s ~ ~ Markets

C o ~ ~ ~ t e~~hi vo el e Electricity 79

As more and more regions/countries open up their electricity markets to competit~on,the

~uestionof how to des~gnthe market in the best interests of the consumers and s u p p ~ i is e~
of prime importance. Central to this are the energy, transmissio and ancillary services
markets and how they are coordinated. The competitive market
demand ~ n c ~ ~ effect~vely
ons in many markets, e.g. stock market
delivery of a product is required by a stock market whereas in an electricity market a
p r o ~ u must l y de~iveredins~ntly(i.e. no storage) and its
c ~ e v e n ~ a ~be
ower system. The closer we get to physical delivery th
the operational and reliability constraints. These basic principles are
i n g and it is universally accepted that e
n many ~ ~ c ~ i o nmarkets
i~dependen~ system opcrator (ISO). Although an accepted pri
the IS0 is a hotly debated topic. S market structures require a large role for the
w h ~ others
l~ require roach. This operator
disc rim in at^^ to all e market hence the
operator. In general responsible for tasks such
g of load for all users and e n s u ~ n gcom
standards. The IS0 will o ~ ~ r the a~e
, open access to the transmission grid to all users
gestion and constraints on a n e ~ b o ~ ~
system reliability the IS0 should also
hancements, The I S 0 may also pro
led basis and perform the s e # ~ e ~ e ~ t

of aspects that need ~ ~ a g i n ranging

g, from
c o ~ e c ~ i o~no l i c ~ econ~est~on
s, management and the a ~ i n i s t r a t i o nof ene
n po~iciesare an ~ m p o ~ a naspect t of the ESO res~onsibili~~es.
and charges that all participants must meet in order to connect to the grid and
in the marke~.The trans~ssionsystem is made up of a
e n e r a ~ r sand cons~mersare located, and these buses are
lines. These lines transport the electrical energy around the hi
t r a n s ~ ~ s ssystem
i o ~ and have limited capacities, which for security
[26], When a line is at its limit the system is congested
er inj~ctionsat every node in the system. Relieving th
generator^ andfor consumers to alter their quantities. ~ ~ e f o congestion r e puts a
c o ~ s ~ r aoni ~the
t e n e r markets
~ and in many instances may render them non-compe~itiv~
[27]. Losses on an e l e ~ ~ i grid c i ~are u n a v o i ~ b l eand can be substantial. A market
nt’s p~ysicallocation on the transmission system, i.e.
portan ant factor in wholesale electricity markets. Th
~ d ~ e n of~ establishing
a ~ s the instantaneous Iocati
of electricity. For e x a ~ p i e a, generator that is injecting p o w ~ r
location at one i n s ~ nin t time can cause substa~tiaIlydifferent losses and c o n ~ e ~ tthan i o ~a
similar i n j e c t ~ oat~another
~ location andlor time. The cost of these loss
sm~ss~on s y ~ t ne ~e to~be~~ l ~ o c ain t esome
~ manner to the
 Power System ~ e s ~ c and
~ ~ n g

electricity market and this is not a trivial task [29]. The revenues collecte~by the TSO
from the ~enera~or§ and loads for these ~ansmiss~on s e ~ ~ c e(co~ection,
§ age,
ay for the ~ a n s ~ i s s i o§ ny s t e ~in tbe short an

In the VHU environ~entthe least cost objective ~ p ~ c a rl e~~ye ~ ~e idi l yto the cost of
a n 6 i l l a ~services such as r ~ s e and ~ ~ e a t as
~ e vol~dge~ o n t r owere e~
opt ~ ~ is atioprocess
n and their cost may not have been e x p l i ~ i ~ ~ y
illary services is costly, and the ~ u a ~ ~ ~of ~ ~ ~
reserv~are services that generat~ngunits provide
they have significant costs associated wit11 them D23. ~ ~ ~ will~ a
not provide these services unless they are ade~uatelycompensa~ed[33]. In s o ~ cases, e
o r § be obliged to provide these services in order to be all~wedto
howev~r,g ~ n ~ r a ~ may
arket. Ancillary services can be self-~~ovided
by the e ~ ~ r g y
nsible for a ~ q u the ~ ~ n ce.
~ ~ h y s i c a ~self-
ly
~ r o ~ i s i af
Q nthese s ient and ener~y~~k~~
these services from others. Therefore in c o ~ p e t i t whole
~v~

