M. – MSc NRE 2010/2011 Page 15

Optimal power flow

## Figure 17. Optimal Power Flow

12. Compare the results and costs in ED and OPF. Make sense out of them. How was the
overload in line 2-5 relieved? Rationalise that in terms of which generator outputs have
increased and which decreased and what effect that had on the flow in line 2-5?

Table 12. Comparison of the flows in the lines, between Optimum Power Flow, OPF, and Economic
Dispatch with transmission losses, ED
Economic dispatch including
Optimal Power Flow
transmission losses
Limit
Lines MVA
MVA MVA Congestion of Congestion of the line
Marginal MVA from
from the line (%) (%)
Cost
1-2 150 125.7 83.8% 0 96.1 64.1%
1-3 65 38.0 58.5% 0 46.4 71.4%
2-3 80 23.8 29.8% 0 33.6 42.0%
2-4 100 22.1 22.1% 0 26.9 26.9%
2-5 100 100.0 100.0% 12.00 152.1 152.1%
2-6 200 78.5 39.3% 0 101.9 51.0%
3-4 100 66.3 66.3% 0 39.2 39.2%
4-5 60 53.3 88.8% 0 58.4 97.3%
5-7 200 65.5 32.8% 0 110.6 55.3%
6-
200 38.8 19.4% 0 74.6 37.3%
7(1)
6-
200 38.8 19.4% 0 74.6 37.3%
7(2)

Table 13. Comparison of the Power Output of the generators, between Optimum Power Flow, OPF,
and Economic Dispatch with transmission losses, ED
Generator OPF - Output (MW) ED - Output (MW)
1 160.0 140.4
2 99.6 248.6
4 200.0 150.2
6 200.0 248.9
7 115.5 0.0

## Ariel Villalón M. – MSc NRE 2010/2011 Page 16

Table 14. Comparison of Nodal Prices at the Buses, between Optimum Power Flow, OPF, and
Economic Dispatch with transmission losses, ED
Bus OPF - Nodal Price (£/MWh) ED - Nodal Price (£/MWh)
1 16.23 16.29
2 15.78 16.90
3 17.02 17.41
4 17.42 17.26
5 22.30 19.19
6 17.33 17.59
7 20.60 19.80

The line 2-5 has a rating of 100 MVA, so for the ED the generator that is connected to bus 2 was
generating 248.6 MW, but considering the optimum power flow (OPF) where the ratings of the
branches are considered, the generator 2 is set to produce 99.6 MW that is feasible to be dispatched
through the line 2-5. In terms of apparent power, the line 2-5 is congested, meaning that there is no
more transmission capacity through this line.

The overall cost of generation for the OPF is 16,703 £/h, value that is bigger than the value obtained
for ED (16,447 £/h). The overall cost of generation is bigger because the network has a finite
capacity, making it more expensive.

In table 14, the nodal prices for OPF are presented compared to nodal prices for ED.

For the OPF, the total generation is 775.1 MW, a power demand of 760 MW and losses of 15.1 MW
for transmission.

13. Click OPF Case Info/OPF Lines and Transformers. Column MVA Marg cost gives the values
of Lagrange multipliers connected with a constraint on a maximum value of given line flow.
Why are all the values equal to zero apart from one?

As can be seen in table 12, in column MVA Marginal cost for Optimal Power Flow, just the line 2-5
has the value different from zero, being 12.1. This value represents the Lagrange multiplier for the line
2-5 that is fully loaded (Lagrange multiplier is nonzero only if the flow on the branch between nodes i
and j is equal to its limit), that is the marginal cost of this constraint in the network. Then, for the line 2-
5 the Lagrange multiplier λ25, is 12.1 £/MWh, and represents the saving that would accrue each hour
if the flow in branch 2-5 could be increased by 1 MW (Kirschen, 2004).

## Where Cmin = the value of the cost at the optimum

= the rating of a line ij
= the Lagrange multiplier for the constrained line ij

## Ariel Villalón M. – MSc NRE 2010/2011 Page 17

14. Power system operation must be secure not only for a normal state of operation but also
following a contingency, i.e. when any one system element trips to e.g. an unexpected fault.
This is referred to as (N-1) security criterion.

## The transmission line 2-5 was tripped.

Figure 18. The seven-bus system when the transmission line 2-5 is tripped

As can be seen in figure above, once the line 2-5 is tripped, the line 4-5 will be overloaded by 157.3%
of its thermal capacity.

Table 15. Comparison of power flows through transmission lines with the system in normal state and
under a contingency (line 2-5 tripped)
Optimal Power Flow System with line 2-5 tripped
Limit
Lines MVA Congestion of the line MVA Congestion of the line
MVA
from (%) from (%)
1-2 150 125.7 83.8% 118.2 78.8%
1-3 65 38.0 58.5% 46.8 72.0%
2-3 80 23.8 29.8% 29.4 36.8%
2-4 100 22.1 22.1% 22.5 22.5%
2-5 100 100.0 100.0% - -
2-6 200 78.5 39.3% 142.4 71.2%
3-4 100 66.3 66.3% 44.0 44.0%
4-5 60 53.3 88.8% 94.4 157.3%
5-7 200 65.5 32.8% 86.2 43.1%
6-7(1) 200 38.8 19.4% 70.1 35.1%
6-7(2) 200 38.8 19.4% 70.1 35.1%

The spare capacity of transmission is used, as the rest of the transmission lines were not constrained
until the fault. But, since the line 4-5 is overloaded, the generation output should be changed, this
meaning, a new OPF should be carried out to restore the normal state of the seven-bus system.

