Académique Documents
Professionnel Documents
Culture Documents
A Dissertation
Presented to
The Academic Faculty
by
Haibin Sun
In Partial Fulfillment
of the Requirements for the Degree
Doctor of Philosophy in the
School of Industrial and Systems Engineering
Approved by:
ii
ACKNOWLEDGMENTS
I would like to express my gratitude to my advisors, Dr. Shi-Jie Deng and Dr. Sakis
Meliopoulos for their invaluable advice and support, especially for the inspiration they
provided me throughout my PhD study. I thank the rest of my thesis committee: Dr. Paul
Griffin, Dr. Shabbir Ahme, and Dr. Haizheng Li for their comments on my dissertation,
especially for Dr. Ahmes insightful comments on an early draft of this dissertation and
on my presentation.
I am grateful to Dr. Jim Dai and Dr. Houcai Shen for introducing me to this PhD
program. Its been a great opportunity to study and work at Georgia Tech together with
our wonderful professors and fellow students, while everyone pursues his dreams. I
would like to thank my friends in School of Industrial and Systems Engineering, School
program at Georgia Tech for their friendship. Thanks also go to Aram, Adrian, and Larry
and Sharon and Jim at SunTrust, for their support and encouragement during my
internships. I enjoyed those wonderful summers with these great colleagues and fun
friends.
Science Foundation for the financial support throughout my PhD study. The
opportunities to meet and learn from the enthusiastic researchers from academia and
Finally but above all, I thank my wife, my parents, my sister, my brother-in-law, and
my nephew for their love, encouragement, and their faith in me all along.
iii
TABLE OF CONTENTS
SUMMARY----------------------------------------------------------------------------------------- X
CHAPTER 1 OVERVIEW-------------------------------------------------------------------------1
iv
3.2 Literature Review---------------------------------------------------------------------- 63
3.3 Deterministic Scheduling Model ---------------------------------------------------- 65
3.4 Stochastic Model with Ancillary Service Uncertainty---------------------------- 71
3.5 Stochastic Model with Market Price Uncertainty --------------------------------- 73
3.6 Stochastic Model with Both Uncertainties ----------------------------------------- 76
3.7 Case Study------------------------------------------------------------------------------ 78
3.8 Conclusions and Discussions -------------------------------------------------------- 85
REFERENCES -----------------------------------------------------------------------------------153
v
LIST OF TABLES
Table 2. 1 Spatial volatility of LMPs calculated by AC and DC power flow based market
dispatch ($/MWh) --------------------------------------------------------------------------- 42
Table 2. 2 Averaged spatial volatility of LMPs over the sample year when imposing
different TRM requirements in the market dispatch ($/MWh) ------------------------ 46
vi
Table 4. 13 Scenario D Day-ahead forward premium (in $/MWh) ---------------------120
Table 4. 15 Statistics of forward and spot shadow prices of the flowgates (in $/MWh)129
vii
LIST OF FIGURES
Figure 2. 7 System averaged LMP with respect to transmission capacity using market
dispatch without TRM requirement when the system load is 80% of peak level --- 43
Figure 2. 8 Generation and load bus LMPs with respect to transmission capacity using
market dispatch without TRM requirement when the system load is 80% of peak
level ------------------------------------------------------------------------------------------- 44
Figure 2. 9 Probability distributions of LMPs at bus 10 over the sample year with
different TRMs requirements -------------------------------------------------------------- 45
Figure 2. 10 Probability distributions of LMPs at bus 18 over the sample year with
different TRMs requirements -------------------------------------------------------------- 46
Figure 2. 11 Q-Q plot for fitted distribution of hourly log returns of LMP at bus 10 (left
panel) and 18 (right panel) determined by market dispatch without TRM
requirement----------------------------------------------------------------------------------- 54
Figure 2. 12 Q-Q plot for fitted distribution of hourly log returns of LMP at bus 10 (left
panel) and 18 (right panel) determined by market dispatch with 10% TRM
requirement----------------------------------------------------------------------------------- 55
viii
Figure 3. 3 Comparison of simulated revenues with regulation service call uncertainty 82
Figure 3. 5 Comparison of simulated revenues with regulation service call and market
price uncertainties --------------------------------------------------------------------------- 83
Figure 4. 1 Hourly day-ahead forward and spot prices on the reference bus in NYEM-- 91
Figure 4. 2 Day-ahead forward and spot price differences between zone CENTRL and
the reference bus in NYEM ---------------------------------------------------------------- 95
Figure 4. 5 Hourly shadow prices on FG1 in forward and spot markets -----------------129
Figure 4. 9 Historical and forecasted spot price at the reference bus in August 2006 --141
Figure 4. 10 Historical day-ahead shadow prices of flowgate FG1 in August 2006 ----142
ix
SUMMARY
Because of the physical nature of electricity and the complexity of system operations,
many challenging problems have arisen from the restructuring of electric power industry.
when making the planning, operating, and trading decisions. This situation has motivated
the reported research work on modeling, evaluating, and constructing strategies to hedge
against the market risks involved. Through integrated modeling of power system
operations and market risks, this thesis addresses a variety of important issues on market
The level of investment in electricity transmission networks has been lagging behind
those in the generation and distribution sectors amid the industry restructuring. It affects
economic efficiency and impairs system reliability. The first part of the thesis addresses
transmission adequacy. The proposed system simulation framework, combined with the
stochastic price model, provides a powerful tool for capturing the characteristics of
with the IEEE RTS24 system yield interesting insights. In contrast with the common
practice of using DC power flow formulations for market dispatch, we advocate the use
constraints in the market dispatch, the resulting market prices yield incentives for market
x
different extents of market participations make generation capacity allocation a
challenging task. The second part of the thesis presents a co-optimization modeling
framework that incorporates market participation and market price uncertainties into the
The advantages of the proposed model are illustrated through a computational study with
The third part of the thesis is devoted to analyzing the risk premium present in the
electricity day-ahead forward price over the real-time spot price. This study establishes a
electricity day-ahead forward risk premium. Through simulations with a three-bus study-
system, it is illustrated that the more frequently transmission congestion happens, the
higher the forward prices get at the load buses. Evidences from empirical studies with
the New York electricity market data confirm the significant statistical relationship
between the day-ahead forward risk premium and the shadow price premiums on
transmission flowgates.
xi
CHAPTER 1
OVERVIEW
Since electricity is an essential resource in the national economy and our daily lives,
the electric power industry has always been under the close watch of the general public.
and airlines. Following this trend, the electric power industry has been undergoing
restructuring from a regime operated with vertically integrated monopolies to one with
competitive markets starting in the early 1990s. Competition has been introduced with
structural changes involving generation, transmission and distribution sectors. The new
business environment consists of primary wholesale markets for bulk energy trading,
open transmission systems for physical electricity delivery, and ancillary service markets
for reliable system. Instead of following regulatory orders, market based mechanisms
have gradually been developed which create incentives for market participants to take
electricity and the complexities of power system operations, many problems have
occurred and made the restructuring process very complex and challenging. Tremendous
extremely volatile electricity market prices have occurred, and these uncertainties pose
system operation and market risks, the research presented in this thesis addresses several
issues important to market participants, including the topics of market signals modeling,
1
1.1 Electricity Power System and Market Risks
Electricity is produced at 10-25kV voltage levels from various fuel sources, such as
coal, oil, natural gas, hydroelectric sources, wind power, and nuclear plants. The
utilities with franchised service areas. Electricity is injected into transmission networks
which operate at 230-765kV voltages to allow economical bulk transportation over long
distances by reducing the conductor heat loss. Individual transmission lines can be taken
out of the network in case of contingencies or for maintenances. At the load centers,
electricity is transformed down to lower voltages (11.5-12kV for large industrial and
commercial customers and 120-240V for most residential customers) for distribution to
end consumers. Alternating current (AC) systems, as opposed to direct current (DC)
systems, are adopted predominantly in bulk power systems for the flexibility of voltage-
conversion.
For decades, the electric power industry had been viewed as a collection of natural
triggered the restructuring of the electric power industry. Competition and the forming of
open market platforms occurred. This process is also described as deregulation and re-
regulation since some aspects of the industry remain regulated. Regardless of how it is
labeled, though, electric power systems have been unbundled to horizontally separated
Market-based mechanisms are expected to drive the system operations through price
2
The electricity spot pricing scheme, as initially proposed by Schweppe et al (1980,
1985, 1988), Caramanis et al (1982), and Bohn et al (1984), and later extended with the
settlements and establishes a platform for revealing market signals for generation
extension of the classical market equilibrium theory. A central market agent (the power
system operator) collects bids from market participants and determines winning bids by
solving optimal power flow (OPF) problems. The market-clearing locational marginal
prices (LMPs) can be obtained through this process and used to settle the electricity
cost certainty for transmission customers, FTRs are structured to entitle (and obligate)
their holders (possibly negative) revenues associated with specific congestions, which
on its management. First, the fact that electricity travels at close to the speed of light and
volatile LMPs. Second, without the widespread use of expensive control devices over the
3
transmission network, electricity flows in accordance with Ohms law1 and Kirchoffs
laws2 instead of on any contracted path. As a consequence, it impedes the free movement
security cost altogether measure the market value of generation and demand, which
further diversifies the LMPs. Generally, the dynamics of LMPs are in line with the ever-
changing system conditions and present market opportunities accordingly. It provides the
basis for a market mechanism to guide the allocation of scarce generation resources and
addition of new capacities. The same argument leads to the research work of evaluating
financial transmission rights which reflect the transmission service conditions and
Similar to LMPs in the energy market and FTRs in the transmission market, the values of
Due to the physical constraints of electricity listed above and the imbedded
Risks haunt market participants in their planning, operating, and trading decisions. Risk
management is often a high priority for participants in deregulated electricity markets due
to the substantial price and volume risks that the markets can exhibit. This situation has
1
Ohms law describes the relationship between the electric potential difference across an ideal conductor
and the current through it.
