Introduction To Electricity Markets

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Pricing Electricity in Pools with Wind Producers
1. Introduction To Electricity Markets

In economic terms, electricity (both power and energy) is a commodity capable
of being bought, sold and traded. An electricity market is a system for effecting
purchases, through bids to buy; sales, through offers to sell; and short-term
trades, generally in the form of financial or obligation swaps. Bids and offers
use supply and demand principles to set the price. Long-term trades are
contracts similar to power purchase agreements and generally considered
private bi-lateral transactions between counterparties. Wholesale transactions
(bids and offers) in electricity are typically cleared and settled by the market
operator or a special-purpose independent entity charged exclusively with that
function. Market operators do not clear trades but often require knowledge of
the trade in order to maintain generation and load balance. The commodities
within an electric market generally consist of two types: power and energy.
Power is the metered net electrical transfer rate at any given moment and is
measured in megawatts (MW). Energy is electricity that flows through a
metered point for a given period and is measured in megawatt hours (MWh) [1].
Markets for energy-related commodities trade net generation output for a
number of intervals usually in increments of 5, 15 and 60 minutes. Markets for
power-related commodities required and managed by (and paid for by) market
operators to ensure reliability, are considered ancillary services and include such
names as spinning reserve, non-spinning reserve, operating reserves, responsive
reserve, regulation up, regulation down, and installed capacity. In addition, for
most major operators, there are markets for transmission congestion and
electricity derivatives such as electricity futures and options, which are actively
traded. These markets developed as a result of the restructuring of electric
power systems around the world. This process has often gone on in parallel with
the restructuring of natural gas markets.
Electricity is by its nature difficult to store and has to be available on demand.
Consequently, unlike other products, it is not possible, under normal operating
conditions, to keep it in stock, ration it or have customers queue for it.
Furthermore, demand and supply vary continuously. There is therefore a
physical requirement for a controlling agency, the transmission system operator,
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to coordinate the dispatch of generating units to meet the expected demand of

the system across the transmission grid. If there are a mismatch between supply
and demand the generators speed up or slow down causing the system
frequency (either 50 or 60 hertz) to increase or decrease. If the frequency falls
outside a predetermined range the system operator will act to add or remove
either generation or load.
In addition, the laws of physics determine how electricity flows through an
electricity network. Hence the extent of electricity lost in transmission and the
level of congestion on any particular branch of the network will influence the
economic dispatch of the generation units. The scope of each electricity market
consists of the transmission grid or network that is available to the wholesalers,
retailers and the ultimate consumers in any geographic area. Markets may
extend beyond national boundaries.
1.1.
Day-Ahead Electricity Market
Day-Ahead-Market (DAM) is a physical electricity trading market for deliveries

for any/some/all 15 minute time blocks in 24 hours of next day starting from
midnight. The prices and quantum of electricity to be traded are determined
through a double sided closed auction bidding process. The operations are
carried out in accordance with the Procedure for scheduling of collective
transactions issued by the Central Transmission Utility (PGCIL), CERC (Open
Access in Inter-State Transmission) Regulations, 2008, as amended from time to
time and the Bye-Laws, Rules and Business Rules of the Exchange.[2]
Trading Process Flow
Bidding
1. Participants enter bids for sale or purchase of power for delivery on the
following day. (T+1 day)
2. Bids for a total of 96 blocks of 15 minute each can be entered.
3. Bidding session: 1000 hrs. - 1200 hrs.
4. Bids can be single and/or block including linked bids:
a. Single bids: 15-Minute bids for different price and quantity pairs
can be entered through this type of order. Partial execution of the
bids entered is possible.
b. Block bids: Relational Block Bid for any 15-min block or series of
15-min blocks during the same day can be entered. Although no
partial execution is possible i.e. either the entire order will be
selected or rejected.
5. The bids so entered are stored in the central order book. The bids entered
during this phase can be revised or cancelled till end of bid call period
(i.e.1200 hrs. of trading day)
Matching
At the end of the bidding session, bids for each 15 minute time block are
matched using the price calculation algorithm. (available in IEX byelaws)
All purchase bids and sale offers are aggregated in the unconstrained
scenario. The aggregate supply and demand curves are drawn on PriceQuantity axes. The intersection point of the two curves gives the market
clearing price (MCP) and market clearing volume (MCV) corresponding
to price and quantity of the intersection point.
MCP and MCV are determined for each block of 15 minutes as a function
of demand and supply which is common for the selected buyers and
sellers.
Selected members are intimated about their partially or fully executed
bids and other trade related information.
By 1300 hrs, transmission corridor required to fulfill successful
transactions are sent to NLDC.
The example below illustrates price calculation. Assume the price tick as below:
For the sake of simplicity we assume only 3 portfolios are entered. The quantity
entered by each portfolio A, B and C for the specific price tick is as shown
below:
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The algorithm will then add the entire purchase quantum and sell quantum after
the bidding session and look for a solution where the net transaction is zero i.e.
the buy quantum is equal to the sell quantum.
The demand-supply graph in such scenario is shown below:
Transmission corridor and funds availability