The fundamental principle of security in a power system considers that a power system should always
be operated in such a way that no credible contingency could trigger cascading outages or another
form of instability. Because all the power systems are routinely affected by unpredictable faults and
failures, they have to be operated with a sufficient security margin. There must be enough reserve
generation capacity to make up for the loss of a generating unit and enough transmission capacity to

## Ariel Villalón M. – MSc NRE 2010/2011 Page 18

handle the power flows displaced by the outage of a line. Securing the system only calls against all
credible contingencies as it is impossible secure it against all possible contingencies. What credible
contingencies are assumed to be it is that the probability of two or more independent faults or failures
taking place simultaneously is too low to be considered credible. So the N-1 accounts for the
feasibility to lose any one of the power system’s N components and continue operating (Kirschen,
2003).

15. Investigate the resulting power flows when you trip a number of different lines (initially one
at a time and then some combinations of trips). Try to make sense out of the resulting power
flows by thinking how a power that was flowing through a tripped line has to be shared by the
remaining lines.

Figure 19. The seven-bus system when the transmission lines 2-5 and 4-5 are tripped

Figure 20. The seven-bus system when the transmission lines 2-5, 4-5, and 4-3 are tripped

## Ariel Villalón M. – MSc NRE 2010/2011 Page 19

Table 16. The seven-bus system with different contingencies. Transmission lines tripped.
System with line 2-5 System with lines 2-5 and System with lines 2-5, 4-5,
Limit tripped 4-5 tripped and 4-3 tripped
Lines
MVA MVA Congestion of the MVA Congestion of the MVA Congestion of the
from line (%) from line (%) from line (%)
1-2 150 118.2 78.8% 142.5 95.0% 106.5 71.0%
1-3 65 46.8 72.0% 30.0 46.2% 66.5 102.3%
2-3 80 29.4 36.8% 29.6 37.0% 58.6 73.3%
2-4 100 22.5 22.5% 39.2 39.2% 132.5 132.5%
2-5 100 - - - - - -
2-6 200 142.4 71.2% 244.3 122.2% 238.4 119.2%
3-4 100 44.0 44.0% 93.6 93.6% - -
4-5 60 94.4 157.3% - - - -
5-7 200 86.2 43.1% 141.8 70.9% 141.8 70.9%
6-
200 70.1 35.1% 118.3 59.2% 116.8 58.4%
7(1)
6-
200 70.1 35.1% 118.3 59.2% 116.8 58.4%
7(2)

In table 16 several contingencies in the power system are presented. First, the line 2-5 is tripped,
then, to line 2-5, the line 4-5 is under fault, therefore, tripped, and after, to those two transmission
lines tripped, line 4-3 is tripped. These states can be seen in figures 18, 19, and 20, respectively.

## Table 17. Generation under the different contingencies considered.

System with line 2- System with lines 2-5 System with lines 2-5,
Generator 5 tripped and 4-5 tripped 4-5, and 4-3 tripped
Power Output (MW) Power Output (MW) Power Output (MW)
1 162.0 166.6 168.9
2 102.0 106.2 108.5
4 200.0 200.0 200.0
6 202.0 206.6 208.9
7 118.0 122.6 125.1
Total Generation 784.0 802.0 811.4

As can be seen, when a transmission line is tripped, the power flow, at first moment, will take the
branches in the nearby to make the dispatch to the loads. The power flows don’t take into account by
themselves thermal ratings, so the transmission lines capacity, in many cases, will be exceeded.
Eventually, this fact may lead to more faults in the system, so more transmission lines may be tripped,
as the relays for the different zones respond to the contingency to protect the power system.

Additionally, can be seen from table 17 that to supply the demand, as the branches of the network are
decreasing (thus, there will be more losses in the lines), the total generation rises, fact that eventually,
may lead to more stability problems during the operation of the power system.

The overall cost of generation in the system, like the losses, rises.

## Ariel Villalón M. – MSc NRE 2010/2011 Page 20

PART II: LOCATIONAL MARGINAL PRICING (LMP)

## II.1 BASE CASE – UNIFORM PRICING (TRANSMISSION CONGESTION NEGLECTED)

The generators connected to the respective busbars are set as appear in table 18.

## Table 18. Generation Costs

Generator 1 6 2 4 7
Incremental Cost (£/MWh) 2 4 6 10 20
Min MW 0 0 0 0 0
Max MW 400 500 500 200 600

## Figure 21. Supply characteristics (with load multiplied by 1.5 times)

Figure 22. Economic Dispatch with transmission losses neglected and loads increased 1.5 times

## Ariel Villalón M. – MSc NRE 2010/2011 Page 21

16. Why are all LMPs the same? Which generator is at the margin (i.e. is partly loaded and
supplies the last MW of demand) and why?

## By multiplying the load by 1.5, the demand is now of 1,140 MW.

All the LMPs are the same because transmission losses are not included in the ED, and therefore, the
lambda of the system, λ, is equal to the marginal cost of the generator that supplies the last MW of
demand, being for this case, the generator 2.

Table 19. Power output of the generators with ED with transmission losses neglected and loads
increased 1.5 times
Generator Power Output (MW)
1 400.0
2 335.5
4 0.0
6 500.0
7 0.0
Total Generation 1,235.5

As can be seen in table 18, generator 2 has a marginal cost of 6.00 £/MWh and a maximum capacity
of generation of 500 MW, so, it is partly loaded.