a state where load shed

and reserve that must

rocess, then the ex

~ncentiveto ~ a i n t a units
i ~ [41]. A strong ar
fines are not n ~ ~ e s sasa pure
~ , market forces

in the competitive enviro

the event of a shortfall in gen

In a ~ ~ o ~ eelectricity
s a l ~ market ~ u l t i ~ l e
being traded over

number of choices d ~ $ ian~e li e~~ ~ r i ~ i ~

~ e ~is used to i ~ ~ u s ~ the
s ~ s model a t ebasic c ~ a r a c ~ e ~ s t i c s
refe~encesto existing wholesale ele ity markets are used here to illus
characteri§ti~s but it should be no eneral these exist in^ m
ecul~ar~t~eswhich do not allow them to be c
lso be noted that even at the time of this writing rn
re a v a ~ ~ a bthel ~ relevant web sites are giv
the
r sh

3.3.1 ~ ~~ yl s ~ e r n
~ r nTest
test system c o n s ~ s ~ ~ofnag supply si
d a simple ~ ~ e e - bnetwork.
us

tors have quadratic production cost

~ i n i ~ uand
mr n a x ~ gen
~u~ con§~aintsgiven by

are the power outputs in MW of generator #1 and

ic utility curves and n i m ~ mand max~mum

2 Power System ~ e ~ t ~ a ~d ~ i n g

Line A (3.5)

Line AC (3.6)

of the respectiv~lines to inj~ctionsat

The coef~cientsof P, and Pzare the line sen~~~ivities
buses r~spectively[27].

us A Line A
us

istinct ~ a d ~ ~n g~ c h a n ithe
s ~central
s ~ auction
iers and ~ustomersboth s u b ~ i t
the market clears, i.e. d e t e ~ i n ~ §
m [46]. In their simplest forms these centralised auctions
to a §im~le
merit order economic ~ s p ~ a~l gc oh~ i [12].
~ h ~ The
d auction for ~~~~~~

auction m e c ~ a n i s ~ ~
Competetive Wholesale Electricity Markets 3

3.3.3 ~ddin
idding into a simple central auction i s similar to the process of each generator submi~i
cost data and each load submi~ingutility ( ~ l l i ~ ~ e s s - t o - pdata
a y )to the
used by the VIU to dispatch the system. In an ideal world with a
electricity market the bid data should be the same as the ~roductioncost (utility) data or
o p p o ~ n i t ycost, wRicRever is eater. The o p p o ~ n cost i ~ is the r~venue
p ~ i c i p would
~t expect to get by selling in a different market. This price
assu~ptionin a competitiv~market is an optimal strategy for a market particip
The p ~ c i nmechan~sm
~ i an important factor in this p r i c e - ~ i n ga s s ~ ~ p t i oand
n the
to the seminal paper by Vickrey [49]. The fixed costs are not
d ~ u a n ~ i t yi.e., clearing the market. The incrementa1 costs
(ut~~ities) are all that are needed to clear the market. Here it will be assumed
no opportunity costs and that all market p ~ i c i p a n t sbid at ~ c r e m ~cost n~l
case where bids vary from incremental cost (utility) is dealt with later in the section on
~ S e ~ t i o3.3.9).
n The cost (uti~ity)curves and the increme~talcos
small test system are given in ~ ~ ~3.2r and e 3.3
s respective~y. T
(utility) curves result in linear increnienta~cost (utility) curves.