Preliminary MCP and MCV are used to calculate the provisional
obligation of the selected participants and the provisional power flow.
Funds available in the settlement accounts of the participants are verified
based on the provisional obligation.
In case of insufficient funds in the account, the bids entered by such a

participant are deleted.
Required corridor capacity and provisional power flow is sent to NLDC
for scrutiny and corridor allocation is requisitioned based on availability.
By 1400 Hrs, NLDC reverts with actual transmission corridor availability
during all 15 minute time blocks across congestion prone bid areas.
Results
Based on the reserved transmission capacity intimated by NLDC, IEX
recalculates MCP and MCV as well as area clearing price (ACP) and area
clearing volume (ACV).
ACP is used for the settlement of the contracts. On receipt of final results,
obligations are sent to the Clearing Banks for Pay In from buying
Members at 14.30 hrs and the bank is asked to confirm the same.
Confirmation
Final results for confirmation and application for scheduling of collective
transactions are sent to NLDC.
NLDC sends the details of the schedule to respective SLDCs.
Scheduling
RLDCs /SLDCs incorporate Collective Transactions in the Daily
schedule.
A scheduled transaction is considered deemed delivery.
Deviations from schedules are dealt under UI or Deviation Settlement or
Imbalance Settlement regulations. The Regional Entities (those connected
at ISTS networks) are governed by CERC Regulations and Embedded
Entities (those connected to state transmission or distribution network)
are governed by respective State Commissions regulations.
1.2.
Balancing Market Operation
Trading on the Balancing Market is implemented through a platform for

collecting purchase and sale bids for electricity through which the System
Operator (ELES) buys and sells electricity intended for the settlement of
imbalances in the electricity system. Trading on the Balancing Market is carried
out together with Intra-day trading, that is, one hour after the closure of the
latter and until actual supply of the product. All companies included in the
Balance Scheme of the electricity market and which acceded to trading on the
Balancing Market and Intra-day trading can participate in trading [3].
2. Co-Optimizing Energy and Reserve Capacity

In order to ensure that enough balancing resources are available during the realtime operation of the power system, the system operator allocates reserve
capacity in advance. In practice, the procurement and scheduling of reserve
capacity implies operating the system at less than its full capacity, while its use
or deployment usually translates into the redispatch of units previously
committed in the day-ahead market, the voluntary curtailment of loads, and/or
the quick start-up of extra power plants to cover unexpected shortages of energy
supply in real time. There exist two schools of thought on how reserve should
be traded in electricity markets. On the one hand, reserve capacity may be
sequentially procured in a series of auctions run once the day-ahead energy
dispatch has been determined. These auctions are organized to procure reserves
with different activation times. The rationale behind this approach is that the
free capacity that has not been successfully placed in one market can then be
offered in the following auctions where the required activation time for the
traded reserve is not as demanding. Consequently, reserve capacity offers that
are successful in one market are not considered in the subsequent ones [4].
On the other hand, energy and reserve may be simultaneously procured in the
same auction using a co-optimization algorithm that captures the strong
coupling between the supply of energy and the provision of reserve capacity.
The following illustrative example serves to get a more intuitive understanding
of this coupling.
2.1.
Sequential Settlement
Consider an electricity market that solely includes two power producers, A and
B. Each of these producers runs a power plant with a capacity of 100MW.
Producer A offers to sell energy at $10/MWh, while producer B does it at
$30/MWh. A demand of 130 MWh is to be supplied. Additionally, with the aim
of dealing with unforeseen events, the system operator estimates that 20 MW of
reserve capacity are required. Producer A is willing to provide reserve at no
cost, whereas producer B offers reserve capacity at $25/MW.
To start with, let us suppose that energy and reserve capacity are sequentially
settled in this order. Thus, the energy-only dispatch is first determined as
follows
10 P A +30 PB
Min.
P A + P B=130,
s.t.
0 P A 100,
0 P B 100,
where
PA
and
PB
are the amounts of energy sold by producers A and B,
respectively. Optimization problem is trivial, and its solution is given by
P A =
100 MWh and
PB =
30 MWh. The clearing (marginal) price for
energy, which is defined as the dual variable of constraint, results in $30/MWh.

Once the energy dispatch is determined, the reserve capacity market is cleared
as follows
Min.
s.t.
0 R A +25 R B
R A +R B=20,
0 R A 100PA ,
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0 R B 100PB ,
Where
RA
and
RB
are the amounts of reserve capacity sold by producers A
and B, respectively. Note that the reserve scheduling takes the energy dispatch
{PA , PB }
= 0 and
as input. The solution to problem is also trivial and is given by R A
RB
= 20MW. That is, since producer A has been dispatched at full
capacity in the energy market, reserve needs are entirely covered by producer B.
seq
Thus, the total system operation costs TC , including both the procurement
costs of energy and reserve capacity, are computed as

TC seq=10 PA +30 PB + 0 R A +25 RB
= $2400
The clearing (marginal) price for reserve capacity is $25/MW, which is the
value taken by the dual variable associated with the reserve requirement
constraint. Therefore, the profits made by producers A and B, respectively,
under the sequential market organization are calculated as follows
profit seq
A =( 3010 ) P A + ( 250 ) R A=$ 2000
profit seq
B =( 3030 ) P B + ( 2525 ) R B =0
2.2.
Simultaneous Trading
Let us now consider that energy and reserve capacity are simultaneously traded
in the same auction. To this end, both commodities are jointly dispatched using
optimization problem below, which minimizes the total system operation costs.
Min.
10 P A +30 PB +0 R A +25 R B
s.t. P A + P B=130,
R A + R B=20 ,
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P A + R A 100, P A 0, R A 0
PB + R B 100, PB 0, R B 0
The solution to this problem is