In general, the following relationship is accomplished; making the nodal price is the same for all the
buses in the seven-bus system:

Figure 23. Economic Dispatch with transmission losses neglected and loads increased 1.8 times

## Ariel Villalón M. – MSc NRE 2010/2011 Page 22

Table 20. Power output of the generators with ED with transmission losses neglected and loads
increased 1.8 times
Generator Power Output (MW)
1 400.0
2 500.0
4 93.3
6 500.0
7 0.0
Total Generation 1,493.3

## By multiplying the load by 1.8, the demand is now of 1,368 MW.

All the LMPs are the same because transmission losses are not included in the ED, and therefore, the
lambda of the system, λ, is equal to the marginal cost of the generator that supplies the last MW of
demand, being for this case, the generator 4, which has a marginal cost of 10 £/MWh.

## So, the marginal generator is the one connected to bus 4.

Additionally, the maximum capacity of generation of generator connected to bus 4 is 200 MW, so it is

18. Assume that we have a fully competitive market so that the prices the generators bid to the
Pool are equal to their marginal costs. Calculate the profit per MW made by each generator
and the congestion surplus.

For the condition of the seven-bus system with the load multiplied by 1.5, the system marginal price,
SMP is 6.00 £/MWh, so producers are paid this price for the output they sell, and consumers pay the
same price for the energy they buy.

The profits per MW, the producers’ revenues and total consumer payments for the whole system are
presented in table 21.

Table 21. Producer Profits per MW generated, producer revenues, and consumer payments in the
seven-bus system with ED with transmission losses neglected and loads increased 1.5 times
Power Marginal Profits per Producers Consumers
Generator Output Cost MW Revenues payments
(MW) (£/MWh) (£/MWh) (£/h) (£/h)
1 400.0 2.00 4.00 2,400.00 2,400.00
2 335.5 6.00 0.00 2,013.24 2,013.24
4 0.0 10.00 -4.00 0.00 0.00
6 500.0 4.00 2.00 3,000.00 3,000.00
7 0.0 20.00 -14.00 0.00 0.00
Total Generation 1,235.5 7,413.24 7,413.24

As there is only one lambda for the whole system (SMP), due transmission losses are not considered
in the economic dispatch, the Congestion Surplus will be:

## Ariel Villalón M. – MSc NRE 2010/2011 Page 23

For the condition of the seven-bus system with the load multiplied by 1.8, the system marginal price,
SMP is 10.00 £/MWh, so producers are paid this price for the output they sell, and consumers pay the
same price for the energy they buy.

The profits per MW, the producers’ revenues and total consumer payments for the whole system are
presented in table 22.

Table 22. Producer Profits per MW generated, producer revenues, and consumer payments in the
seven-bus system with ED with transmission losses neglected and loads increased 1.8 times
Power Marginal Profits per Producer Consumer
Generator Output Cost MW Revenues payments
(MW) (£/MWh) (£/MWh) (£/h) (£/h)
1 400.0 2 8.00 4,000.00 4,000.00
2 500.0 6 4.00 5,000.00 5,000.00
4 93.3 10 0.00 933.30 933.30
6 500.0 4 6.00 5,000.00 5,000.00
7 0.0 20 -10.00 0.00 0.00
Total Generation 1,493.3 14,933.30 14,933.30

As there is only one lambda for the whole system (SMP), due transmission losses are not considered
in the economic dispatch, the Congestion Surplus will be:

## Ariel Villalón M. – MSc NRE 2010/2011 Page 24

II.2 COMPETITION IN QUANTITIES

19. Assume that you are trader working for inframarginal generator 2. Assume that your
maximum capacity is as declared so far (500 MW). Try to increase your net profit by reducing
your declared capacity to 400 MW, 300 MW, 200 MW or 100 MW. Plot the resulting profits as
the reduction of capacity. What are general conclusions about optimal bidding strategy for an
inframarginal generator?

## Table 23. Generation Costs

Generator 1 6 2 4 7
Incremental Cost (£/MWh) 2 4 6 10 12
Min MW 0 0 0 0 0
Max MW 400 500 500 200 600

The load was kept multiplied by 1.5, so the total demand is 1,140 MW.

## Ariel Villalón M. – MSc NRE 2010/2011 Page 25

Figure 25. Generator 2 – 400 MW max output

## Ariel Villalón M. – MSc NRE 2010/2011 Page 26

Figure 27. Generator 2 – 200 MW max output

## Figure 28. Generator 2 – 100 MW max output

The system clearing prices (SMP) for each of the situations where the generator 2 withdraws
capacity, its power output, and the profits that the producer, owner of the generator 2, would perceive,
are presented in table 24.

## Ariel Villalón M. – MSc NRE 2010/2011 Page 27

Table 24. SMPs, power outputs, revenues, costs and profits for each of the situations where
generator 2 withdraws an additional unit generation (100 MW)
System
Withdrawn Power
Marginal Costs
Capacity Output Revenues (£/h) Profits (£/h)
Price (£/h)
(MW) (MW)
(£/MWh)
0 500 10.00 5,000.00 3,000.00 2,000.00
100 400 10.00 4,000.00 2,400.00 1,600.00
200 300 12.00 3,600.00 1,800.00 1,800.00
300 200 12.00 2,400.00 1,200.00 1,200.00
400 100 12.00 1,200.00 600.00 600.00

Figure 29. Graph of the profits obtained by generator 2 by withdrawing capacity in the spot market
Profits (£/h) as function of withdrawn generation capacity
2,000
2,000
1,800
1,600
1,500

1,200
£/h

1,000

500 600

0
100
200
300
400
Withdrawn Generation Capacity (MW)

As can be seen in the graph of figure 29, the highest profits are obtained when the generator is
working at its maximum capacity, without withdrawing any unity capacity.