20

0 100 200 300 400 500 BOO 700

Power (MW)

Cost ( ~ t i lcurves
i ~ ~ for the small test system
 5

n
u
0 100 200 300 400 500 600 7

3 I ~ ~ r e ~ e icost
i ~ a(utility)
l curves for the small test system
C o ~ ~ e t e ~Wholesale
ive Electricity Markets

Profits for the ~ e n ~ r aare a ~t ea ~~ i the

~ ~c ar ~s c u ~by n ~di~erencebetween the r e ~ e n ~ ~
e cost. The cost in t h ~ calcu~ations
§~ is taken to be the
i~nore§other fixed costs such as eapit
ce ~ e ~ e the e nutility
p r ~ c~i~~c h~ a n i sisi npay as you bid w h ~ pra~~ i c i ~ a pn ~ s
is prQ~osedthat this type of d i s c r ~ ~ i n a ~ opricing ry wi

ts (3.11, (3.2), (3.3) and (3.4) and (be load balanc~c o ~ s ~ a ~

roce~§ (a ~ ~ a d r a ~p ir co g ~ a ~ i n g
ils of solution) the no-load and fixed

et in h i s m ~ n e with~ut
r amb
~ ~ c r e a s ~[ndg~ c r e a s ~ ~ g ~ ,
 Power System R ~ s ~ c and
~ ~n e rge ~ l a t i Q n

constraint (3.9) and the assumption of a lossless system, the pool (central auction) is
revenue neutral, i.e. what is paid in by the loads is paid out to the ~enerators,

le 3.1 Market clearing, transmission uncQns~ained

G e n ~ ~ ~ Q r / Quantity
~ Q a ~ (MW) Price ( $ ~ ) ( S u ~ l ~($A)
~ Profit s)
Generator #I 313.6 18.3 683.7
~eneratQr #2 409. I 18.3 21 10.3
Load #\ 522.7 18.3 437 1.9
Load #2 200.00 18.3 4345.5

3.3.5 ~ a rTiming
~ ~ t
to the stochas~icnature of the demand [ and the need to s c h e d ~ e~ e ~ e r a t i o n
resources in advance, electricity markets can characterised by timing. Forward
s are run in advance of the delivery time. This enables suppliers to
e~erationto meet the demand and for the IS0 to coo~dinate~ a n s r n i ~ s and i~n
ervice needs. The forward markets also perform a very important financial
ants by locking in prices an
I-time (spot) markets and is ractice [SZ]. In power
systems with large themal plants that are in unit constraints these
1. There may be a m u ~ t i ~ of d ef o ~ ~ ~a r kd e at
~s
ahead, month ahead and day ahead. In C a l i f o ~ i athe power
(PX) m s three different types of forward markets [53,54]. The day-ahead
lishes prices and quantity of electricity for delivery d ~ each~ hown of ~the
. The day-of~our-aheadmarket o erates similar to the day
ding closer to the delivery hour.
pa~icipantscan buy and sell energy months in ad
order of min~tesin ance of delivery are deeme
a ~ p r o ~ ~ real-time
hes markets are needed to ensure supply and
adapt to unforesee~c~rcumstances.These real-time markets are in
d Norway the respecti~elSOs operate
market for real-time a d ~ u s ~ [55, e n ~101. The p
~ i ~but~ this is set to change with the ~ t r o d u c ~ i oofn a binding day-a~ead~ a r ~ e t
r e a ~ -basis
E567.

The core product being soid in electricity markets is energy. U l t i ~ a ~ e the l y coordi~&ti~n
of units (sc~eduling)and of the ~ransmissionand a n c i 1 1 services~ enables its
seque~tia~ e l e c ~ c market
i~ structure is one in which the energy t ~ a ~ ~ d
ndently of the transmission and ancillary services. The provision of the
tlal trans~issionand ancillary services needs follows e ~ e r g y~ a d in~ an ~
sequentia~~ ~ a n n eIn
r . ~ a l ~ f oforward
~ i a energy ~ a r k e t are
s con
real-tinre energy, congestion management and ancillary services
i a There i s a strong physicai coup1
a l i f o ~ ~[58].