2
Kirchoffs law of voltage reveals the meaning of potential - the voltages around a closed path in a circuit
must sum to zero; Kirchoffs law of current is the current conservation in Ohms law - the sum of currents
entering a node must equal the sum of currents exiting the node.
4
motivated the research work to model, evaluate, and construct strategies to hedge against
The research presented here has been conducted along three lines.
The first line focuses on market signals modeling for transmission adequacy
investment. The generation sector has attracted a significant amount of attention since
the inception of the electricity market restructuring. The divesture of generation assets
from utility companies induced the development of various generating facilities valuation
models. However, while it is generally agreed that a highly reliable transmission system
is a necessity for a workable power market, the important issue of valuing transmission
asset has not been adequately addressed. An AC power flow based market dispatch
losses correctly, reveals the economic incentives of voltage bound, and provides
system simulation framework with the stochastic model adopted in section 2.3, it
provides a powerful tool to capture the characteristics of market prices movements and
The second line of the research is about generation capacity scheduling. The third
chapter looks at the operation of a hydroelectric generation unit with market uncertainties.
energy spot market and ancillary services markets as a price taker, the producer needs
need to balance the market opportunities on both sides with respect to limited water
5
optimal scenario-dependent scheduling strategy instead of a fixed trajectory as in the case
scheduling strategy.
The third line of inquiry addresses the issue of electricity forward trading. Market
markets are modeled, and the market equilibriums are addressed in chapter 4. Optimal
decision problems of generation producers as the electricity supplier and load serving
entities as the electricity buyer on forward and spot electricity wholesale markets are
modeled. Their respective optimal positions and the market equilibrium prices are
with respect to the market equilibrium conditions and transmission network constraints.
The study establishes a quantitative model for incorporating transmission congestion into
the analysis of electricity day-ahead forward price premium. The impact of transmission
congestions on the forward risk premium is illustrated through simulations with a three-
bus study-system. Evidences from empirical studies with the New York electricity
The thesis concludes in chapter five and provides directions for future research.
6
CHAPTER 2
INVESTMENT
The on-going power industry restructuring process with the subsequent evolution of
the market environment and regulatory rules have drastically affected the system
planning process. Since the restructuring started with the introducing competition into
the generation sector, active research has been undertaken to understand the impact of
competitive markets on the generation sector. However, the lingering regulation over the
transmission sector leaves important issues about how well market mechanisms can work
with transmission networks still unclear. In light of the unprecedented generation build-
up, statistics show a clear and increasing lag between transmission construction and
more frequently and over longer distances further threaten transmission capacity. The
inconsistency and the mounting problems this causes call into question the adequacy of
transmission and create a need for investment incentives and effective cost recovery
chapter addresses the central problems of modeling market signals to allow credits for
mitigation. The proposed system simulation framework, combined with the stochastic
7
model, provides a powerful tool for capturing the dynamic market signals and evaluating
transmission investments.
Acronyms
MW Mega watts, unit for real power, the rate of energy consumption
8
Pmn The real power flow over transmission line m n .
{ S
, T } Reserve margins of {generation, transmission} capacity in percentage of their
g() A set of power flow functions of system state and control variables.
g Q () A set of quadratic power flow functions of system state and control variables.
h() A set of branch loading functions of system state and control variables.
xQ The vector of the state variables for in quadratic power flow formulations.
{v , v }
l u
[ ] [ ]
The {lower, upper} bounds of bus voltage magnitudes, v l = vnl , v u = vnu .
9
The vector of phase angles of bus voltages, = [ n ] .
2.1 Introduction
In the pre-deregulation era of the electric power industry, economies of scale and
scope, as well as the desire to avoid duplication of the infrastructure, led to the formation
decision risk allocation. The perceived flaws of the monopoly structure ultimately led
public utility regulatory policies act in 1978 encouraged non-utility generation owners to
supply power to the existing utilities. The movement toward more competitive wholesale
(FERC)s Energy Policy Act of 1992, which opened the door of the previously monopoly
franchised generation market to independent power producers. The FERCs orders 888
access to the transmission network. The open access to transmission network and the
another building boom of power plants. In addition, the frequent price spikes and
extreme volatility in late 1990s created profit and risk hedging incentives for independent
Additional state and federal regulatory policies promoted the formation of independent
system operators (ISOs), and, in some cases, the divestiture of generation assets. ISOs,
10
where they were formed, separated operational control from ownership of the
transmission and generation assets to increase efficiency and inhibit detrimental activities
from conflicting interests. FERC Order 2000 continued this trend by promoting the
pricing reform.
demand increases at an annual rate of 2-3% and substantial changes in the generation
allowed electricity to be produced in more modular and flexible quantities with higher
efficiency. A building boom ensued added over 200GW of new generation between the
years of 1999 and 2004 (NERC, 2004). In many cases, these units were located
connection capacity for granted. With the building boom reaching its end and the
becoming increasingly vital. The importance of its new role of supporting market
transactions is far beyond what is indicated by the relatively small capital cost it
Compared with the steady increase of demand and generation, however, transmission
investment declined over the same time period. In 1972 approximately 30GW generation
was added, supported by $7.4billion (in year 2004 dollars) in transmission investment. In
2001, 40.6GW generation was added with only $4.6billion in transmission. By the year
2003, the numbers further diverged to having 52.4GW of new generation versus
11
1.6%, respectively (see Hirst, 2004). The market environment strains the system further
because merchant power plants competing for short and long-term contracts with
multiple buyers are encouraged to transfer larger quantities of electricity over longer
flow patterns significantly different from the projected scenarios in system planning. As
a result, transmission loading relief (TLR) procedures, which dictate a certain percentage
curtailed, have been called frequently for managing transmission utilization to prevent
overload situations that put the system at risk. Statistics by North American Electric
Reliability Council (NERC) on the exercises of level 2 or higher TLR from July 1997 to
December 2005, shown in figure 2.1, illustrates the increasing frequency of transmission
system challenges in recent years. Note that load seasonality is the primary factor for the
320
Monthly Logs
240
12 Month Rolling Averages
TLR Times
160
80
Date
0
Jul-97 Nov-98 Apr-00 Sep-01 Jan-03 Jun-04 Nov-05
electricity market, development of the transmission sector has been largely overlooked.
The lack of widely accepted regulation rules and absence of effective market mechanisms
lead to vague signals for market participants. Potential transmission investors face
12
physical nature, organization structure, and market risk related obstacles that complicate
transmission investments are haunted with the free-riding problem due to the difficulty of
isolating the benefits to the investor. Market participants would choose to be free riders,
b. Market risks -- Given the ever changing electricity demands, generation portfolio,
network topology, and market rules, it is impossible to predict with accuracy the future
project is regulatory approval. In many cases, however, alignment of federal, state, and
local regulations results in project delays, and rejection is a very real possibility.
blocks of capacity. The obscured linkage between expected benefit and marginal cost
complicates the investment decisions. Joskow and Tirole (2003) illustrate that lumpiness
Note that these obstacles are confounded by fragmented ownership that easily leads to
sub-optimal solutions.
among them, a transmission network is critical for supporting electric power trading and
making real the benefit of competitiveness and the economy of scale in the generation
effective pricing mechanism and value the transmission services correctly. Among
13
various approaches proposed along the years, the embedded cost and the marginal cost
based methods are two most notable ones. The primitive embedded cost method
b. The contract path method -- This method assumes that the transaction incurred
power flows follow a contract path and the transmission cost allocation is confined to
transmission facilities along the contract path while ignoring the impact on others.
power flow changes, on a line or net interchange basis, incurred by the power transaction.