As the generator 2 has a marginal cost of 6.00 £/MWh, when it declares that its maximum capacity for
that hour is 500 MW (its maximum power output possible) and, therefore, an inframarginal generator
that is under all the situations of withdrawn capacity, fully loaded. It is always in merit as the market
clearing price is between 10 and 12 £/MWh, which is determined by the marginal generator,

In general, the optimal bidding strategy for an inframarginal generator can be presented as follows:

It is considered that all the generators in the pool bid the true marginal costs of running their plants
and the system clearing price at demand D is p. The benefit and the cost when one generator
withdraws a unity of capacity Δq will be pΔq, the cost of gaming, and qΔp, the increased profit for the
remaining in-merit generating capacity. Additionally, the effect of withdrawing a unity of capacity Δq is
the increasing of the market clearing price Δp, due to the shifting to the left of the part of supply curve
which stars from the gaming generator (Bialek, 2002).

## Ariel Villalón M. – MSc NRE 2010/2011 Page 28

Then the benefit B is:
Δ Δ Δ Δ Δ Δ

## So, the benefit-cost ratio, G, is:

Δ
Δ

Where = the market share of the remaining in-merit plants of the generator
= the price sensitivity of supply, i.e., relative increase in the total generation
as a response to the relative increase in the system clearing price.

The benefit-cost ratio of the gaming allows quantifying the gain that can be earned. It confirms that for
the gaming to be profitable, a portfolio generator should have a large market share s(D-) and/or the
supply curve should be steep, as then eg(D) is small (Bialek, 2002).

In general, the plant to be withdrawn should be the most expensive in-merit plant in the generator’s
portfolio as then c’ q is the highest (Bialek, 2002).

If we consider a base-load power plant with small marginal cost, the ratio c’ q p can be neglected
and the gain is (Bialek, 2002)

So, the gaming is profitable when Gain > 1, i.e., when (Bialek, 2002)

For this sort of power plants, gaming can be profitable if the gaming generator (the owner of the
generation portfolio) has large enough market share (Bialek, 2002).

20. Repeat the investigation assuming that you were working now for the marginal generator 4.
Draw general conclusions

The load was kept multiplied by 1.5, so the total demand is 1,140 MW.

## Ariel Villalón M. – MSc NRE 2010/2011 Page 29

Figure 31. Generator 4 – 100 MW max output

The system clearing prices (SMP) for each of the situations where the generator 4 withdraws
capacity, its power output, and the profits that the producer, owner of the generator 4, would perceive,
are presented in table 25.

Table 25. SMPs, power outputs, revenues, costs and profits for each of the situations where
generator 4 withdraws an additional unit generation (100 MW)
System
Withdrawn Power
Marginal Costs
Capacity Output Revenues (£/h) Profits (£/h)
Price (£/h)
(MW) (MW)
(£/MWh)
0 93 10.00 930.00 930.00 0.00
100 93 10.00 930.00 930.00 0.00

As can be seen on table 25, there are no profits, generation for the generator 4 as it withdraws
generating capacity. The maximum real capacity for the generator 4 is 200 MW, so as we are
considering unities of generation of 100 MW, there is not much space for gaming, and, additionally, its
marginal cost is 10.00 £/MWh, fact that makes the generator 4 become marginal generator (figures 30
and 31), as the market clearing price is 10.00 £/MWh.

In general, the gaming for a marginal generator that for this case was displaced in the merit order by
another plant belonging to another owner, so the marginal gain can be presented as (Bialek, 2002):

assuming that the system clearing price p was set by the marginal cost of the price-setting generator,
c’(q+Δq). The latter equation shows that in this case the gain is always greater or equal than 1
providing that the slope of the supply curve is positive, meaning that at the margin, the price obtained
is equal to the cost so there can be no profit lost due to withdrawing marginal capacity (Bialek, 2002).

Additionally, the demand for energy is supplied by the rest of generators for the seven-bus power
system but the last MWh is supplied by generator 4 as it is the marginal generator that sets the
System Marginal Price, SMP. In other words, and as will be seen in question 22, the generator 4 has
very few market share, so it is not able to be successful when gaming as its auction (its high marginal
cost of production and its reduced declared generation capacity) just sets the price for all the power
system.

## Ariel Villalón M. – MSc NRE 2010/2011 Page 30

21. Now assume that you are trading for a portfolio generator, i.e. a company owning both
generator 2 and generator 4. Try to increase your net profit by reducing the declared capacity
of either, or both, of the generators. Generally, what is the best strategy for a portfolio
generator? What are the risks?

In general, in a Cournot model it is considered that each firm decides the quantity, Pf, that it wants to
produce (Kirschen, 2004):

The price, π, is then determined by the inverse market demand function, which expresses the market
price as a function of the total amount of energy traded

If firm f assumes that its competitors will not adjust the amount of energy they produce, its revenue is
given by

## Its marginal revenue is therefore

The Cournot model suggests that firms should be able to sustain prices that are higher the marginal
cost of production, with the difference determined by the price elasticity of the demand. For a
commodity like electrical energy that has a very low elasticity, the equilibrium price calculated tends to
be higher than the prices observed in the actual market (Kirschen, 2004).