MWh, and
RB
PA
= 80 MWh,
RA
= 20 MW,
PB
= 50
= 0 MW. The total system operation costs in this case ( TC )
are calculated as
TC =10 PA +30 PB + 0 R A +25 RB =1080+3050+ 0+0=$ 2300
Prices for energy and reserve capacity, defined as the dual variables of
constraints 1 and 2 respectively, are $30/MWh and $20/MW in that order.
Therefore, the profits made by producers A and B under the simultaneous
market clearing of energy and reserve are given by
profit A=( 3010 ) P A + ( 200 ) R A=2080+ 2020=$ 2000
profit B= (3030 ) PB + ( 2025 ) RB =05050=$ 0
Which turn out to be the same as the profits made by both producers in the
sequential setup However, the simultaneous dispatch of energy and reserve
captures the coupling existing between these two commodities, thus reducing
the total costs by $100 Actually, in this illustrative example, the interaction
between energy and reserve is inferred from the following results
1. Producer A cannot sell as much energy as it might do otherwise. Indeed, this
producer is committed to producing 80 MWh of energy, so that it can provide its
spare capacity (20 MW) as reserve. Reserve requirements are thus satisfied.
2. On the contrary, producer B, which runs a more expensive power plant, has to
produce more energy in order to meet the electricity demand.
3. The price for reserve capacity in the simultaneous arrangement ($20/MW)
does not correspond to any of the reserve offer costs submitted by the
producers. It is, in fact, given by the difference between the marginal energy
costs of producer B ($30/MWh) and A($10/MWh). This is so because a 1-MW
increase of the reserve needs in constraint is covered by producer A. To this end,
this producer must decrease its energy production by 1 MWh, while producer B
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must increase it by the same amount. This action does not involve any
additional reserve cost, but increases the cost of the energy dispatch by $20.
2.3.
Probabilistic Approach
Consider again the electricity market described in Example. Recall that this
market is a duopoly made up of producers A and B, in which reserve
requirements are estimated by the system operator at 20 MW. The reason for
this estimate is that the electricity demand may increase from 130 MWh to 150
MWh without prior notice, and the system operator decides to protect the
electrical infrastructure against this unexpected growth of consumption by
scheduling 20 MW of reserve capacity in advance. The probability of this
happening is, though, relatively small, specifically 0.05. Let us now rethink this
problem using a probabilistic approach. For this purpose, note that, in response
to a sudden increase of load, three different balancing actions may be taken,
namely
1. Producer A may increase its production from
increase
rA
is obtained from the reserve capacity
PA
to
RA
P A +r A
. The energy
scheduled beforehand
for this producer

2. Similarly, producer B may increase its production from
energy increase
rB
PB
to
PB +r B
. The
results from deploying the reserve capacity
RB
dispatched beforehand for this producer.

shed
3. A part of the load increase, L
, may be simply not supplied. This action,
however, entails huge economic losses, which are estimated at $1000/MWh.

Based on these three possible balancing measures, the energy-reserve dispatch
problem can be reformulated as follows
M .10 P A +30 P B+ 0 R A +25 R B+ 0.05 ( 10 r A +30 r B +1000 L shed )

shed
s.t. r A +r B + L =20,
10
10
r A R A , rB R B ,
P A + R A 100,
PB + R B 100, Lshed 20,
P A , PB , R A , R B , r A , r B , L
The solution to this problem is
PA
shed
0,
RA
= 80 MWh,
PB
= 20 MW,
= 50
shed
MWh, RB = 0 MW, r A = 20 MWh, r B = 0, and

= 0. Therefore,
L
the energy and reserve capacity dispatches, i.e., { P A , PB }{ R A , R B } , respectively,

obtained from problem are the same as those resulting from problem in
previous Example This is just pure coincidence. Actually, these two models are
different inasmuch as the following
1. This Market-clearing problem takes into account explicitly both the
probability of occurrence of the 20-MWh demand increase and its potential
impact on system operation costs through the utilization of balancing resources.
s h ed
Indeed, the expression 0.05 ( 10 r A +30 r B +1000 L ) represents the expected cost
incurred at the balancing stage. This cost component is, in contrast, ignored in
previous dispatch model
2. The reserve dispatch yielded by market-clearing model is directly determined
based on how valuable this reserve is to consumers by including the cost of the
expected load not served in objective function, where this cost appears as
0.05 ( 10 r A +30 r B +1000 Ls h ed ) . For the particular instance solved above, this cost
is equal to zero, meaning that consumers are willing to pay for 20 MW of

reserve capacity that can be deployed to satisfy a potential consumption
increase, if needed. In contrast, if the probability of occurrence of the 20-MWh
demand growth is small enough, say 0.005, or the value of lost load is
sufficiently low, e.g., $100/MWh, no reserve capacity is dispatched, i.e.,
{ RA , RB }={0,0} and the whole demand increase is shed instead (
s h ed
= 20
MWh), if it comes to it.

3. While the 20-MW reserve requirement enters previous dispatch model as an
input in constraint, reserve needs are an outcome of market-clearing in this
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model In fact, there is no reserve requirement constraint in this problem.

Instead, we enforce constrain, in which all the variables involved, namely,
r A , rB
and
s h ed
, represent balancing energy quantities. But if there is no such
reserve requirement constraint, how do we determine the reserve capacity price?