d. The MW-Mile method -- The MW quantity and mile transferring distance of each
power transaction is calculated to measure the transmission network usage. The system
In summary, the embedded cost methods are based on approximated power flow
patterns that do not reflect actual system dispatching and do not follow up with the ever-
changing system conditions. Because Kirchoffs laws govern the flow of electricity
are not fully reflected in individual prices but smeared over all network users. In contrast,
the marginal cost method measures the market value of delivering an additional unit of
electric power from the source to the sink bus. It is an extension of electricity locational
pricing theory. Since a power transfer is physically equivalent to an power injection and
a power withdrawal and the two locations involved, the market value of transmission
14
usage can be immediately revealed as the difference between the locational electricity
prices at the sink and source points. The opportunity cost of transmission service
provides economic incentives and promotes allocation of the scarce transmission capacity
However, since LMPs are volatile and cannot be foreseen with accuracy in advance,
market price risks create strong demands for congestion-hedging among risk-averse
transmission service customers. In PJM for example, the system operators identified
several groups of electrically neighboring buses with active power transactions and
defined them as trading hubs. The hub settlement LMPs are calculated as the average of
the group of bus to provide market participants with more stable prices since. Market
demands. A FTR entitles (or obligates) its holder to collect a stream of revenues
determined by LMP differences between the two underlying locations over a contractual
Before the structuring of FTRs, physical transmission rights (PTR) were proposed at
the conception of market restructuring. A PTR gives its holder the priority to access the
great extend, the allocation of PTRs through bilateral contracts or private auction markets
determines the usage of scarce transmission capacity and determines the system dispatch
as well. Therefore, PTR holders have market power to withhold transmission access and
hamper competition. The scheduling priority of PTR holders creates perverse incentives
which conflict with the bid-offer matching mechanism. Furthermore, the exclusion of the
15
system operators control from the withheld transmission capacity compromises the
system reliability. Its been argued that the physical interpretation of transmission rights
was the principal pitfall that buried the FERCs original capacity reservation tariff. In the
to FTR holders, the FTR-based congestion hedging mechanism keeps the centralized
market dispatch paradigm intact. It has been adopted into the PJM system since 1998, in
Since the underlying LMPs are determined by the market dispatch model which takes
system operating constraints in both normal and contingent scenarios into consideration,
An FTR provides a perfect price hedge against transmission congestion for power
transactions between the underlying source and sink. Assume a market participant
LMPs are ~
p A and ~
p B during time period T , respectively. The congestion rent involved
the ever-changing system operating conditions, the market participant can procure a FTR
of q AB MW from source A to sink B over time period T at a cost of C FTR . It entitles him
C Total for the power transaction is the net of cost and revenue,
C Total = C FTR + q AB ( ~ p A ) q AB ( ~
pB ~ p A ) = C FTR
pB ~ (2.1)
Considering a random deviate q AB of the transaction quantity in real time market from
~
the projected q AB , the total cost of uncertain transmission service C Total is,
C Total = C FTR + q AB ( ~ pA )
~
pB ~ (2.2)
As long as the volume deviation q AB is trivial, the transmission service can be secured
16
Since a FTR is typically connected with an existing or projected power transaction
conform to the system capability and ensure the revenue solvency of the system operator,
the setup of FTRs is subject to a simultaneous feasibility test (SFT) defined as follows
Definition 2.1 (Simultaneous feasibility test) Given a set of FTRs defined over a
common time period, the system operator needs to test if the transmission network can
Using DC power flow, assuming F and F' represent the system PTDF matrix in the
transmission capacity limits are T and T ' . The SFT problem can be described as follows,
F(P I PW ) T (2.3a)
Note that constraints (2.3a) and (2.3b) represent the feasibility criteria in normal and
incentives for transmission capacity allocation, and the FTR mechanism provides
transmission congestion costs, and to facilitate the market based competitive electricity
trading. Due to the obstacles listed in section 2.1.1, investment cost allocation is a
17
bellow are essential to understanding the problem and finding incentives for transmission
investment,
alternative power sources and additional options to meet consumption at the lowest
and alleviate market participants risk-hedging pressure created by volatile market prices.
market power which intentionally creates scarcity and manipulates prices. This power
transmission upgrades.
frequently and out-of-merit generation units have to be called to serve demands. The
18
inefficiency involved represents the social cost of the inadequate transmission capacity.
Figure 2.2 illustrates the net deadweight loss due to transmission congestion,
congested, since a subsequent contingency event may interrupt or compromise the quality
bring widespread benefits to most market participants in the electric vicinity, it is hard to
draw the beneficiary boundaries, and a regulatory process is involved to allocate costs
incurred to a large group of consumers through an added service charge. A request for
proposals (RFP) process is preferable since the RFP process promotes minimal cost while
assigning the projects risks to the winning respondent instead of to the end consumers.
Investments in this category should be limited to those projects the direct economic
this approach is to allocate investment costs through a cost-benefit analysis among sub-
electricity delivery to the market, load connection requests to get access to desired
19
resources, and capacity expansions that reduce congestion energy cost for consumers in a
load pocket like, for example, New York City. The free-riders problem is less
bothersome here since the economic benefits of the projects to potential investors are
more exclusive, although they usually introduce more competition to mitigate the existing
investment projects are to be sponsored by those who would gain the benefits. It is
necessary, however, to assure that the projects not degrade system reliability nor create
mechanism and seek financial transmission rights as payoffs. Three components are
spatial-differentiated electricity price signals indicate where and how much to invest;
second, FTRs hedge against congestion-risks or, as tradable financial instruments, entitle
investors to the right to collect revenues in the future; third, an efficient financial
transmission rights identification and allocation mechanism is expected to assign the right
amount of rights to the right investors, which include eliminating the opportunities of
free-riding public good benefits. Note that the identification of incremental FTRs created
by merchant transmission investment is guided by the SFT problem (2.3a-b). With the
revenues entitled to the incremental FTRs, at least part of the cost can be recovered
without resorting to the traditional regulatory charges. Bushnell and Stoft (1996) show
that the transmission rights entitled revenues provide market incentives for transmission
investment. The merchant investment mechanism relies on free entry and unfettered
20
competition in the market. It places the risks of investment inefficiencies and cost
upgrade may affect the transfer capacity between two locations in another part of the
the long run, the network externality may degrade system reliability and undermine open
competition. Should a transmission upgrade impair existing FTRs, the theory of public
economics suggests that the investor should buy back the disabled FTRs. Another option
for the system operator is to retain some transmission rights and avoid jeopardizing FTRs
requires the assessment of market conditions in the future. The projection of locational
market prices as the market signals is one the most essential tasks involved. Two
competing approaches are available for market price modeling: a fundamental approach
that relies on system simulation; and a technical approach that models the stochasticity
directly. While the fundamental approach provides more realistic representations under
of the two approaches by calibrating the stochastic price process models using
The rest of the chapter is organized as follows: as the core problem of market
simulation, the market dispatch is formulated as an optimal power flow (OPF) problem in
Section 2.2. The quadratic power flow (QPF) and costate based linearization approach
are used to solve the OPF problems efficiently. The impact of reliability requirement on
21
market prices is evaluated by incorporating the corresponding operational constraints. In
Section 2.3, the proposed market simulation model is applied to the IEEE RTS24 system.
The results according to different market dispatch models are compared and
market simulation and stochastic modeling to capture market dynamics. Market prices
obtained through system simulation are used to calibrate the stochastic model parameters.
Finally, Section 2.5 concludes with observations and presents discussion of additional
functions of the system operator (called ISO or RTO), which is an establishment that
operating the competitive wholesale electricity market and ensures the reliability in
managing the regional transmission system and the wholesale electricity market. By
collecting electricity supply bids and demand requests, the system operator determines
the set of winning supply bids to meet the demands while observing all the system
constrained optimal power flow (OPF) problem, which solves a set of linear or nonlinear
expense, minimizing system status deviation, minimizing transmission loss etc. The
rational for choosing different objectives and the respective implications on market
participants are discussed by Alonso et al. (1999). A primitive formulation of the market
dispatch OPF which minimize the total generation procurement cost is defined as follow,
22
Definition 2.2: (The market dispatch OPF problem) By collecting I supply bids and
J demand requests, the system operator conducts the market dispatch accordingly to
minimize the total generation procurement cost while accommodating all power flow
By minimization of the total generation procurement cost as the objective, the market
dispatch model actually determines the locational marginal prices. A LMP measures the
incremental system generation procurement cost for a unit of incremental demand at the
specific location. In addition, the settlement prices of transmission service market are
The system status variables x consist of magnitudes and phase angles of bus voltages,
and so on, the system control variables u includes real and reactive loads and generations,
voltage settings and bounds, transformer tap settings, and so on. For example, a
withdrawals at the corresponding source and sink buses. In a system with interface with
neighboring systems and power interchanges, the interface MW limits are usually treated
flow directions.
The equality constraints F Eq (s, d, x, u ) = 0 are always binding at least to within a user
specified tolerance. They consist of generation bus voltage setting and the power balance
equations,
23
g (s, d, x, u ) = 0 (2.4d)
real and reactive power flows, the power balance equation at any bus n which matches
+ jvn v [G
m n
m nm sin ( n m ) + Bnm cos( n m )]
Note that explicit load-flow equations are listed as essential constraints in the formal
establishment of the optimal power flow problems. Instead of approximating the losses
as a polynomial function of the power output of each unit (Wood and Wollenberg, 1996)
and calculate a penalty factor for each generation unit, the transmission losses are
accounted implicitly in the power flow equations and their market costs are imbedded in
The inequality constraints F Ineq (s, d, x, u ) 0 consist of system operating limit and
bound constraints. In the primitive formulation of the market dispatch OPF, generation
capacity bounds
s s Max (2.4f)
h(s, d, x, u ) T (2.4g)
Note that the transmission loading thermal limits apply to not only single
transmission lines, but to sets of transmission facilities with certain capacity limit,
defined as transmission flowgates, which constraint the power flow through the interface
involved.
The Lagrange function associated with OPF problem (2.4) can be defined as,
24
I
L (s , , , ) = Ci (si ) + g() + (s s max ) + (h() Tk ) (2.5)
i =1
( )
In order for a point s* , * , * , * to be optimal, in addition to (2.4b) and (2.4c), to
L
(s, , , ) = 0 (2.6a)
s s =s*
* [h() T] = 0 , * 0 (2.6b)
( )
* s* s Max = 0 , * 0 (2.6c)
In the economic sense, the Lagrange multiplier n associated with the real power
balance at the bus n can be interpreted as the locational marginal price of energy because
it quantifies the cost (or value, from demand side) for supplying (or consuming) an
additional MW at the bus n of the network. On the other hand, the Lagrange multiplier
k associated with the power flow limit of the k th transmission flowgate is interpreted as
the variation in social generation procurement cost if the transmission capacity is relaxed,
called flowgate shadow price or congestion multiplier. And the Lagrange multiplier i
reveals the market opportunity cost associated with the scarcity of supplier i s generation
capacity.
By solving (2.4), LMPs can be read off the Lagrange multipliers associated with the
corresponding constraints, which measure the cost to serve the next MW of load at a
25
specific location, using the lowest production cost of all available generation, while
observing all operating constraints. In the absence of any binding constraints, all of
LMPs are identical. The FTR values can be readily derived from the price differences.