In the case considering two producers, each of them trying to maximize their profits, they manage to
maintain a price that is much higher than the marginal cost of production. In the pool, their interactions
will settle at the Nash Equilibrium where neither firm can increase its profit through its own actions
(Kirschen, 2004).

This equilibrium can be expressed considering the profits earned by each firm as follows

Where π(D) represents the inverse demand curve. Each firm tries to maximize its profit. As both firms
share the same market, the supply must be equal to the demand. Therefore we must also have
(Kirschen, 2004)

## So, the conditions of optimality are (Kirschen, 2004):

Specifically, for the generator 2 and generator 4, the different combinations of withdrawn capacity
were found, in order to maximize the profit in the pool for the seven-bus system.

## Demands for generator 2 and 4 summed Profit Generator 2

Profit generator 4 SMP (£/MWh)

## Ariel Villalón M. – MSc NRE 2010/2011 Page 31

Table 26. Illustration of Cournot competition between the generators 2 and 4, owned by the same
company, in the seven-bus system
Maximum
Declared Generator 2
Capacity
(MW) 400 300 200 100
583 1,600 500 1,800 400 1,200 300 600
366 10 400 12 400 12 400 12
Total profit Total profit Total profit Total profit
200 (£/h) 1,966 (£/h) 2,200 (£/h) 1,600 (£/h) 1,000
Generator 4

## 500 2,400 400 1,800 300 1,200 200 600

200 12 200 12 200 12 200 12
Total profit Total profit Total profit Total profit
100 (£/h) 2,600 (£/h) 2,000 (£/h) 1,400 (£/h) 800
400 2,400 300 1,800 200 1,200 100 600
0 12 0 12 0 12 0 12
Total profit Total profit Total profit Total profit
0 (£/h) 2,400 (£/h) 1,800 (£/h) 1,200 (£/h) 600

As can be seen in table 26, the combination that maximizes the profit for the company is generator 2
with a maximum output declared of 400 MW (100 MW withdrawn) and the generator 4 with a
maximum output declared of 100 MW (100 MW withdrawn). After of executing the OPF in the
software PowerWorld, the output for the generators 2 and 4 are 400 MW and 100 MW, respectively.

For this situation, both generators work at its maximum declared capacity, constraining the total
capacity of generation for the whole pool, making the SMP be 12.00 £/MWh, becoming both into
inframarginal generators (in-merit generators) as the marginal generator is the one connected to the
slack bus 7. This generator 7 sets the market clearing price at 12.00 £/MWh.

The main risk for the power company that owns both generators is that its most expensive generator
turns out to be out of merit as its marginal cost of production may be higher than the market clearing
price.

As a general rule, can be said that the generator to be withdrawn should be the most expensive in-
merit plant in the generator’s portfolio as then the marginal cost of production is the highest (Bialek,
2002).

22. Generally, is it more profitable to reduce capacity of a base load generator or a generator
near the top of the merit order?

In general, it is more profitable to reduce capacity of a generator near the top of the merit order,
though this will depend of the market share of this generator, so, even using base-load plants can be
successful.

Figure 32. Shares and gain: (a) required market share for withdrawing zero-marginal cost plant, (b)
marginal gain due to withdrawing zero-marginal cost plant, (c) marginal gain due to withdrawing
marginal plant when demand is inelastic, and (d) marginal gain due to withdrawing marginal plant
when the price sensitivity of supply is -0.05

## Ariel Villalón M. – MSc NRE 2010/2011 Page 32

In figure 32 can be seen that gaming can be successful even using base-load plants, providing that
the gaming generator has large enough market share (curve a). As can be seen, for the demand of
40-75% of the system capacity, the required market share is about 20-40%. In the region of 75-85%
of the system capacity, the supply curve is quite flat, making not profitable for a base-load generator
at all to withdraw capacity as the required market share would have to be greater than 1, fact that is
impossible. As can be seen, as the marginal cost of production of a base-load plant is very low (it can
be considered as 0), the only moment when it is worth to withdraw capacity is when the supply curve
is very steep, being in the case shown in the curve b of the figure 32, when demand is greater than
90% of the maximum load (Bialek, 2002).

For a generator near the top of the merit order, is definitively more profitable to withdraw capacity,
compared with a base-load generator. As can be seen for the curve c, the marginal gain is between 1
and 2 until the system load reaches 90%. Then the supply curve becomes very steep and the gain
increases reaching the peak value of 7 (Bialek, 2002).

## II.3 COMPETITION IN PRICES

23. Assume that you are a trader working for inframarginal generator 2. Try to increase your
profit by changing your bid price so that it is different than your marginal cost given in table 1.
Plot the results. Can you increase your profitability by doing that? What are the conclusions?