We will get to the answer of this question in due time.
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3. Introduction to Stochastic Programming

Unknown data abound in decision-making problems in the real world. This lack
of perfect information is common in problems belonging to different knowledge
areas such as engineering, economics, finances, etc. Decision-making problems
in electricity markets are no exception. In fact, uncertainty is present in most
decision-making problems faced by electricity market agents. For example,
electricity prices are unknown when agents have to submit their offers or bids to
the pool. Similarly, at the time of procuring the energy needed to supply client
loads, retailers do not know precisely the electricity demands of these clients.
However, decisions need to be made even with lack of perfect information. This
is what motivates the use of stochastic programming models for decision
making under uncertainty [5].
Most decision-making problems can be adequately formulated as optimization
problems. If the input data of an optimization problem are well-defined and
deterministic, its optimal solution (decision) is achieved by solving the problem.
The decision is then implemented to attain the best outcome. However, more
often than not, the input data are uncertain but describable through probability
functions. In such a situation, it is not clear how the decision-making problem
should be formulated. One possibility is to substitute the uncertain input data
(describable through probability functions) by their corresponding expected
values, which results in a well defined and deterministic optimization problem.
However, solving such a problem may lead to a solution that once implemented
does not result in the best outcome. Alternatively, the probability distribution of
input data can be approximated by a collection of plausible sets of input data
with associated probabilities of occurrence. For instance, three sets of input data
with three values of probability of occurrence adding to 1.
Then a stochastic optimization problem can be formulated implicitly weighting
(with the probabilities of occurrence) the individual solutions associated with
each set of input data to achieve a single solution that is the best in some sense
for all sets of input data. That is, we achieve a solution that is adequately pre13
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positioned with respect to all the sets of input data, but not to any one of them
particularly. As a result of the uncertain input data being described by a
collection of different sets of data, the resulting objective function is uncertain
and needs to be characterized as a random variable. Since such objective
function is not a real-valued function but a random variable, the problem of
establishing a specific objective for the decision-making problem arises. One
alternative is to maximize the expected value of the objective function, other
one, to maximize the expected value of such function but limiting its variance,
etc. Implementing the solution obtained by solving the stochastic problem
above pre-positions the decision-maker in the best possible manner if
considering all possible input data sets duly weighted by their respective
probabilities. This solution is not the best for each individual set of input data
but it is the best if all of them, weighted with their probabilities of occurrence,
are simultaneously considered. The price to be paid for using a stochastic
programming approach is a dramatic increase in the size of the problem to be
solved, which if handled without care may lead to intractability.
Illustrative example from [5]:
An electricity consumer is facing both uncertain electricity demand and price
for next week. For simplicity, we consider that both price and demand are
uncertain but constant throughout the week. Scenario data pertaining to demand
and price are provided in Table. Additionally, this consumer has the possibility
of buying up to 90 MW at $45/MWh throughout next week, by signing a
bilateral contract before next week, i.e., before knowing the actual demand and
pool price it has to face. The decision-making problem of this consumer can be
formulated as a two-stage stochastic programming problem. At the first stage,
the consumer has to decide how much to buy from the contract, and the second
stage reproduces pool purchases for each of the three considered demand/price
realizations (scenarios).
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The node-variable formulation of this two-stage stochastic programming

problem is as follows
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C
Variable P represents the power bought through the bilateral contract, while
variables
P1
P2
, and
P3
represent the power bought in the pool for
scenarios 1, 2, and 3, respectively. The objective function is the expected cost

faced by the consumer to supply its uncertain demand. Powers are multiplied by
the number of hours in a week (168) to obtain the energy consumed throughout
the week. The first three constraints enforce energy supply for the three
scenarios, while the remaining constraints are the contract bounds and nonnegativity declarations for all the variables. Note that the variables of this
problem are associated with the nodes of the scenario tree and so the
denomination node-variable formulation. The solution to this problem is
C
P
= 80, P1 = 30, P2 = 20, P3 = 0, which means that, before the week, the
consumer buys 80 MW using the bilateral contract, and during the week, 30, 20
or 0 MW for demands (prices) 110 (50), 100 (46) or 80 (44) MW ($/MWh),
respectively.
3.1.
3 Bus System with and without Reserve Bidding
The proposed pricing scheme is illustrated next using the three-node system
sketched in Fig. 1. Line reactances and capacities are all equal to 0.13 p.u. and
100 MW, respectively. The system includes three conventional generators (G1,
G2, and G3) and one wind power plant (WP). Data for the conventional units
are provided in Table I. Note that, comparatively speaking, unit G1 is cheap, but
inflexible; unit G2 is relatively cheap, but flexible; and unit G3 is expensive, but
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flexible. The wind plant is located at node 2. Its uncertain power output is
modeled by means of three scenarios, which are referred to as medium (35
MW), high (50 MW), and low (10 MW), with probabilities of occurrence equal
to 0.5, 0.2, and 0.3, in that order. The power block offered by the wind producer
is assumed to be equal to its forecasted power production (i.e., 30.5 MW). The
three-bus system also includes an inelastic load (L3) of 200 MW located at node
3, with a value of lost load equal to $1000/MWh [6].
The market is cleared based on this information. Market outcomes related to
dispatched quantities and deployed reserve are collated in Table II. The
scheduled wind power production
W sq = 20 MW. The resulting energy and
balancing prices are shown in Table III. Note that electricity prices are the same
at all nodes in the system, because the network does not become congested in
any of the three considered wind power scenarios. Given the energy and
balancing prices in Table III and the dispatched quantities in Table II, the
payments to market participants per scenario can be computed. For instance, the
payment to generator G3 in scenario low is given by
30 29+10 30=$ 1170
Furthermore, considering that the energy production cost of unit G3 is equal to

