Power System Economic

and Market Operations
Power System Economic
and Market Operations

by
Jin Zhong
CRC Press
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To My Family
Contents

Preface xv
Acknowledgments xvii

1 Introduction 1

2 Economic operation in power systems 5

2.1 Introduction of power system operation 5

2.2 Development of economic operation 8
2.3 Incentives of economic operation 12
Bibliography 12

3 Power generation costs 13

3.1 Load cycles 13

3.2 Costs for power generations 16
3.2.1 Coal-fired steam power plants 16
3.2.2 Gas-fired power plants 22
3.2.3 Hydro power stations 24
3.2.4 Nuclear power stations 25
3.2.5 Wind power and solar energy 25

vii
viii Contents

3.3 Generation planning 26

3.3.1 Conventional generation planning 26
3.3.2 Screening curve 28
3.3.3 Load duration curve 31
3.3.4 Generation planning and generation
scheduling 35
3.4 Summary 35

4 Economic dispatch 37

4.1 Introduction 37
4.2 The problem of economic dispatch 38
4.3 Economic dispatch problem considering losses 49
4.4 Economic dispatch with piecewise linear cost
functions 52
4.5 Summary 55

5 Optimal power flow 57

5.1 Introduction 57
5.2 Power flow formulations 59
5.2.1 Bus admittance matrix 59
5.2.2 Power flow equations 60
5.3 Optimal power flow modeling 63
5.3.1 Mathematical model of optimal
power flow 63
5.3.2 Solution algorithms for optimal
power flow 65
5.4 DC optimal power flow 67
5.5 Security-constrained optimal power flow 68
5.6 Examples 72
5.6.1 Test system 72
5.6.2 Example for AC optimal power flow 73
5.6.3 Example for DC optimal power flow 74
5.6.4 Example for security-constrained
optimal power flow 75
5.7 Modified optimal power flow models for
power system operations 77
5.7.1 Minimize generation cost 78
5.7.2 Minimize losses/total generation 78
5.7.3 Minimize generation adjustment 78
Contents ix

5.7.4 Minimize load shedding 79

5.7.5 Optimization of reactive power 79
5.8 Optimal power flow and unit commitment 81
Bibliography 81

6 Unit commitment 83

6.1 Introduction 83
6.2 Illustrative example of unit commitment 84
6.3 Mathematical model of unit commitment
problem 91
6.3.1 Variables of unit commitment problem 92
6.3.1.1 Control variables 92
6.3.1.2 State variables 92
6.3.2 Objective function 92
6.3.3 Unit constraints 93
6.3.3.1 Generator output limits 93
6.3.3.2 Generation unit ramping
constraints 94
6.3.3.3 Generation unit operation
time constraints 95
6.3.3.4 Other unit constraints 95
6.3.4 System constraints 96
6.3.4.1 Power balance constraints 96
6.3.4.2 Network constraints 97
6.3.4.3 System reserve constraints 98
6.4 Solution algorithms for unit commitment problem 99
6.5 Summary 100

7 Electricity market overview 101

7.1 Traditional power industry 101

7.2 Deregulation of power industry 103
7.2.1 Unbundling of integrated power
systems 103
7.2.2 Restructured power system for
market operation 106
7.3 Power deregulation in different countries 107
7.3.1 Great Britain 108
7.3.2 Australia and New Zealand 109
7.3.3 Nordic countries 110
7.3.4 United States 111
x Contents

7.3.5 Europe 113

7.3.6 China 113
7.4 Electricity retail markets 114
7.5 Overview of electricity market operation 116
7.5.1 Markets 116
7.5.1.1 Energy market 116
7.5.1.2 Ancillary service market 117
7.5.1.3 Electricity financial market 117
7.5.2 Market participants 118
7.5.3 Market operations and its timeline 119
7.5.4 Spot market pricing mechanisms 121
7.5.5 Congestion management 123
7.5.6 Transmission services 124
7.6 Summary 125
Bibliography 125

8 Electricity market pricing models 127

8.1 Introduction 127

8.2 Nodal price-based market model 128
8.2.1 Marginal price introduction 128
8.2.2 Optimal power flow-based market
model 129
8.2.2.1 Objective functions 129
8.2.2.2 Constraints 131
8.2.3 Security-constrained optimal power
flow-based market model 132
8.2.3.1 Objective functions 133
8.2.3.2 Constraints 133
8.2.4 Bilateral contract formulation in the
market model 135
8.3 Locational marginal price 136
8.3.1 Formulation of locational marginal
price 137
8.3.2 Derivation of locational marginal
price for a security-constrained
market model 147
8.4 Examples for locational marginal price
calculation and market clearing 149
8.4.1 An example of locational marginal
price calculation without loss or
congestion 149
8.4.1.1 Example A 149
Contents xi