## The results are presented in table 27.

Table 27. SMPs, power outputs, revenues, costs and profits for each of the situations where
generator 2 raises its bid price
Real
Price
Generation SMP Revenues Marginal Expenses Profits
bidden
(MW) (£/MWh) (£/h) Cost (£/h) (£/h)
(£/MWh)
(£/MWh)
6 500 10 5,000 6 3,000 2,000
7 500 10 5,000 6 3,000 2,000
8 500 10 5,000 6 3,000 2,000
10 500 10 5,000 6 3,000 2,000
12 382 12 4,584 6 2,292 2,292
13 0 12 0 6 0 0
14 0 12 0 6 0 0
16 0 12 0 6 0 0
18 0 12 0 6 0 0
20 0 12 0 6 0 0

Figure 33. Graph of the profits obtained by generator 2 by raising the bid price in the spot market
Profits (£/h) as function of raising of the bid price
2,500
2,292
2,000 2,000 2,000
2,000 2,000
Profit (£/h)

1,500

1,000

500

0 0
0 0
6 7 0 0
8 10 12 13 14 16
Bid Price (£/MWh) 18 20

Assuming that the generator 2 bids its true marginal cost (6 £/MWh), the profit that can get is 2,000
£/h. By raising the bid price to 12 £/MWh, the profit turns out to be higher, reaching 2,292 £/h, as can
be seen in table 27 and figure 33. This inframarginal generator, by raising the bid price to 12 £/MWh,

## Ariel Villalón M. – MSc NRE 2010/2011 Page 33

becomes into the marginal generator, setting the market clearing price, and getting partly loaded as
its power output is 382 MW.

For the inframarginal generator 2, there is no effect on the profits meanwhile the bidding price does
not reach the value of the market clearing price.

24. Assume that you are a trader working for the marginal generator 4. Try to increase your
profit by changing your bid price so that it is different than your marginal cost given in table 1.
Plot the results. Can you increase your profit by doing that? To what extent? What are the
conclusions? What is the danger in that strategy?

Table 28. SMPs, power outputs, revenues, costs and profits for each of the situations where
generator 4 raises its bid price
Real
Price
Generation SMP Revenues Marginal Expenses Profits
bidden
(MW) (£/MWh) (£/h) Cost (£/h) (£/h)
(£/MWh)
(£/MWh)
10 93 10 930 10 930 0
11 93 11 1,023 10 930 93
12 93 12 1,116 10 930 186
13 0 12 0 10 0 0
14 0 12 0 10 0 0
15 0 12 0 10 0 0
16 0 12 0 10 0 0

Figure 34. Graph of the profits obtained by generator 4 by raising the bid price in the spot market
Profits (£/h) as function of raising of the bid price
200 186

150
Profit (£/h)

93
100

50
0
0 0
0
10 0
11 0
12
13
14
15
Bid Price (£/MWh) 16

As can be seen in table 28, the marginal generator 4 increases its profit from 0 £/h to 186 £/h by
increasing the bidding price from the real marginal cost until 12 £/MWh, that corresponds to the value
of the marginal cost for the generator 7. By bidding prices further this value, the generator 4 just
becomes out-of-merit, and therefore, there will not be any power output neither profit.

In general for a marginal generator, the outcome of raising the bid price by Δp will depend of the size
of Δp. If it is small then the marginal plant will not be replaced in the merit-order by another plant.

The expected value of the gain for the marginal generator is (Bialek, 2002)

Where P is the probability of the marginal plant is not replaced in the merit-order by another plant, and
if Δp is large, then the gaming plant will be replaced in the merit-order by the next cheapest plant

## Ariel Villalón M. – MSc NRE 2010/2011 Page 34

which has its bid price p1 lower than the inflated bid price of the gaming plant, i.e., p1 = (p+Δp1) <
(p+Δp). The probability of such event is (1-P).

## The expected gain can be expressed as well as (Bialek, 2002)

The latter equation shows that the marginal gain is always greater than 1 providing that the slope of
the supply curve is positive. P can be considered as the probability of predicting accurately the bids of
other generators. Thus accurate prediction of the competitors’ bids has the effect of increasing the
gain, as it allows choosing such a value of Δp that the gaming generator is not pushed out of the
merit-order (Bialek, 2002).

As the outcome of raising the bid price by Δp depends of the size of Δp , the danger in this strategy is
to turn the generator out of merit, as there is always uncertainty in prediction of the competitors’ bids
that may lead to the undesirable outcome of having an out-of-merit generator, and therefore, no
profits at all.

Additionally, the probability of the marginal generator is not replaced in the merit-order by another
generator may increase as there is repetitiveness of the auction coupled with the increasingly limited
number of competitors as the load increases, especially at the peak load (Bialek, 2002). This fact
helps to diminish the uncertainty for gaming with bid prices and to improve the accurate of prediction
of the competitors’ bids.

Moreover, one would not expect aggressive bidding from the competitors which would have the effect
of lowering the probability of keeping the generator in-merit (P). As inflating the market clearing price
benefits all the generators, not only the gaming one, it is not in their interest to outbid each other,
making tacit collusion, and thus high P, very likely (Bialek, 2002).

25. Now assume that you are trading for a company owning both generator 2 and generator 4.
Try to increase your profit by manipulating bid prices. What is the best strategy?

Table 29. Illustration of Bertrand competition between the generators 2 and 4, owned by the same
company, in the seven-bus system
Real Marginal Cost
Price Bidden (£/MWh) Generation (MW)
(£/MWh) SMP Revenues Expenses Profits
Generator Generator Generator Generator Generator Generator (£/MWh) (£/h) (£/h) (£/h)
2 4 2 4 2 4
6 10 500 93 6 10 10 5,930 3,930 2,000
7 11 500 93 6 10 11 6,523 3,930 2,593
8 12 500 93 6 10 12 7,116 3,930 3,186
10 13 500 0 6 10 12 6,000 3,000 3,000
12 14 500 0 6 10 12 6,000 3,000 3,000
14 15 0 0 6 10 12 0 0 0

As can be seen in table 29, the bidding prices for generators 2 and 4 that have the highest profit , are
8 £/MWh and 12 £/MWh, respectively. The base-load generator 2 is fully loaded and the generator 4
is the marginal generator, setting the market clearing price.