$30/MWh, the profit that it makes in scenario low is 117030 40=30 $ / Mw h
. Table IV provides the benefit obtained by market participants both per scenario
and in expectation. Observe that the profit made by generator G3 is indeed a
random
variable
whose
expected
value 30 0.5+120 0.230 0.3=0 .
Generator G3 can be seen then as the marginal unit in a stochastic sense. The
randomness of its profit is inherited from the uncertain character of the reserve
deployment service, which in turn depends on the actual wind power
realization. The proposed market settlement guarantees cost recovery for
generating units in expectation, but this does not prevent generator G3 from
incurring economic losses in scenarios medium and low (see Table IV).
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To reduce the risk of negative profits faced by market participants that are
willing to make real-time adjustments, reserve capacity bids can be introduced
in the proposed market settlement as stated in Section II-A. Consider that
generator G2 offers both downward and upward reserve capacity at a cost of
$1/MW, while generator G3 does it at a cost of $2/MW. Table V shows the dayahead schedule and the real-time redispatch in this case. The wind power
production scheduled at the day-ahead stage is 20 MW again. Likewise, Tables
VI and VII list, respectively, the clearing prices and the profit made by market
participants per scenario and in expectation when the aforementioned reserve
capacity bids are taken into account to clear the market. As an example, observe
that the benefit of generator G3 in scenario low is now given by
40 3040 30=$ 0
, where we ignore the costs related to the reserve
capacity bids inasmuch as the provision of reserve capacity does not entail
specific costs to generators. Note, indeed, that generator G3 does not incur
economic losses in any of the three considered scenarios. Furthermore, its
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expected profit is equal to 60, i.e., greater than 0. Therefore, the possibility of
bidding reserve capacity serves to competitively reward the capability of and
the willingness to make real-time adjustments, thus promoting the flexibility of
market participants in an efficient manner.
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4. Case Study 1
The pricing scheme described in Section II-B is further illustrated using a 24bus system based on the single-area version of the IEEE Reliability Test System
1996 [8]. For simplicity, the generating units of this well-known system are
grouped by node and type. The only purpose behind this grouping is to facilitate
the presentation and analysis of the simulation results. Thus, the simplified
system consists of 34 lines, 12 generating units, and 17 loads. On the
assumption of a perfectly competitive electricity market, the energy offers
submitted by generating units represent their marginal costs of energy
production, which are indicated in [8, Table VI]. We assume that nuclear and
hydro power producers offer their energy production at zero prices. The amount
of reserve capacity that each generating unit is willing to provide, either
downward or upward, is listed in Table IX. We assume that the nuclear and
hydro generators are not technically able to provide reserve. No reserve capacity
costs are considered.
Two wind farms comprising 2.5-MW wind turbines Nordex N80/2500 with a
hub height of 105 m are located at nodes 7 and 8. The power curve of this
turbine model is publicly available in [9]. Wind speeds at both wind sites are
described by means of the same Weibull distribution with scale and shape
parameters equal to 9.7 and 1.6, respectively. This probability distribution for
wind speeds, in combination with the considered wind turbine model, results in
a capacity factor for both wind farms of approximately 40%. This capacity
factor has been estimated using the Wind Turbine Power Calculator provided in
[9]. Besides, wind speeds at both wind sites are assumed to be correlated with a
correlation coefficient of 0.5. Correlated samples are then obtained by using the
sampling procedure described in [10]. An original set of 10 000 samples is first
generated and subsequently reduced to 100 by applying the scenario reduction
technique proposed in [11] and [12]. Selecting the right number of scenarios
constitutes a tradeoff between model accuracy and tractability. We believe that
current computational machinery allows considering a large enough number of
scenarios. Note that the number of scenarios should be large enough so that
adding any additional scenario does not change the market outcomes
(preferably) or minimally changes them. We assume that wind power producers
offer their forecast production at zero prices. Note that nowadays this offering
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strategy constitutes a common practice for wind producers participating in

electricity markets.
The results reported below correspond to one single period characterized by a
total system demand of 2850 MW. This demand is geographically distributed
among nodes as specified in [8, Table V]. Loads are assumed to be inelastic
with a value of lost load equal to $2000/MWh. Results for two different wind
penetrations levels, 12.3% and 26.3%, are presented. The wind penetration level
is given as the ratio of the installed wind capacity to the total system demand.
The number of wind turbines in the farms at nodes 7 and 8 that are required to
achieve these penetration levels are 40 and 100, and 100 and 200, respectively.
The market-clearing problem has been solved using CPLEX 9.0.2 under GAMS
on a Windows-based personal computer Intel(R) Core(TM) i5 with four
processors clocking at 2.4 GHz and 6 GB of RAM. The required computational
time is around five seconds.
For low wind penetration levels, such as 12.3%, there is enough room in the
transmission network to accommodate the energy transactions settled at the
market stage plus the subsequent energy redispatches in the form of deployed
reserve without the occurrence of congestion events. Therefore, the wind energy
injected at nodes 7 and 8 is able to reach every node in the system and as a
result, no differences in prices exist among nodes. In particular, for a wind
penetration level of 12.3%, the energy price ( n) is equal to $19.9/MWh at