8.4.2 Examples of locational marginal

price calculation with network effects 150
8.4.2.1 Examples: Without loss or
congestion 150
8.4.2.2 Examples: With congestions 155
8.4.3 Locational marginal price calculation
for a system 159
8.4.3.1 Example D1 161
8.4.3.2 Example D2 161
8.4.3.3 Example D3 162
8.4.3.4 Example D4 164
8.5 Market settlement 167
8.5.1 Bilateral contracts in a spot market 167
8.5.2 Bilateral contract settlement 168
8.5.3 Examples for bilateral contract
settlement 169
8.5.3.1 Example I: Double payment
of bilateral contract 169
8.5.3.2 Example II: Internal
settlement for double
payment offsetting 171
8.5.3.3 Example III: External
settlement for double
payment offsetting 173
8.5.4 Contract that is not resource specific 174
8.6 Uniform zonal price-based market model 175
8.6.1 Uniform market price 176
8.6.2 Zonal uniform market price 178
8.6.2.1 Potential price zones 178
8.6.2.2 Zonal price clearing 179
8.6.3 Zonal price market operation issues 181
8.7 Nodal pricing versus zonal pricing 183
8.8 Summary 184

9 Congestion management and transmission tariff 185

9.1 Introduction 185

9.2 Congestion management 186
9.2.1 Transmission congestion 186
9.2.2 Congestion management and
congestion charge 186
9.3 Transmission right 187
xii Contents

9.4 Transmission tariff 189

9.5 Congestion revenue 191
9.6 Summary 193

10 Ancillary service markets 195

10.1 Introduction 195

10.2 Classifications of ancillary services 197
10.3 Frequency regulation services 199
10.3.1 Electricity balancing market 200
10.3.2 Regulation service market 202
10.3.3 Performance-based regulation
service market 203
10.4 Reserve service market 205
10.5 Reactive power as an ancillary service 206
10.5.1 Costs for providing reactive power 207
10.5.2 Reactive power market model 209
10.6 Summary 212
Bibliography 212

11 Electricity financial market and its risk

management 213

11.1 Risks in the electricity market 213

11.2 Risk management in the electricity market 214
11.3 Electricity derivatives 216
11.4 Summary 217

12 Low carbon power system operation 219

12.1 Introduction 219

12.2 Emission dispatch model 220
12.3 Emission reduction policies for
power sectors 223
12.3.1 Introduction of policies applied
in power generations 223
12.3.2 Clean Air Act of the United States 223
12.3.3 European Emission Trading Scheme 225
12.3.4 Renewable energy certificate scheme 226
12.3.5 Feed-in tariff 226
Contents xiii

12.4 Impacts of CO2 prices on power system

dispatch 227
12.5 Impacts of emission trading on generation
scheduling and electricity prices 228
12.6 Discussions on low carbon market
mechanisms 229
12.7 Summary 232

Index 233
Preface

The objective of this book is to introduce power system

economic operations in traditionally integrated power systems
and market operations in deregulated power systems.
The power system economic operation is mathematically
treated as an optimization problem. The objective function
of economic operation is to minimize generation cost, trans-
mission losses, and so on, subject to power system operation
constraints. With the development of new algorithms and com-
puting technologies, sophisticated optimization models are
proposed and solved for power system operation and planning.
In this book, we start from generation cost formulations and
introduce traditional economic dispatch model, optimal power
flow model, and unit commitment model.
With the deregulation of the power industry, integrated
power system is unbundled to generation, transmission, and
distribution. Electricity is traded in the wholesale market.
Small customers purchase energy from electricity retailers
through the retail market. The electricity market is operated
for energy trading while satisfying power system operation
requirements. Electricity market is mathematically modeled as
an optimization problem that is subject to power system opera-
tion constraints and market operation constraints. In this book,
we introduce electricity market models and electricity market-
related issues.
This book can serve as a textbook for an undergraduate
course or a postgraduate course for engineering students. This
book is also valuable to engineers who are working in this field.

xv
Acknowledgments

First and foremost, I thank my husband Kun for standing beside

me throughout my career and while writing this book. I thank
my parents for their love and support throughout my life.
I am deeply grateful to my PhD and postgraduate supervi-
sors, Professor Kankar Bhattacharya and Professor Xiaomin
Bai, who brought me into the area of electricity market.
I especially thank Professor Felix Wu for his encouragement
and support in my research and career these years.
Thanks to my students, Dr. Zhongwei Wang, Dr. Yuqian Song,
and Dr. Yuchen Tang for their help in some equations and data
processing.

xvii
ChA P t E r ON E

Introduction

Electrical power is probably one of the most important

elements of modern society. Since the discovery of electricity
and the invention of electric dynamo and incandescent light
bulb, people’s life style has been changed significantly. Electric
power systems provide a clean and convenient energy to light
houses and drive machine motors. Electric energy has become
a necessity of daily life.
Pearl Street Station, the first power station established in
1882 by Thomas Edison, supplied DC power for lighting streets
within a short distance from the station. Due to the excessive
power losses and voltage drop, the low voltage of DC system
became the bottleneck of long-distance electricity delivering.
The invention of AC transformer made it possible to raise the
voltage to a higher level for long distance power transmis-
sion. The advantages of AC power systems were obvious, and
AC power systems were adopted all over the world. In recent
decades, HVDC/EHVDC has developed very fast, which helps
to transfer electric power in a more efficient way through long
distances. In the past century, electric power system had a sig-
nificant development. Large-scale centralized power plants
were established due to the economies of scale. High-voltage
transmission and distribution lines were installed to deliver
electric energy to every corner of the world. Power lines of
different voltage levels form the power grid, which intercon-
nects power plants and electricity users in different areas.
The interconnection of power grids makes the overall power
generation and transmission more economical and reliable.
Through interconnection, less expensive generators can gen-
erate more power to supply customers at expensive areas, and