For Bertrand competition the optimal bidding strategy, according to (Hao, 2000) can be expressed in
a simplified way as follows:

For a bidder who participates in a clearing price auction, three outcomes exist: winning below and on
the margin, or losing. Corresponding to these outcomes, the bid price is either the same as the
winning price, or below the winning price, or above the winning price. The bidding strategy is
described by B(ci) for a Bidder i. The probability that a bidder who wins the auction, but not on the
margin is R(B-1(bi)) and H(B-1(bi)) the probability that Bidder i wins the auction on the margin.

## Ariel Villalón M. – MSc NRE 2010/2011 Page 35

The common objective for bidders is to maximize their expected payoffs. Assuming the winning price
is w, the payoff π for bidder i is (w-ci) if bi wins the auction but not on the margin, and is (bi-ci) if bid bi
is on the margin. Thus the expected payoff function π bi) is the sum of above two terms weighted by
their probabilities of occurrence:

Increasing bi will increase the bidder’s payoff if Bidder i continues to set the marginal clearing price.
However increasing bi will also decrease the probability of winning. The objective for a bidder is to
select bi to balance the gain from winning against the increased probability of losing so that the
expected payoff is maximized.

## And the latter equation simplified:

And rearranging and integrating by part formula and boundary condition, the general bidding strategy
can be expressed as follows:

So, the latter equation describes the general bidding strategy given an estimate of the expected
winning price. This result shows that a bidder´s optimal bid is determined by three components: its
cost of production, the probability of winning below or on the margin and the difference between its
cost and the expected winning price (Hao, 2000).

## Ariel Villalón M. – MSc NRE 2010/2011 Page 36

II.4 LOCATIONAL MARGINAL PRICES: congestion included

## Figure 35. Optimal Power Flow including congestion of transmission

26. Compare the bus marginal costs (i.e. LMPs) with generator prices. Try to make sense of
LMPs. Why are they equal to marginal cost for some local generators but not for all of the?
What is the regularity?

As can be seen in figure 35, the marginal costs of the buses are:

## Table 30. Marginal costs and load on the buses

Bus Marginal Cost (£/MWh) Load (MW)
1 2.00 0
2 2.68 60
3 9.25 165
4 10.00 120
5 25.77 195
6 8.46 300
7 20.00 300

## Table 31. Marginal costs of the generators

Generator Marginal Cost (£/MWh)
1 2.00
2 6.00
4 10.00
6 4.00
7 20.00

## Table 32. Maximum and actual power output of the generators

Generator 1 6 2 4 7
Maximum Output (MW) 400 500 500 200 600
Actual Output (MW) 205.6 500.0 0.0 178.1 255.9

## Ariel Villalón M. – MSc NRE 2010/2011 Page 37

The generators 1, 4, and 7 are the marginal generators as the bus marginal costs are the same that
the marginal costs of generation for each of them (table 30 and 31). Additionally, these generators are
not generating at their maximum capacity, as can be seen in table 32. They are called part-loaded
generators, and each of them set the marginal price at the bus where they are connected.

In general, if there are m transmission constraints in the system, there will be m + 1 marginal
generators (Kirschen, 2004).

Table 33. Transmissions lines capacities, actual power flow, and congestion
Lines Limit (MVA) Flow (MW) Congestion of the line (%)
1-2 150 140.6 93.7%
1-3 65 65.0 100.0%
2-3 80 39.8 49.8%
2-4 100 29.8 29.8%
2-5 100 100.0 100.0%
2-6 200 89.0 44.5%
3-4 100 60.2 60.2%
4-5 60 27.7 46.1%
5-7 200 67.0 33.5%
6-7(1) 200 55.5 27.8%
6-7(2) 200 55.5 27.8%

So, as can be seen in table 33, there are two transmission constraints (100% of congestion of the
lines), and that fact does make sense with the regularity of m + 1 marginal generators as generators
1, 4, and 7 are.

27. For those nodal LMPs which are not equal to the marginal costs of local generators, verify
experimentally that LMP is equal to the minimum cost of supplying extra MW of demand
without violating security constraints. Do it for node 5 as its LMP is higher than any generation
cost. To do that increase the local demand by 1 MW, see where the power to supply that extra
demand comes from and calculate the nodal LMP as the weighted average of costs of
generators supplying this extra 1 MW.

Figure 36. Optimal Power Flow including congestion of transmission with load in bus 5 increased in 1
MW

As can be seen in figure 36, the total cost of the total generation per hour, with the load in bus 5
incremented in 5 MW (load of 196 MW) is 12,793.00 £/h, value that is £ 25.77 bigger than the

## Ariel Villalón M. – MSc NRE 2010/2011 Page 38

situation presented in figure 35, where the total cost per hour of the generation is 12,767.00 £/h for a
load of 195 MW in the feeder connected to the bus 5.

Considering that the nodal price is defined as the cost of supplying an additional MW of demand at
that node by the cheapest means, without violating the security-constrained dispatch, therefore, can
be said that the definition is accomplished as the total price is incremented in £ 25.77 as the demand
at node 5 is 1 MW bigger (table 34) than the situation presented for question 26 (figure 35).