every node. Likewise, the probability-removed balancing prices under the
highest and lowest wind production scenarios, which will be denoted,
respectively, by
n w
w
and
n w / w
hereafter, are $16.0/MWh and $21.7/MWh
in that order, irrespective of the node under consideration. These probabilityremoved balancing prices are obtained by dividing each dual variable
its associated probability
nw
by
. This way, the energy prices and the probability-
removed balancing prices are of the same order of magnitude. Further, the
balancing prices so transformed are dual optimal for the real-time market model
that results from problem (1) once the wind power uncertainty is disclosed and
first-stage variables (scheduled quantities) are fixed to their optimal values. On
the contrary, for high enough wind penetration levels, e.g., 26.3%, network
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bottlenecks become probable and consequently, the nodal prices differ. As an

example, Table X shows, for this wind penetration level, the values of the
energy price and the probability-removed balancing prices under the highest and
lowest wind production realizations at some selected nodes. In light of these
prices, the following three observations are in order
1. In the scenario of highest wind power production, the balancing
prices are zero at the nodes where the wind farms are connected,
namely, nodes 7 and 8. The reason for this is that any marginal
increment of load at these nodes is satisfied, in this scenario, by the
wind energy production that would be otherwise spilled due to the
network congestion.
2. The balancing price in the scenario of lowest wind power
production is node-independent. This is so because, under this
scenario, the network does not become congested.
3. Even though the scheduled productions do not cause network
congestion at the market stage, the energy price differs among
nodes. This highlights the coupling between energy and balancing
prices induced by the two-stage stochastic programming approach.
Intuitively speaking, the energy price anticipates probable network
bottlenecks during the real-time operation of the power system.
The payments to market participants under the proposed pricing scheme are
indicated in Table XI for the two considered wind penetration levels. While the
system operator makes payments to producers, it receives payments from
consumers. This is why the payments to loads in this table are expressed in
negative numbers. Observe that if the wind penetration level grows, the
payments to conventional producers diminish, whereas the payments to wind
producers increase. Logically, there is a transfer of revenues from conventional
generators to wind producers at the same time that the payments from loads are
reduced due to the free character of the wind energy. In either case, revenue
adequacy in expectation is guaranteed. In fact, for a wind power penetration
level of 26.3% (condition such that network congestion events are probable) the
system operator is expected to incur a financial surplus of $728.1.
Lastly, Tables XII and XIII provide, respectively, the expected profits achieved
by conventional and wind producers under the proposed pricing scheme.
24
24
Observe that all the participants recover their production costs in expectation,
thus making an expected profit greater than or equal to zero. In general, the
Expected profits of conventional producers decrease as they are displaced from
the energy supply by an increasing wind power penetration. Only generating
units 3 and 4 see their expected profit increased due to the fact that they get
more involved in the deployment of reserve with the increment in wind power
penetration.
25
25
4.1.
Conclusions and Future Work
1. The proposed pricing scheme [6] is adapted to the specificities of wind

producers, characterized by their variability and unpredictability. This
constitutes no harm to conventional producers.
26
26
2. This pricing scheme is marginal and results in both cost recovery for
producers and revenue reconciliation, both in expectation.
3. Two sets of marginal prices are derived: pool prices that reflect energy
scheduling and balancing prices that reflect system operation.
4. The proposed prices are derived from the solution of an LP problem.
Thus, they are obtained in an easy and robust manner.
5. The pricing scheme described in this paper does not embody nonconvexities (e.g., start-up costs or minimum power output constraints).
Future work is needed to incorporate such non-convexities.
5. Case study 2
Results from a case study based on the single-area version of the IEEE
Reliability Test System1996 [8] are discussed in this section. For simplicity,
generating units are grouped by type and node. This way, just one binary
variable is required to determine the on/off status of each group of units.
Further, the nuclear and hydro generators are considered must-run units. These
simplifications have no purpose other than to alleviate the computational burden
involved in obtaining the results presented in this case study. By appealing to
the assumption that the electricity market is perfectly competitive, offers
submitted by generating units correspond to their marginal costs of energy
production, which are listed in [8, Table 6]. The generation mix of the power
system also includes two wind farms located at nodes 7 and 8. The same
Weibull distribution, with scale and shape parameters, and, equal to 9.7 and 1.6,
respectively, is used to model wind speed at both sites. The two wind farms are
comprised of 2.5-MW wind generators, model Nordex N80/2500 with a hub
height of 105 m. The power curve of this turbine model can be found in [9].
According to the Wind Turbine Power Calculator provided in this reference, the
estimated capacity factor of both wind farms is approximately 40%. We
consider a system demand of 2850 MW, distributed among nodes as indicated in
[32, Table 5]. Loads are assumed to be inelastic. Therefore, the maximization of
the social welfare in the market-clearing formulation [7] boils down to the
minimization of the operating costs.
Next, we suppose a correlation coefficient between wind farms equal to 0.8 and
we assess the impact of the wind power penetration level on LMPs in terms of
means and standard deviations. For this purpose, we use 10000 samples of the
wind farm power outputs in the simulation process. This number of samples is
high enough to provide estimates for means and variances (the square of
27
27
standard deviations) with a degree of precision (coefficient of variation of