1
2 POWER SYSTEM ECONOMIC AND M ARKE T OPER ATIONS

fewer generators are engaged as reserves for peak load periods

in an interconnected system.
The power system operator monitors and controls the system
and maintains the system to be operated in a safe and reliable
way. In addition to system reliable operations, the system oper-
ator is responsible for power system economic operation. The
purpose of economic operation is to dispatch electric power
generators with the minimum generation cost while satisfying
the electricity demand. As the amount of fuel consumptions for
a power system is huge, the savings on fuels in a small percent-
age by economic operation could result in a large amount of
savings in generation costs.
Electric power is generated by different types of generators.
According to fuel types, conventional power plants could be
categorized as coal-fired power plant, oil-fired power plant, gas
turbines, nuclear power plant, and hydro power station. With
today’s emphasis on energy and environmental considerations,
renewable energy, such as wind power-, solar-, and geothermal-
based generations, is increasing significantly. For different
types of generators, generation costs are different due to fuel
prices and generation technologies. Every generating unit has
its unique generation cost characteristics. In a power system,
the total available generation capacity is bigger than the total
demand for almost anytime. To supply a given amount of elec-
tricity demand, there are more than one options/combinations of
generating units for the system operator to dispatch the genera-
tors. The total generation cost differs for different combinations
of generating units and outputs. It would be more economical
to find the option/combination with lower cost to supply the
electricity demand. This is the basic principle of power system
economic operation. Power network constraints also need to be
considered for economic operation.
Conventional power system economic dispatch is imple-
mented on the basis that all generators in the network are
owned by one power company, and the system operator knows
the cost curves of all generators. The system operator searches
for a least-cost solution for dispatching generating units in the
system.
Power industry has been changed since power deregulation
in 1990s. Generations are separated from the transmission net-
work. Most generators are independent power providers owned
by generation companies. Independent system operators (ISOs)
or transmission system operators (TSOs) are responsible for
system reliable and economic operations. The generation cost
of each generator is not known to the ISO/TSO. Electric energy
IntroduC tIon 3

is traded in the electricity market. In the market, the concept

of economic dispatch is extended with market operation.
The  market design, clearing procedure, and settlement pro-
cess affect the way electricity is traded and the generation
dispatched. Besides, power network constraints need to be
considered in the market operation.
The purpose of the book is to provide a systematic under-
standing of power system economic operations in traditionally
vertically integrated systems and market operations in deregu-
lated power system. The principles of economic dispatch, unit
commitment, and optimal power flow and their mathematical
models will be introduced. Then, the market mechanisms and
mathematical models for energy market and ancillary services
will be presented. In the end, electricity financial market and
low carbon electricity market operation will be introduced.
The book is targeted to senior students and postgraduate
students in electric power engineering and energy engineer-
ing, researchers and engineers in the area of power system
economic operations and electricity markets, system operators,
electricity marketers, electricity retailers, and other electricity
market participants.
Economic operation in power systems
Carpentier, J. Optimal power flows. International Journal of Electrical Power and Energy
Systems, 1(1): 3–15, 1979.

Optimal power flow

Bergen, A. R. , and Vittal, V. , Power System Analysis, Prentice-Hall, Upper Saddle River, NJ,
2000.
Castillo, E. , Conejo, A. J. , Pedregal, P. , Garcia, R. , and Alguacil, N. , Building and Solving
Mathematical Programming Models in Engineering and Science, John Wiley & Sons, New York,
2002.
Stevenson, W. D., Jr , Elements of Power System Analysis, McGraw-Hill, New York, 1982.
Power Systems Test Case Archive, [Online]. Available:
http://www.ee.washington.edu/research/pstca/

Electricity market overview

Bhattacharya, K. , Bollen, M.H.J. , Daalder, J.E. , Operation of Restructured Power Systems,
Kluwer Academic Publishers, 2001.

Ancillary service markets

Fitzgerald, E. , Kingsley Jr. C. , and Umans, S.D. , Electric Machinery, McGraw-Hill, New York,
1992.
Wang, Z. , Zhong, J. , and Li, J. , Design of performance-based frequency regulation market
and its implementations in real-time operation, International Journal of Electrical Power and
Energy Systems, 87: 187–197.
Zhong, J. and Bhattacharya, K. , Toward a competitive market for reactive power, IEEE
Transactions on Power Systems, 17(4): 1206–1215.