The non-zero shadow prices of binding transmission constraints are major factors which
diversifies the LMPs across the system. Market uncertainties due to fluctuating system
loads, varying generation bid function, and unexpected transmission circuit outages can
[
~ ~ ~
]
be incorporated by using random variables T, d, Ci carrying the distribution properties
of the underlying coefficients, see (Sun et al. 2005). With a parametric optimal power
flow formulation, the sensitivity of the optimal operating conditions with respect to any
operators control can be investigated and the corresponding economic values can be
interpreted.
Traditionally, to obtain the present system operating conditions for further analysis,
the power flow of the system can be described using the voltage magnitude and phase
angle at each bus, the transformer tap, and so on. These traditional power flow (TPF)
equations are formulated in terms of g (x, u ) = 0 based on the fact that the sum of the
injected power flows at a bus is zero. However, due to the high nonlinearity of some
equations, the converging to the solution is usually slow. For market dispatch, a common
AC power flow equations and adopt DC formulation instead. DC power flow prompts
the simplicity and fast solution of the market dispatch problem. In the characterization of
transmission branches, DC model usually ignores conductance and reactive power flows.
It also assumes the voltage magnitudes at all buses are unit valued and the phase angles
26
are close to each other. Specifically, the power flow equations can be simplified as
follow in per-unit measures, not that only real power flows are modeled.
sn dn = B (
m n
nm n m ) (2.7)
Given the limitations of TPE and DC power flow modes, quadratic power flow (QPF)
model (Meliopoulos, 2001; Kang, 2001) is proposed based on modeling any power
system component as a set of linear or quadratic equations (which can be achieved with
the introduction of additional state variables). In formulating the QPF model, the system
states are expressed in the format of Cartesian coordinates instead of the polar
coordinates used in the traditional power flow model. This makes it possible to formulate
the power flow equations in linear or quadratic forms in terms of system state variables.
Unlike the TPF model, which consists of the power balance equations at each bus of the
system, the QPF model consists of writing the Kirchoffs current law at each bus of the
system. In general, a bus may be connected with generation, loads, circuit, shunt devices,
etc. While the circuits and shunt devices are linear elements, the loads and generation
may operate in such a way that imposes nonlinearities. The models of loads and
generators are expressed in terms of their terminal currents and additional equations in
additional state variables that define their operating modes. The additional equations may
be nonlinear but of order no higher than two. The resulting set of equations is consistent,
i.e., the number of equations equals number of unknowns. The convergence characteristic
of the QPF model is superior to that of TPF model since Newtons method is ideally
Application of connectivity constraints (Kirchoffs current law) at each bus yields the
27
g Q (x Q , u) = [x Q , u ] [x Q , u ] + [x Q , u ] + = 0
T
(2.8)
where and are non-variable matrices and is a non-variable vector. Their values
method and iteration terminates when the norm of the QPF equations is less than certain
tolerance,
xQ
k +1 k
= xQ xQ ( )k 1
( )
g Q xQ
k
(2.9)
(x Q ) the Jacobian matrix of the set of power flow equations at state vector x Q
Although for a large-scale system the number of equations is large and so is the
dimension of the Jacobian matrix. However, the Jacobian matrix is highly sparse and the
An extension of the costate method to the QPF introduced in (Meliopoulos, 1988) and
applied in (Bakirtzis, 1991; Meliopoulos, 1994) can be applied to analyze the sensitivity
g Q (x Q , u ) g Q (x Q , u ) dx Q
+ =0
u x Q du
which leads to
g (x , u ) g (x , u )
1
dx Q
= Q Q Q Q (2.10)
du x Q u
The derivative of the system performance index function with respect to u c is given by:
28
df I (x Q , u ) f I (x Q , u )
+ x Q (x Q )
T
= (2.11)
du u
f (x , u ) g (x , u )
1
= I Q Q Q
T
x Q
x Q x Q
With the quadratic power flow model and costate method based linearization
I J
St. si d j = 0
i =1 j =1
(2.12b)
I J
alh,i,s si + alh,,jd d j Tl Tl 0 , l
i =1 j =1
(2.12c)
s sMax s (2.12d)
d d
alh,i,s = hl (s, d, x ) and alh,,jd = hl (s, d, x )
d ( si ) s =s
d (d j )
0 ,d =d 0 , x = x 0 s =s0 ,d =d 0 ,x = x0
are model coefficients obtained at the current system operating conditions, they measure
the sensitivity of transmission loading with respect to unit additional power injection by
29
alh,n,s = alh,n,d ,
which denotes the impacts on the power flow on flowgate l from one unit of incremental
Since reactive power flows and voltage variations are accounted in the AC power
flow equations, alh,n,s and alh,n,d reflect the system operating conditions more accurately
compared with the PTDF coefficients derived by DC power flow equations. The detailed
To incorporate the changes in transmission loss due to the changes of demand and
supply and increase the accuracy of the linearization model, the system power balance
(1 a )s (1 + a )d
I J
l ,s
i i
l ,d
n j =0 (2.12f)
i =1 j =1
d d
where ail ,s = l (s, d, x ) , a lj,d = l (s, d, x ) .
d (si ) s =s
d (d n )
0 ,d =d 0 , x = x 0 s =s 0 ,d =d 0 ,x = x 0
anl ,s and anl ,d can be calculated in a similar procedure as for alh,n,s and alh,n,d . For n ,
anl ,s = anl ,d . They measure the sensitivity of system transmission loss with respect to unit
electricity at required quality. Although there has been substantial research activity on
transmission reliability constraints in a competitive electricity market has not yet been
hard for system operators to estimate the economic consequences and for market
30
participants to take proper market positions and manage risks involved. In retrospection,
the unprecedented volatile California market electricity prices in 2000-2001 led to rolling
fundamental reasons such as abnormal hydro resource and high demands, the inadequacy
of transmission capacity made the system vulnerable to the exercise of market power.
market, since transmission bottlenecks held back the otherwise reachable alternative
generation sources to the buyers. The lessons call for imposing transmission adequacy
requirement to maintain a reliable environment for the energy trading and to support open
competition.
In an electricity market, as the competitions are getting more intensive and drive
market participants to chase market opportunities, more generation units and transmission
facilities are operated close to the edge for economic efficiency. This leads to higher
risks of equipment contingency status and puts the failure stakes higher than ever before.
A contingency event such as the forced outage of a transmission line or a generator unit
may jeopardize the entire system if there lacks back up transmission capacity or
generation source to support the power flows anticipated by the normal operation of the
system. To prevent that a single contingency events could trigger the occurrence of
As mentioned earlier in section 2.1.1, reliability is deemed as public good with non-
value reliability and the costs involved are smeared among all consumers. We propose
31
that economic values of reliability can, at least partially, be discovered with a properly
The generation and transmission capacity reserve requirements are imposed for
system adequacy concerns to ensure the existence of sufficient facilities to satisfy system
capacity for market dispatch. For example, replacing the constraint (2.4f) with
( )
s 1 S s Max (2.13a)
transmission reserve margin can be imposed by replacing the constraint (2.4g) with
( )
h(s, d, x, u ) 1 T T (2.13b)
The unused capacity, namely, the generation reserve margin ss Max and the
when contingency events such as load surges or equipment outages happen. With such
reserve margins, the systems can absorb the dynamics caused by the disturbances and
remain stable. The technical problems of determining spare capacity in each generation
unit and transmission facility to keep the system operation safety have been proposed by
Bobo et al. (1994) and McCalley et al. (1991) respectively. By incorporating the
generation and transmission reserve margin requirements as adequacy constraints into the
market dispatch, their economic incentives can be revealed and passed to the
32
corresponding beneficiaries. Therefore, an investment cost recovery mechanism can be
established accordingly.
The contingency test constraints are imposed for system security, which is related to
the ability of the system to respond to disturbances arising within the system. In the
power system operations, the N-1 criteria are widely adopted in industry for postulated
contingency tests. It means that given a normal operating condition [s, d, x, u ] , in case a
single postulated contingency event k happens, the demands d and the market dispatch
determined supplies s can still be accommodated with no pressure for any immediate
deviated system states x (k ) will be reached. The system can stand the contingency states
x (k ) for a short period of time. However, to keep the safety of the system, the x (k ) should
not deviate out of the feasible regions and the system operator will go through certain
operational procedures to put system states from the edge of feasible regions back to
normal conditions. To reflect the N-1 contingency-proof criteria, for each postulated
( )
g s, d , x ( k ) , u ( k ) = 0 (2.13c)
h(s, d, x ( ) , u ( ) ) T ( )
k k k
(2.13d)
Note that under contingency event k , the transmission capacity vector may change to
T (k ) correspondingly.
reserve requirements and the contingency tests leads to a more conservative market
dispatch at the cost of higher generation procurement cost. The incremental cost of
generation procurement incurred can be reflected by augmented market prices and passed
33
Additional practices to promote a reliable market dispatch include imposing upper
and lower bounds for voltage magnitudes to keep the quality of power supply and the
vl v vu (2.13e)
and imposing upper and lower bounds for reactive power outputs which reflect the
Ql im(S ) Qu (2.13f)
When solving the market dispatch OPF problem, as components of LMPs, marginal
costs associated with various reliability constraints can be read off the corresponding
Lagrange multipliers (Alvarado 2003). As more reliability constraints become active, the
LMPs become further differentiated between locations across the system. By taking
criteria can be imbedded accordingly. Different model parameters can apply to different
consumers expecting lower loss of load probability, higher S and T values can be
One the other hand, for consumers expecting a relatively stable voltage level, a higher v l
or a lower v u should apply to the corresponding bus. Note that such parameter-settings
usually affect not individual but a group of end consumers, the decision should be based
on aggregated requirements. Due to the impact on the resulting LMPs, the reliability-
By incorporating the reliability constraints explicitly into the market dispatch model,
the openness of the market pricing mechanism can be improved since market values
34
instead of regulation rules determine the service values and allocate the costs involved
one the most essential tasks involved is the modeling of locational market prices. As the
market signals, LMPs indicate the values of transmission services and the benefits of the
presents a fundamental approach for market price modeling by representing the LMP-
determining market dispatch decision as an optimal power flow problem. Given the high
properties of the market price behaviors requires very complicated numerical methods
and procedures. A natural alternative is to resort to system simulation, through which the
fundamental uncertainty factor of the system can be represented as random variable with
corresponding distributions.