## Table 34. Marginal costs and load on the buses

Bus Locational Marginal Price (£/MWh) Load (MW)
1 2.00 0
2 2.68 60
3 9.25 165
4 10.00 120
5 25.77 196
6 8.46 300
7 20.00 300

## Table 35. Power output of the generators

Generator 1 6 2 4 7
Actual Output (MW) 205.5 500.0 0.0 177.8 257.4

Table 36. Transmissions lines capacities, actual power flow, and congestion
Lines Limit (MVA) Flow (MW) Congestion of the line (%)
1-2 150 140.4 93.6%
1-3 65 65.0 100.0%
2-3 80 39.9 49.9%
2-4 100 29.9 29.9%
2-5 100 100.0 100.0%
2-6 200 89.4 44.7%
3-4 100 60.1 60.1%
4-5 60 27.6 46.0%
5-7 200 68.1 34.0%
6-7(1) 200 55.3 27.7%
6-7(2) 200 55.3 27.7%

As can be seen in tables 35 and 36, the extra power comes from the generator 7, mainly, and flows
through transmission line 5-7.

28. Shadow costs of the lines (i.e. values of Lagrange multipliers associated with a constraint).
Why are there only two lines with their shadow costs different than zero? What is the general
rule?

## Table 37. Transmissions lines records

From Bus To Bus Max % of MVA Limit Lim MVA Marg. Cost (λ), Constraint
Number Number MVA (Max) MVA £/MWh Status
1 2 140.6 93.7 150
1 3 65 100 65 10 Binding
2 3 39.8 49.8 80
2 4 29.8 29.8 100
2 5 100 100 100 42.5 Binding
2 6 89 44.5 200
3 4 60.2 60.2 100
4 5 27.7 46.1 60
7 5 67 33.5 200
6 7 55.5 27.7 200
6 7 55.5 27.7 200

## Ariel Villalón M. – MSc NRE 2010/2011 Page 39

As can be seen in table 37, just two lines are occupied until their complete capacity (100%), as they
are line 1-3 and 2-5.

In this case, the Lagrange multiplier, λ, for all the transmission lines but 1-3 and 2-5, are equal to zero
as they still have capacity for transmission, so the constraint is not active.

For the line 1-3 the Lagrange multiplier is 10 £/MWh, that means that the saving that would accrue
each hour if the flow in branch 1-3 could be increased by 1 MW.

Equivalently, for the line 2-5, the Lagrange multiplier is 42.5 £/MWh, amount that could be saved each
hour by increasing the flow in 1 MW.

29. What is the physical meaning of a Lagrangian multiplier related to a power flow constraint?

Figure 37. Optimal Power Flow with the rating of branch 2-5 incremented in 1 MW (from 100 to 101
MVA)

As can be seen in figure 37, the total cost of generation in the system is now 12,725 £/h, value that is
smaller in 42.5 £/h than the total cost considered with a rating of 100 MW for the branch 2-5.

In this case, and as can be seen in table 37, the Lagrangian multiplier for this branch is 42.5 £/MWh.
So, the total cost per hour was reduced in the value of the Lagrangian multiplier for the mentioned
branch.

## Ariel Villalón M. – MSc NRE 2010/2011 Page 40

30. Calculate and compare the congestion surplus in each of three ways:

a. The difference between the payments by the loads and the generators revenues

## Table 38. Economic operation of the seven-bus system: congestion surplus

Total
Bus 1 Bus 2 Bus 3 Bus 4 Bus 5 Bus 6 Bus 7
System
Consumption (MW) 0.0 60.0 165.0 120.0 195.0 300.0 300.0 1,140
Production (MW) 205.6 0.0 0.0 178.1 0.0 500.0 255.9 1,140
Nodal Marginal Price
2.00 2.68 9.25 10.00 25.77 8.46 20.00 78.16
(£/MWh)
Consumer payments 160.8 1,526.2 1,200.0 5,025.1 2,538.0 6,000.0
0.00 16,450.20
(£/h) 0 5 0 5 0 0
Producers revenues 1,780.9 4,230.0 5,118.7
411.18 0.00 0.00 0.00 11,540.90
(£/h) 8 0 4
Merchandising surplus (£/h) 4,909.30

## b. The difference between in LMPs between terminal loads in each line

Table 39. Contribution of each branch to the merchandising surplus of the seven-bus system
Lines Flow (MW) From price (£/MWh) To price (£/MWh) Surplus (£/h)
1-2 140.6 2 2.7 95.60
1-3 65.0 2 9.3 471.25
2-3 39.8 2.68 9.3 261.49
2-4 29.8 2.68 10.0 217.92
2-5 100.0 2.68 25.8 2,309.00
2-6 89.0 8.46 2.7 -514.30
3-4 60.2 10 9.3 -45.15
4-5 27.7 10 25.8 436.36
5-7 67.0 20 25.8 386.30
6-7(1) 55.5 8.46 20.0 640.59
6-7(2) 55.5 8.46 20.0 640.59
Total 4,899.63

c. Calculation of the congestion surplus utilizing the shadow cost of the transmission
lines

As can be seen on table 37, the shadow cost of the each of the branches (column MVA Marg. Cost
(λ)) is zero, except for those transmission lines that are fully loaded.

Those branches are 1-3 and 2-5, with 10 £/MWh and 42.5 £/MWh, respectively.

Where:

## Ariel Villalón M. – MSc NRE 2010/2011 Page 41

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