estimates expressed in percentage) below 1.10 and 2.94%, respectively, for all
the simulations carried out in this case study. In average values, these numbers
drop up to 0.46 and 1.01% in that order. Fig. 2(a) and (b) shows the evolution of
the mean and standard deviation of LMPs at nodes 7, 8, and 20 as the
penetration level of wind generation in the 24-node system increases. Note that
the wind power penetration level is expressed as a percentage of the total
system demand (2850 MW) and is augmented by increasing equally the number
of wind turbines installed in the two wind farms. The choice of the nodes for
analysis is not arbitrary. Nodes 7 and 8 are those where the two considered wind
farms are placed, while node 20 can be seen as representative of those buses
electrically far from the nodes where the wind generation is injected into the
power network. First, the wind power production is used to displace part of the
energy supplied by the groups of 197-MW and 100-MW units placed at nodes
13 and 7, respectively. Then, for a wind penetration level around 17.5%, the
power produced by the wind farms in some scenarios is high enough to keep the
units at node 13 shut down, provided that the group of 12-MW units at bus 15 is
started up. These units are the most expensive ones in the system and as a result,
their utilization pushes the LMPs up and causes the sudden increase that can be
observed in Fig. 2(a). If the wind penetration level is increased a little more, up
to 21%, the percentage of scenarios in which the 12-MW units at node 15 need
to be used drastically decreases and the average values of LMPs start to drop
again as a consequence. Moreover, the exclusion of these small units from the
energy dispatch also justifies the sudden fall in the standard deviations of LMPs
that can be appreciated in Fig. 2(b). In addition, for low wind penetration levels
1% , the wind energy injected at nodes 7 and 8 is able to reach every bus in the
system and consequently, the means and standard deviations of LMPs are all
very similar. The existing differences stem from the loss component of LMPs.
However, from a wind power penetration level higher than 21%, the curves
represented in Fig. 2 start to diverge in a significant manner. The different
behaviors exhibited by the means and standard deviations of LMPs from this
point on are mainly due to the fact that situations in which the network becomes
congested begin to happen, or statistically speaking, begin to be probable. In
such situations, the network caps the amount of wind energy that can be
transferred from nodes 7 and 8 to the rest of buses in the system and as a result,
the effect of wind generation on LMPs becomes locally accentuated. This effect
is twofold: on the one hand, the probability of loads at nodes 7 and 8 being
28
28
supplied by free wind energy increases, with the consequent sharp decrease in
the means of the corresponding LMPs; on the other hand, the energy supply
from wind sources is inherently uncertain and such an uncertainty is passed on
to the LMPs in the form of a considerable increase of their standard deviations.
In general terms, the impact of a growing wind generation on LMPs translates
into a decrease of their means, but an increase of their standard deviations. For
instance, the coefficients of variation of LMPs at nodes 7, 8, and 20 (defined as
the ratio of the standard deviation to the mean) go from 0 for a 0% wind
penetration level to 96, 77, and 21%, respectively, for a 50% wind penetration
level.
This subsection is intended to illustrate that correlation among wind sites can
have a significant impact on LMPs and therefore should not be ignored when
assessing the economic repercussions of wind integration. To this end, we
consider that the number of 2.5-MW turbines installed in the wind farms at
nodes 7 and 8 is 140 and 200, respectively. Therefore, the total wind capacity
connected to the power grid is 850 MW, which represents a wind penetration
level of almost 30%. Fig. 3(a) and (b) represents, respectively, the means and
the standard deviations of LMPs at nodes 7, 8, and 20 as a function of the
correlation coefficient between wind farms. The dashed lines have been
obtained by linear regression, and their only purpose is to stress the general
trends exhibited by the simulation outcomes. In accordance with the results
provided in the previous subsection, a wind penetration level of 30% is high
enough to produce eventual network bottlenecks and hence the remarkable
differences existing among means and standard deviations of different LMPs.
Note that the correlation between wind farms has a minor impact on the means
and standard deviations of LMPs at nodes 7 and 20, but a considerable effect on
the mean and standard deviation of the LMP at node 8. In numbers, if the
correlation coefficient is augmented from 0 to 0.95, the mean of such an LMP
experiences a reduction of 10.3%, whereas its standard deviation suffers an
increase of 30.7%. Logically, power output fluctuations from wind farms fed
with uncorrelated winds cancel out and as a result, the overall wind generation
variability diminishes.
Moreover, due to the occurrence of network congestion, which particularly
affects the transmission line connecting buses 7 and 8, the impact of the
29
29
correlation coefficient between wind farms on the LMPs should be locally

appraised. In this line, the average value of the LMP at node 8 decreases as this
coefficient approaches 1, because the percentage of scenarios in which the
power produced by the wind farm at this node is spilled increases considerably
from 10.07% ( =0
to 23.36% (
=0.95
. This remarkable growth of
wind spillage events leads to a similar increase in the percentage of instances in

which the price at node 8 is zero, specifically from 12.51% ( =0 to 27.13%
( =0.95 . In contrast, the mean of the LMP at node 7 slightly increases with
the correlation coefficient between wind farms, because the average power
generated by the thermal units at this bus also increases from 66.4 MW (
=0
to 87.7 MW ( =0.95 .
30
30
5.1.
Conclusion
This paper [7] provides a simulation methodology to assess quantitatively the

impact of an increasing integration of wind power on electricity LMPs. The
impact on both average values and volatilities is analyzed. An increasing
amount of wind power integration results in lower LMPs throughout the
network until bottlenecks appear, which makes local the LMP reduction
inherent to increasing wind power integration. A high correlation among wind
plants has an important impact on LMP volatilities and a reduced impact on
LMP average values. This is a consequence of the fact that no-correlation
originates the statistical cancelling out of wind fluctuations and thus stable
average values. The methodology proposed in this paper allows visualizing the
above phenomena and, which is more important, calculating their actual
numerical impacts. As future works, we intend to contrast the results provided
by the proposed methodology with the empirical analysis of real measurements
from diverse power markets, and to extend the simulation algorithm to account
for inter-hour complexities such as the temporal correlations of wind speed
series and the ramping capabilities of generating units.
31
31
References
[1] http://en.wikipedia.org/wiki/Electricity_market
[2] http://www.iexindia.com
[3]
https://www.borzen.si/en/Home/menu2/Power-Market
Balancing-Market/2Izravnalni-trg-en-US
Operator/The
[4] Morales JM, Conejo A, Madsen H, Pinson P, Zugno M (2014). Integrating