Numerical experiments with the IEEE RTS-24 system are presented in this section to
empirically illustrate the fundamental modeling of market signals. The structure of the
35
Figure 2. 3 The IEEE RTS24 system
The system consists of 24 buses connected with 38 transmission lines. There are load
demands at 17 of the buses, and 32 generation units connected to 10 of buses. Note that
multi generation units of different capacities can reside at one bus and some buses are
connected by double transmission lines. Bus 15 is the system slack bus. Most generation
units reside at the upper part of the system, which consists of buses 11 - 24 and is
operated at 230 kilovolt (kV). The lower part of the system is operated at the 138 kV
and is connected with the upper system through voltage transformers. The system has a
total installed generation capacity of 3561MW. The yearly peak load D Peak is 2850 MW.
And the weekly, daily and hourly load peaks are given in percentage of D Peak .
36
Generation unit parameters [s max , Ql , Qu ] , transmission capacities T and T ( k ) in
contingency k , transmission parameters [Rmn ,X mn ,Gmn ,Bmn ] for each line m n , the
outage rates and the averaged failure-repair cycles of all types of generation and
transmission equipments are referred to (Billinton and Li, 1994). The function generation
procurement cost from each generation unit i is assumed to be a quadratic function of the
referred to (Meliopoulos et al., 1990). To reflect the increase fuel cost over the years, the
values of these coefficients are doubled. We assume that the generation cost function as
used in the objective function of the market dispatch include the components of a profit
margin beyond the operational costs. In this case, the short-run marginal cost as used for
the first best pricing can provide enough market incentives for generation suppliers.
The original IEEE RTS24 system was configured for the test of system generation
adequacy related reliability analysis only, high transmission capacity was assumed in
(Billinton and Li, 1994). Since we are more interested in the modeling of transmission
respectively, to be 60% of the limits given in (Billinton and Li, 1994). Correspondingly,
The rest of the section is organized as follows: In Section 2.3.1, we compare the
models. The causes and the impact of the differences are identified. To investigate the
experiments are conducted in Section 2.3.2 by using different formulations of the market
37
2.3.1 Comparison of DC and AC Models
In the proposed market dispatch model in Section 2.2, we advocate using AC power
flow formulation for equation (2.4d) instead of using the DC power flow formulation.
Since the transmission line resistance is ignored in the DC power flow equations, the
system is assumed to be lossless. Also assumed in the DC power flow equations is that
reactive power is perfectly distributed over the network and the voltage magnitudes at all
buses are exactly at the nominal valued. However, for a practical system, given the
available reactive power resources at certain but not all buses, controls over the reactive
market dispatch models through numerical examples in this section to advocate using AC
power flow. For the N-1 contingency test described in (2.13c) and (2.13d), we consider
the outage of transmission lines 5-10 and 18-21 respectively. The voltage magnitude
bounds v l , v u are set to be 97% and 103% of the corresponding nominal values,
regulation equipments and the voltage magnitude bounds under contingency are relaxed
(Milano, 2003).
We first look at a scenario when the system load is low (40% of peak load). Figure
2.4 illustrates the LMPs determined by the AC and DC power flow based market
38
54
LMP ($/MWh)
AC Power Flow Based
Market Dispatch
46
DC Power Flow Based
Market Dispatch
38
30
22
Bus
1 6 11 16 21
reaches its capacity bounds, and no bus voltage magnitude bound constraint is active.
The LMPs according to the DC model are the same for all buses. However, due to the
transmission losses, the LMPs on all buses according to the AC model show certain
variety across the system. The differences between the two models are most notable at
pure load buses 4-14. Note that according to the AC model, the total generation real
power output is 709 MW, while the total demand is 684 MW only. This indicates a
transmission loss of 25MW over the network, which accounts for 3.65% of the total
model, an uniform LMP of 26.09 $/MWh can be reached for all buses, which is
Overbye et al. (2004) argue that the ignorance of DC model can be compensated by
uplifting the system load by a certain percentage to account for the transmission loss as
reveal by the AC model. Following their suggestion, we calculate the LMPs using the
DC model while uplifting the loads at all buses by 3.65%. The resulted LMPs at all
buses are 26.34 $/MWh. Although it is closer to the AC model results shown in figure
2.4, differences remain on most buses. This is not a surprising result since the uplift of
39
loads at a same percentage is equivalent to the allocation of transmission losses to all
network. In a real system however, the incremental transmission losses caused by unit
power withdrawals at different locations are generally not the same. The impact of this
difference is more significant if we look at a high-load scenario when the system load is
90% of the peak level. Figure 2.5 illustrates the LMPs determined by the AC and DC
54
AC Power Flow Based
Market Dispatch
46
DC Power Flow Based
Market Dispatch
38
30
22
1 6 11 16 21 Bus
and lead to the differentiation of LMPs over the network. By uplifting the loads at each
bus to compensate for transmission losses in the DC model and setting the transmission
line resistance to be zero in the AC model, the LMPs determined by the respective
adjusted market dispatch models are illustrated in the following figure 2.6,
40
54
LMP ($/MWh)
DC Power Flow Based
Market Dispatch with
46 Load Uplift for
Transmission Losses
22
1 6 11 16 21 Bus
When comparing figure 2.6 with figure 2.5, we note that by ignoring transmission
losses in the AC model, the LMPs determined are closer to the DC model results.
Similarly, uplifting the loads in DC model to compensate for transmission losses brings
the LMPs resulted closer to those determined by the AC model. However, the remaining
Actually, another immediate observation from figure 2.5 is the significant difference
between AC and DC model determined LMPs at buses 7 and 8. It reveals the impact of
voltage bound constraints (2.13e) in the AC market dispatch model, which are absent
from the DC counterpart. Given power flow Pmn + jQmn over a transmission line m n ,
Vmn = (Rmn + jX mn )
(Pmn + jQmn )e j m
(2.14)
Vm
In the high-load scenario illustrated in figure 2.5, heavy power flow over the transmission
line 10-8 leads to significant voltage decrease along the transmission line and causes the
binding voltage lower bound at bus 8. This limits the output of low-cost generation at
41
bus 13 to meet load at bus 8 and incur the high cost generation output at bus 7 instead.
It is foreseeable that if the transmission line impedance is high, the voltage decrease
incurred is significant and the voltage bound constraints tend to become active and cause
the redistribution of power flows over the network. Consequently, the LMP values
By reading figures 2.4 and 2.5 again, another difference between AC and DC power
flow based market dispatch can be observed: LMPs determined by the AC model show
more significant differences between buses in the system. To quantify this difference, we
(P P ) (N 1)
N
2
SV = n (2.15)
n =1
N
1
where P =
N
P
n =1
n .
The spatial volatility of LMPs at the low and high load scenarios according to the AC
and DC power flow based models are listed in table 2.1 as follow,
Table 2. 1 Spatial volatility of LMPs calculated by AC and DC power flow based market
dispatch ($/MWh)
DC Model AC Model
Low-Load Scenario 0 1.57
High-Load Scenario 2.37 5.34
As shown in table 2.1 above, with more constraints explicitly incorporated, the AC
power flow based market dispatch model determines higher spatial volatility of LMPs in
Due to the inaccuracy of DC power flow approximation, for the rest of the numerical
examples in this chapter, we resort to the AC power flow based market dispatch models.
42
2.3.2 Evaluation of Reliability Constraints
augmented LMPs and allocate the costs involved to the beneficiaries. Among various
methods to reach higher reliability through market dispatch, we advocated the imposing
of generation reserve margin ss Max and the transmission reserve margin (TRM) T T as
indicated by constraints (2.13a) and (2.13b). Since we try to tackle the modeling of
market signals for transmission adequacy in this chapter, we focus on the TRM T T and
present numerical examples in this section to show the impact of imposing constraints
(2.13b).
Before jumping onto the experiments results, we start with a look at the sensitivity of
LMP with respect to transmission capacity using the market dispatch model without
TRM requirements. The following figure 2.7 plots the changes of system averaged LMP
(equal weight for LMPs at all buses) with respect to the assumed transmission capacity
42
40
38
36
34
60% 80% 100% 120%
Transmission Capacity in Percentage of Nominal Value
Figure 2. 7 System averaged LMP with respect to transmission capacity using market
dispatch without TRM requirement when the system load is 80% of peak level
43
From figure 2.7, we observe that the system averaged LMP decreases with the
system, the LMP stays constant even when more transmission capacity is invested. This
is because the generation resources are dispatched in merit-order already and the increase
of transmission capacity does not change the profile of winning generation supply bids.