Renewables in Electricity Markets - Operational Problems, Springer Verlag
[5] Morales JM, Conejo A, Madsen H, Pinson P, Zugno M (2014). Decision
making under uncertainty in Electricity markets - Operational Problems,
Springer Verlag
[6] Morales, J.M., Conejo, A.J., Liu, K., Zhong, J.: Pricing electricity in pools
with wind producers. IEEE Trans. Power Syst. 27(3), 13661376 (2012)
[7] J. M. Morales, A. J. Conejo, and J. P. Ruiz, Simulating the impact of wind

production on locational marginal prices, IEEE Trans. Power Syst., vol. 26, no.
2, pp. 820828, May 2011.
[8] Reliability Test System Task Force, The IEEE reliability test system 1996,
IEEE Trans. Power Syst., vol. 14, no. 3, pp. 10101020, Aug. 1999.
32
32
[9] Danish Wind Industry Association, Wind Turbine Power Calculator.

[Online]. Available: http://guidedtour.windpower.org/en/tour/wres/pow.
[10] H. Heitsch and W. Rmisch, Scenario reduction algorithms in stochastic
programming, Comput. Optim. Appl., vol. 24, pp. 187206,2003.
[11] J. Dupaov, N. Grwe-Kuska, and W. Rmisch, Scenario reduction in
stochastic programming: An approach using probability metrics, Math.
Program., vol. 95, Ser. A, pp. 493511, 2003.
[12] P. Pinson, C. Chevallier, and G. N. Kariniotakis, Trading wind generation
from short-term probabilistic forecasts of wind power, IEEE Trans. Power
Syst., vol. 22, no. 3, pp. 11481156, Aug. 2007.
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Introduction To Electricity Markets

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1

Pricing Electricity in Pools with Wind Producers

1. Introduction To Electricity Markets

Pricing Electricity in Pools with Wind Producers

to coordinate the dispatch of generating units to meet the expected demand of

Day-Ahead Electricity Market

Day-Ahead-Market (DAM) is a physical electricity trading market for deliveries

Pricing Electricity in Pools with Wind Producers

Pricing Electricity in Pools with Wind Producers

The demand-supply graph in such scenario is shown below:

Transmission corridor and funds availability

Pricing Electricity in Pools with Wind Producers

In case of insufficient funds in the account, the bids entered by such a

Balancing Market Operation

Pricing Electricity in Pools with Wind Producers

Trading on the Balancing Market is implemented through a platform for

2. Co-Optimizing Energy and Reserve Capacity

Pricing Electricity in Pools with Wind Producers

are the amounts of energy sold by producers A and B,

respectively. Optimization problem is trivial, and its solution is given by

100 MWh and

30 MWh. The clearing (marginal) price for

energy, which is defined as the dual variable of constraint, results in $30/MWh.

Pricing Electricity in Pools with Wind Producers

are the amounts of reserve capacity sold by producers A

as input. The solution to problem is also trivial and is given by R A

= 20MW. That is, since producer A has been dispatched at full

costs of energy and reserve capacity, are computed as

Pricing Electricity in Pools with Wind Producers

The solution to this problem is

= 0 MW. The total system operation costs in this case ( TC )

Pricing Electricity in Pools with Wind Producers

is obtained from the reserve capacity

for this producer

results from deploying the reserve capacity

dispatched beforehand for this producer.

however, entails huge economic losses, which are estimated at $1000/MWh.

M .10 P A +30 P B+ 0 R A +25 R B+ 0.05 ( 10 r A +30 r B +1000 L shed )

Pricing Electricity in Pools with Wind Producers

The solution to this problem is

MWh, RB = 0 MW, r A = 20 MWh, r B = 0, and

the energy and reserve capacity dispatches, i.e., { P A , PB }{ R A , R B } , respectively,

is equal to zero, meaning that consumers are willing to pay for 20 MW of

{ RA , RB }={0,0} and the whole demand increase is shed instead (

MWh), if it comes to it.

Pricing Electricity in Pools with Wind Producers

model In fact, there is no reserve requirement constraint in this problem.

, represent balancing energy quantities. But if there is no such

reserve requirement constraint, how do we determine the reserve capacity price?

Pricing Electricity in Pools with Wind Producers

3. Introduction to Stochastic Programming

Pricing Electricity in Pools with Wind Producers

Pricing Electricity in Pools with Wind Producers

The node-variable formulation of this two-stage stochastic programming

Pricing Electricity in Pools with Wind Producers

represent the power bought in the pool for

scenarios 1, 2, and 3, respectively. The objective function is the expected cost

3 Bus System with and without Reserve Bidding

Pricing Electricity in Pools with Wind Producers

W sq = 20 MW. The resulting energy and

30 29+10 30=$ 1170

Furthermore, considering that the energy production cost of unit G3 is equal to

value 30 0.5+120 0.230 0.3=0 .