However, no more conclusions can be drawn from figure 2.7 unless that the transmission
meet system demands. In order to find out the impact on distinct market participants, we
pick any 2 buses (5 and 10) with pure load demands and 2 buses (18 and 22) with high
installed low cost generation capacity and plot the changes of their LMPs as the available
55
Bus 5
LMP ($/MWh)
Bus 10
48
Bus 18
Bus 22
41
34
27
20
60% 70% 80% 90% 100% 110% 120%
Transmission Capacity in Percentage of Nominal Value
Figure 2. 8 Generation and load bus LMPs with respect to transmission capacity using
market dispatch without TRM requirement when the system load is 80% of peak level
As the transmission capacity increases, the changes of LMPs at the 2 load buses 5 and
10 show quite similar tendency: decreases to a low value until transmission capacity
reaches a certain adequacy threshold and stays the same afterwards. It corresponds to the
44
observation from figure 2.6 above. For generation buses 18 and 22, the direction of the
changes is the opposite: increases to a low value until transmission capacity reaches a
certain adequacy threshold and stays the same afterwards. It is an interesting observation
since it reveals that low-cost generation suppliers can sell more energy at higher prices
Higher T values actually reduce the available transmission capacity for market dispatch
in normal system operating conditions and reserve more capacity for contingency
load and low-cost generation buses when a TRM requirement is imposed. Using the
given hourly load over one sample year (52 weeks), we calculate the hourly LMPs at
buses 10 and 18 sequentially and plot their probability distributions in the following
T
=0%
0.12 T
=10%
T
=20%
Probability Density
0.1
0.08
0.06
0.04
0.02
30 35 40 45
LMP at Bus 10
Figure 2. 9 Probability distributions of LMPs at bus 10 over the sample year with
different TRMs requirements
45
T
=0%
0.45 T
=10%
T
=20%
Probability Density
0.35
0.25
0.15
0.05
22 23 24 25 26 27 28
LMP at Bus 18
Figure 2. 10 Probability distributions of LMPs at bus 18 over the sample year with
different TRMs requirements
Observations from figures 2.9 and 2.10 coincide with the indication from figure 2.8:
higher TRMs increase the LMP at the load bus due to transmission congestion charges
and lower the LMP at the generation bus due to lower output level, while lower TRMs
grant more transmission capacity for market dispatch, reduce transmission congestions
and determine less differentiated LMPs between buses. The quantitative measures of
averaged spatial volatility of LMPs over the sample year at different TRMs are listed in
Table 2. 2 Averaged spatial volatility of LMPs over the sample year when imposing
different TRM requirements in the market dispatch ($/MWh)
0% TRM 10% TRM 20% TRM
4.02 4.67 5.12
Through simulation studies, this section compares alternative market dispatch models
which differ from each other in DC or AC power flow formulations and in the set of
reliability constraints considered. Their impacts on market prices are investigated and
interesting observations are made accordingly. In the simulation study, we calculate the
46
market prices at the interval of 1 hour. In a practical system, for example in PJM and
NYISO, LMPs are usually every 5 minutes. The difference between these different
market dispatch models would be more significant if applied in such practical systems.
In addition, as is one of the goals for the restructuring of electricity market, to establish
economic incentive based market mechanisms for ancillary services, market dispatch
and cost allocation, as is proposed in our model for reliability enhancement. More
information regarding the market dispatch should be open to market participants for
better market assessments. Due to complexity of the problem, the observations are
importance of the problem is revealed, more analytic results are expected in our further
research.
As mentioned earlier in section 2.1, two approaches are widely employed in studying
the electricity price behaviors, namely, a fundamental approach and a technical approach.
As the core of the fundamental approach, the market dispatch model is studies in section
2.2 and applied in system simulation study in section 2.3. Along the line of technical
form stochastic processes (Deng, 1999), fussy regression combined with neural network,
However, it is challenging for these models to reveal the impacts of bulk power system
constraints on price volatility. Moreover, the constantly changing market rules make the
technical models difficult to calibrate using market data. This section tackles the
technical approach by combining it with the fundamental approach and using the system
47
2.4.1 Quantile based GARCH Model
volatility clustering and the heavy tail have been revealed in literatures. Merited with the
empirical data, the quantile-based probabilistic model advocated in (Deng and Jiang,
2004) is implemented for modeling the unconditional distribution and to fit the marginal
simulation are used to calibrate the model parameters to make the model applicable to the
In contrast to the traditional time series analysis which focus on modeling the conditional
first moment, GARCH model incorporates the conditional second moments explicitly to
better interpret the dynamics. The versatile capability of the quantile based distributions
q( y ) = F 1 ( y ) = inf {x : F ( x ) y} (2.16)
48
1
1
x
q( x; , , , ) = ln
+ (2.17)
1 x
x x>0
x ( ) = 0 x=0
( x ) x<0
(x ) ( ) exp 1 (x )( )
(x )
f ( x; , , , ) = 1
for x ( , ) ( ,+ ) (2.18)
1+
1
(x )( )
1 + exp
Q( , , , ) are: parameter indicates the tail order, the smaller the value of , the
fatter the tail of the distribution; depicts the balance of distribution tails with = 1
meaning a balanced tail and < (> )1 meaning a fatter left (right) tail compared with the
other; scales the point probability density ; and determines the central location of
the distribution.
The time series of the hourly log returns of electricity prices at bus n can be
calculated as:
pn , h
n ,h = log = log( pn , h ) log( pn , h 1 ) (2.19)
p
n , h 1
where h is the index of hour, h = 1,L, H and pn ,h denotes the simulated LMP on bus n
at hour h .
49
Given the distributions defined by the quantile function, we turn to the time series
specified in equation (2.20) as follow is adopted to model the hourly log returns of
n, h = n, h n, h (2.20)
{ }
Q( , , , ) random variables and are independent of n , h k , k 1 for h .
of the distribution of n, h where the scaling factor n, h depends on the past of the
n , process. Compared with GARCH models with normal distributed error terms, the
and makes the maximum likelihood estimation an applicable approach for the inference
of model parameters [ , , , ] .
the model parameters and gives flexibility in accommodating various tail behaviors
c. The GARCH model provides inherent ability in capturing the volatility clustering
50
For the estimation of the model parameters, a quantile match approach was used in
(Jiang, 2000) which minimize the Ln norm distance between the theoretical quantile as a
function of model parameters and the empirical quantile. The explicit quantile and
estimation (MLE) another viable approach for parameter inference in the quantile based
GARCH model.
n ,h ~ f ( n ,h ; , , n,h , n ,h ) (2.22)
The joint probability distribution of the hourly log returns of LMP at bus n over a time
( ) ( )
H
f n ,1 , n , 2 ,L , n ,H = f n ,h | n ,h1 (2.23)
h =1
= ln ( f ( n ,1 , n , 2 ,L, n ,H )) = ln f ( n ,h | n ,h1 ) = ln ( n ,h | n ,h1 )
H H
(2.24)
h=1 h =1
( ( ))
H
= ln f n ,h ; , , n,h , n ,h
h =1
To estimate the parameters [ 0 , 1 , 2 ] for the GARCH model and the parametric
( )
the log-likelihood function { n ,h }h =1 ; , , , , 0 , 1 , 2 can be written as follow,
H
51
Max (
{ n ,h }h=1 ; , , , , 0 , 1 , 2
H
) (2.25a)
0 , 1 , 2 0 , , , 0 (2.25c)
1 + 2 < 1 (2.25d)
where constraint (2.25d) is intended to guarantee the stationary of the stochastic process
Due to the high nonlinearity of the problem (2-25), the convergence to optimum is
very slow and difficult to achieve. Since it is proved that assuming normality for error
terms n ,h does not affect the inference of GARCH model parameters [ 0 , 1 , 2 ] , the
problem (2-25) can be decomposed into two steps as follows. In the first step, estimate
distribution N (~, ~ ) . This particular distribution has two parameters ~ and ~ only
where, the constant term C can be ignored without affect the optimality searching.
Max ( H
)
{ n ,h }h=1 ; , , , = ln ( f ( n ,h ; , , n,h , n,h ))
H
h =1
(2.26)
52
( n ,h n ,h )( ) exp 1 (
n ,h )( )
H ( n , h n ,h )
n ,h
=
n ,h
1
1+
h =1
( )
1
(
n ,h 1 + exp n ,h n ,h )
n ,h
St. , , 0
The quantile based GARCH model (2.20) is applied to model the simulated IEEE
RTS24 system electricity price processes obtained in the previous section. First, the
LMPs at buses 10 and 18 determined by the AC power flow based market dispatch
without TRM requirement are selected for parameter calibrations. Following the quantile
function based parameter estimation procedures described above, the model parameters
for the quantile distribution that fit the simulated RTS24 electricity prices are estimated
Figure 2.11 illustrates the quantile-quantile (Q-Q) plots of the empirical quantile
versus the respective theoretical quantiles. The theoretical quantiles are plotted on the x-
axis and the empirical quantiles on the y-axis. In the two QQ plots in figure 2.11 and
2.12, the mid part of the plot forms a relatively straight line, which indicates a good fit
between the empirical quantile function and the theoretical quantile function, except for
several outliers.
53
Bus 10 Bus 18
0.45 0.35
Emperical Quatiles
Emperical Quatiles
0.2 0.15
-0.05 -0.05
-0.3 -0.25
-0.3 -0.05 0.2 0.45 -0.25 -0.05 0.15 0.35
Theoretical Quatiles Theoretical Quatiles
Figure 2. 11 Q-Q plot for fitted distribution of hourly log returns of LMP at bus 10 (left
panel) and 18 (right panel) determined by market dispatch without TRM requirement
bus 10 is fatter than the tails of LMPs at bus 18. Nevertheless, for both distributions,
< 1 indicate that both distributions have fatter left tails than the right tails.
Next, the LMPs at buses 10 and 18 determined by the AC power flow based market
dispatch with 10% TRM requirement are selected for parameter calibrations. The model
parameters for the class I distribution that fit the simulated RTS24 electricity prices are
54
Bus 10 Bus 18
0.5 0.3
0.3 0.18
Emperical Quatiles
Emperical Quatiles
0.1 0.06
-0.1 -0.06
-0.3 -0.18
-0.3 -0.1 0.1 0.3 0.5 -0.18 -0.06 0.06 0.18 0.3
Theoretical Quatiles Theoretical Quatiles
Figure 2. 12 Q-Q plot for fitted distribution of hourly log returns of LMP at bus 10 (left
panel) and 18 (right panel) determined by market dispatch with 10% TRM requirement
By comparing the estimates of model parameters in table 2.4 with those in table 2.3,
we find that the LMP at bus 10 determined by market dispatch with the TRM
requirement shows fatter tail than without TRM requirement. However, the opposite is
found for bus 18. This observation matches the observations from figures 2.9 and 2.10
This section illustrates how the parameters of the stochastic models can be calibrated,
and how the market simulation based fundamental approach can be combined with the
stochastic model based technical approach to model the market signals. With the
parameters well calibrated, these technique models can be employed to value economic
incentives and transmission services, which provide market signals for making the
investment decisions on where and how much to invest in generation and transmission.
construction of new lines can be evaluated based on the projection of future market
conditions using the reduced-form electricity price models calibrated through the power
55
2.5 Conclusions and Discussions
This chapter addresses the problem of modeling market signals for transmission
adequacy investment. An AC power flow based market dispatch model which takes into
account various system operating constraints as well as the system reliability constraints
is proposed. Simulation experiments with the IEEE RTS24 system illustrate the
advantages of this model as compared with others. The AC model captures the economic
incentives of adding the voltage bound constraints and therefore the allocation of reactive
model, the AC model allocate transmission loss correctly. The economic impact of
reliability enhance through market dispatch is evaluated for different market participants.
The cost of imposing reliability constraints can be recovered from consumers with
combine the strength of the market simulation based fundamental approach and the
stochastic model based technical approach, market prices obtained through system
simulations are used to calibrate the parameters of a quantile-based GARCH model. The
changes of system conditions can be captured by the stochastic model parameters. This
research work builds a power tool for projecting the dynamics of future market signals,
Future work can be carried out to consider the strategic interactions between
trading liquidity, the adequacy of market incentives are intended to be investigated in the
56
CHAPTER 3
This chapter proposes a stochastic programming framework for solving the optimal
electricity spot market and the ancillary services market as a price taker. It seeks to
maximize its profit by jointly optimizing its energy/capacity sales and scheduling into all
service and market price uncertainties. Numerical studies on the advantages of the
uncertainties are carried out in a realistic case study. The proposed model can also be
directly adapted for determining the optimal scheduling and bidding strategy for a power
57
k Scenario of ancillary service, k = 1,2,L, K .
Tn{l ,u} Lower/upper MW-equivalent water release target at stage n , TNl = TNu = TN .
h [
Vector of phE , pUh , phD , phS , phN , phB ]
T
with the components denoting the prices of
[
A constant coefficient vector, = 1, u , d ,0,0 ]
{U , D , S , N } Expected call probabilities of {regulation-up, regulation-down, spin reserve,
j ,j
1 2 One-step state transition probability from market price level scenario j1 to j2 .
58
Scenario dependent Variables
nk Probability of S n = k at stage n .
hj Probability of Lh = j in hour h .
Decision Variables
qh Vector of [qhE , qhU , qhD , qhS , qhN ]T with the components denoting generation
Rh [ ]
Vector of RhE , RhU , RhD , RhS , RhN with the components denoting the expected
59
Note that when augmented with the superscript ( k1 , k 2 ,L, k n 1 ) , ( j h ) , or both, the
or both have occurred. When augmented with subscript of a set of hours, the above
variables represent a vector of the variables indexed with each h in the set.
3.1 Introduction
In electricity market designs such as the one implemented in California, there often
exist multiple markets for selling and buying electric power. These markets typically
include forward energy markets, ancillary services (AS) markets, and real-time energy
markets. While the overall transaction volume of the ancillary services markets is
smaller than that of the energy markets, the revenue from selling ancillary services can
market offers participants the choice (and certain obligation) to participate in the ancillary
services markets besides the energy markets. To determine the best portfolio strategy for
selling electricity into these markets, market participants need to jointly optimize (or, co-
incorporating both price and operational uncertainties in the energy and ancillary services
markets. There has been a large amount of research on the co-optimization problem of
selling electricity into multiple markets given deterministic price forecasts. However,
much less literature is available on such a problem subject to uncertain price forecasts as
well as random service requests on the committed ancillary services capacity. This
60
While the electricity forward, ancillary services and real-time markets are similar in
the sense that they are all conducted through auctions, they differ in the types of products
offered for trading. Unlike the forward and real-time (instantaneous delivery) energy
markets which are for firm energy delivery, the ancillary services market is a forward
market for capacity with obligation to deliver energy only when called in real-time. The
need for ancillary services as a form of reserve capacity comes from the fact that it is
impossible to forecast system demand exactly and then purchase electricity for all the
customers ahead of time. Although the real-time energy market is also available for
difficult to predict how much capacity would show up in real-time since there are no
time and thus ensure that at least some additional capacity is available in real-time to
balance the potential discrepancy between load and generation, the independent system
operator (ISO) pays a reservation price to all the participants who clear the AS market to
keep their capacity idle and available for generation increase (or load decrease) if needed
also receive payments for energy generated in real-time at the real-time market clearing
price, which is determined by the aggregate energy bids in the real-time market.
Normally, market clearing prices in the energy and AS markets are formed from the
respective bids received. There are four major ancillary services (namely, regulation-up,
the flexibility and response-time of service offered. Using the system frequency as the
control signal, regulation services are devoted to the continuous balancing of generation
resource and load to assist in maintaining normal system frequency. They are
61
generation control signals by acting directly on the stream inlet valve. Regulation-up and
regulation-down services are procured separately. Spin and non-spin reserves (namely,
operating reserves) are prepared for purposes such as peak load shaving and security
maintenance in case of plant or transmission outages. Regulation up, spin and non-spin
all come from generation units operating at less than full capacity. Regulation-up is
When simultaneously participating in the energy and AS markets, a critical issue that
market participants face on a daily basis is how to allocate their capacity between energy
and AS markets so as to maximize their profits or minimize their overall costs. In order
to be able to deal with this problem, the market participants need to be capable of
forecasting prices (and level of their volatility) in all of the energy and ancillary services
markets. While there has been significant research done in the area of price forecasting,
accurate energy price forecasting is still daunting at best. This suggests the need of a
unpredictable real-time imbalance between demand and supply. The regulation capacity
actually called in real-time is highly variable. However, we are not aware of any research
taker. The co-optimization model of capacity allocation in multiple markets for this
hydro producer is formulated and solved utilizing stochastic programming, which gives
62
as is the case of deterministic optimization. We employ stochastic programming
techniques for hedging potential revenue loss against market uncertainties by explicitly
taking into account the energy price volatility and the AS request variability in the form
of regulation-up and down service call probabilities. The advantages of the stochastic
presented in Section 3.3. Sections 3.4 and 3.5 discuss the modeling of ancillary service
uncertainties is presented. A case study with realistic data is carried out to illustrate the
advantage of the proposed stochastic formulation in Section 3.7 with output graphs and
tables. Section 3.8 concludes and outlines some future research directions.
scant. Most of the early works on the co-optimization problem adopt a deterministic
ancillary services markets given market demand information. In the spot market, power
alternative markets and determine the optimal capacity allocation to each market in
response to time-varying market conditions over a given time horizon. Arroyo and
63
Conejo (2000) address the optimal response of a thermal unit to energy and spin reserve
spot markets assuming accurate market price forecasts. However, the applicability of the
results hinges on the accuracy of the price estimates. Profit opportunities can be lost if
markets is provided in (Wallace and Fleten, 2003). The increased awareness of market
uncertainties calls for rigorous risk management of exposures to both ancillary service
and market price uncertainties. For a power producer, risk exposures are controlled by
putting proper financial instruments, such as futures contracts and flexible-load contracts,
into its portfolio. Mo et al. (2001) present a risk management approach that integrates
futures contract hedging and hydro generation scheduling in the energy markets. The risk
level can be controlled by setting prudent value-at-risk targets. Moreover, the operation
1996; Jacobs et al., 1995; and Takriti et al., 1996). Carpentier et al. (1995) model the
uncertainty of demand and unit failures. Jacobs et al. (1995) introduces PG&E's optimal
information. Takriti et al. report a multi-stage stochastic programming model for unit
and electricity demand. Philpott et al. (2000) consider the problem of scheduling the
turbines in a chain of stations down a river valley subject to uncertain demand. Ozturk et
64
al. (2004) use chance constrained programming to ensure a high probability of satisfying
load. Ferrero et al. (1998) present a dynamic programming two-stage algorithm approach
in recent years has price uncertainty come to the attention of researchers. For example,
Plazas et al. (2005) study optimal bidding strategies for the day-ahead energy market and
Although the literature on thermal unit commitment is plentiful, the literature on hydro-
electric units is relatively limited. Conejo et al. (2002) study self-scheduling of cascaded
hydro generating plants along a river basin which sell energy in the day-ahead market.
However, the ancillary service uncertainty in the ancillary services markets, namely, the
In this section, we present a deterministic model. Similar versions of the model are
electricity energy market and four ancillary services markets, namely, regulation-up,
regulation-down, spin reserve, and non-spin reserve. The energy market and the ancillary
markets clear simultaneously. The producer forecasts the hourly prices of each market
h = [ p hE , p hU , p hD , p hS , p hN , p hB ] , h H A
T
The revenue from each market is the product of the corresponding price and
65
RhE = phE qhE
(
RhU = pUh + U phB qUh)
(
RhD = phD D phB qhD)
( )
RhS = phS + S phB qhS phS qhS
( )
RhN = phN + N phB qhS phS qhS
Note that the revenues from ancillary services consist of both capacity payment and real-
time balancing energy payment. However, due to the fact that S and N , are typically
very small (less than 1% on average), the energy payment terms in spin and non-spin
The objective of the optimization problem is to maximize the expected total revenues
(q H ) = p h T q h (3.1)
hH
where, p h = h (3.2)
1 0 0 0 0 0
0 1 0 0 0 U
= 0 0 1 0 0 -D (3.3)
0 0 0 1 0 0
0 0 0 0 1 0
aforementioned markets. The operation and maintenance costs are ignored in the
objective function since they are relatively fixed and low compared with market revenues.
66
For scheduling of hydro units, the water supply is a major concern. We simplify the
problem by limiting the modeling to hydroelectric plants that are not hydraulically
coupled. The total MW generation potential within a time period depends on the
elevation difference between headwater and tailwater, reservoir inflows and outflows,
producer, we can envisage specification of weekly or monthly target values for water
flows, which are normally determined by some long-term hydro planning model. Such
water flow constraints are termed water target constraints herein. Because of small S
S
and N values, we can neglect q h and qhN in the expected MW generated in hour h and
define
y h = E [y~h ] = q hE + U q hU D q hD = q h , h H A (3.4)
Tnl
{
y } Th
h H 1 ,L, H n
n
u
(3.5)
the corresponding time period. Note that the Lagrange multiplier of the target
constraint actually reveals the marginal value (namely, shadow price) of the
corresponding water resource. Indeed, is one of the most important inputs for setting
In light of the market rule against gaming behavior of double booking capacity, we
q hD q hE , h H A (3.6)
67
qhC = qhE + qhU + qhS + qhN = h q h
Note that qhD denotes downward commitment of capacity, it is not included in qhC nor
q hR above.
characteristics and leave capacity margin for both energy and operating reserve markets
as follows.
Without meaningful bounds, a producer may tend to dedicate most capacity to one of the
markets while leaving others under-attended. Such an allocation would not be favorably
respecting these implied regulatory constraints. Note that q h can be quite different for
hours, most generation units are operated at low output levels, the upper bound of qhD is
parameters such as those corresponding to ancillary services (~U , ~U ) and market prices
~
. The decisions based on (3.1) are questionable if the range of these random variables
max E [ (q H , )] (3.8)
q H
68
where R N denotes the set of all feasible decisions which is defined by the constraints
~
(3.5-7), and denotes set of possible realization of , ~U , ~ D . [ ]
The deterministic formulation (3.1-3) is actually an expected value scenario of (3.8)
defined as follows,
( ) [[]
max q H , , where = E , E [~U ], E [~ D ]
q H
~
]
Usually, deterministic optimization leads to an inferior solution since embedded
( )
max q H , max E [ (q H , )] . Thus, the optimal value of the deterministic
q H q H
optimization is biased upward relative to the optimal value of the stochastic optimization,
essentially to strike a careful balance between using water now and using it at a future
point. While deterministic multi-period optimization yields decisions for all periods, a
recourse, recourse actions are taken after some uncertainty has been resolved. The set of
decisions is divided into periods before and after the realization of uncertainty. In our
problem, the sequence of events and decisions, when considering ancillary service
69
St. AQ H n = b
q H n 0 , q H n+1 ( ) 0
(Birge, 1997).
finite number (say K ) of possible realizations ( k ) with probabilities p(k ) , the stochastic
program can be written in the following extensive form to describe explicitly the decision
St. Aq H n = b
T (k )q H n + Wq {(kH)n+1 ,LH N } = h (k )
The recourse model transforms the randomness contained in a stochastic program into
some specific parameters according to some random distributions. Modeling details such
as possible set of outcomes or scenarios and the coarseness of the period structure must
be specified with great care so as to achieve an optimal trade-off between realism of the
optimization model, which affects the usefulness and quality of the obtained decisions,
service and price uncertainties. The objective function and constraints of the
70
corresponding mathematical programming models are defined based on market scenarios
of interest.
In hour h , the regulation services can be either called or not. According to (3.4), ~
yh
has the following possible values depending on which regulation service is called,
Note that even though it can happen that regulation-up and regulation-down services are
called in the same hour, it does not happen often. Therefore, we exclude this scenario
here. This mild assumption can be easily relaxed, albeit at the cost of higher dimensions
every hour. However, if we model all possible scenarios for each hour h , the number of
approximation is in order.
Yn ~ Norm , 2 ( )
71
where, = E [Yn ] = (q
hH n
E
h + U qhU D qhD = ) q
hH n
h
hH n hH n
Yn(k ) = + (k )
commitment scenarios by the end of any intermediate stage n . Given the discretization
[ ] [ ]
E ~hU = U (k ) = U (k ) , and E ~hD = D (k ) = D (k )
where (k ) = Yn(k ) .
The ex-post expected value of market price vector p (hk ) corresponding to the realization
of scenario S n = k becomes
p (hk ) = ( k ) h (3.13)
1 0 0 0 0 0
0 1 0 0 0 U (k )
where, (k ) = 0 0 1 0 0 - D (k )
0 0 0 1 0 0
0 0 0 0 1 0
72
The scheduling strategy can be easily determined since the deterministic equivalent
1 2 3 4
[(
Max E S , S , S , S q H1 , q(Hk12 ) , L , q(Hk1N,L, k N 1 ) )] (3.14)
K K
p (k )q ( k ) + L + K k p ( k )q ( k ,Lk )
= 1k p (Hk )q H + 2k
1 1 2
H H
2 1
N H H N N 1 N 1
N N
1 1 2 2
k =1
1 k =1 2 k =1 4
K
[ ] ( [ ] K
) ( [ ] )
K K
= E S p H 1 q H 1 + 1k1 E S p H 2 q (Hk12 ) + L + 1k1 2k 2 L Nk N11 E S p H N q (Hk1N,L, k N 1 )
1
k1 =1
2
k1 =1 k 2 =1 k N 1 =1 N
St. (h, n, k1 , k2 , L , kn 1 ) ,
n 1
Tnl Yi (k1i1 ) + y( h
k1 ,L, k n1 )
Tnu
i =1 hH n
0 q(hk1 ,L, k n1 ) q h
Objective function (3.14) is readily extendible to the E [ ()] Var [ ()] form to
do not examine the mean-variance model in this chapter. It is reserved for future research.
73
Significant price volatilities have been observed since the market de-regulation. In
this section, we focus on hedging against fluctuating market prices. We assume the
producer has a projected hourly market price process and, according to (3.2), the
market price process vector p in place. For example, in Southern California Edison, a
forecasting services are employed for validation purposes. Instead of developing a full-
fledged stochastic model for the price evolving processes, we model the price uncertainty
by considering a set of discrete price levels which are expressed in proportions of the
forecast and match the means and projected volatilities. The uncertainty is compensated
p (hj ) = ( j )p h (3.15)
J
(
and corresponding probability hj with hj = 1 . Also assume that Prob Lh = j hL1
j =1
)
( )
= Prob Lh = j 1L , 2L , L, hL1 . The decision strategy is that for each realization of energy
Markovian process is employed for modeling the evolution of price level process. While
this Markovian assumption simplifies the complex energy price behavior, we concentrate
our effort on dealing with price fluctuations. To construct the price model, we choose
J J
( j ) in a way to keep j p (hj ) = j ( j )p h = p h and keep the correlation matrix of
j =1 j =1
market settlement prices intact. To simplify the formulation, we assume that the
decision strategy applies from h = 2 onward, meaning that the solution for the first hour
becomes
74
p1( j1 )q1
p (2j2 )q (2j1 )
J
j1 J L
+ P(L2 = j2 L1 = j1 ) J
(3.16)
j1 =1
+
j2 =1
+ P(LH = jH LH 1 = jH 1 ) p (HjH )q (HjH 1 ) ( )
jH =1
Assuming the Markovian state transition matrix of the price level process being
[ ]
= j1 , j2 = Prob(L2 = j2 L1 = j1 ) , j{1, 2} = 1,2, L, J
[ ]
J
= j , j = j ' j ', j
j '=1
J J J
j p1( j )q1 + j , j p (2j )q(2j ) + L + j
1 1 2 1
H 1 , j H
p (HjH )q (HjH 1 ) (3.17)
1 2
j1 =1 j2 =1 j H =1
or, equivalently,
H J J
q1 E [p1 ] + jh1 q (hjh1 ) jh1 , jh p (hjh ) (3.18)
jh1 =1
h=2 jh =1
z h
Min
h{H 1 ,L, H n }
Tnl , z h
Max
h{H 1 ,L, H n }
Tnu , n
where the introduction of z hMin and z hMax is to avoid the exponential growth of the number
of water target constraints with the number of time periods. The following constraints
qhD ( j ) qhE ( j )
75
qhR ( j ) = hq (hj ) qhR
0 q (hj ) q h
A complete stochastic model taking into account both ancillary service and market
( ) ( )
K J K J
Prob S n = k , Lh = j L
h 1 = P Lh = j L
h 1 P (S n = k ) = k
j =1
n j h , j h
=1
k =1
1
k , jh k =1 jh =1 h
The following figure 3.1 illustrates the decision tree for a 4-stage complete model
considering both ancillary service and market price uncertainties with discretization
parameters K = 3 and J = 3 .
76
Figure 3. 1 Scenario tree with both uncertainties
E L
HA
,1S , 2S , 3S , 4S
[ (q( j h 1 )
H1 , q(Hj2h1 )(k1 ) , L , q(Hj hN1 )(k1 ,L, k N 1 ) )] (3.19)
( ) ( ) ( )
K K
= 1 q(Hj1h1 ) + 1k1 2 q(Hjh21 )(k1 ) + L + Nk N11 N q (Hj hN1 )(k1 ,L, k N 1 )
k1 =1 k N =1
( )
J J
where, 1 q(hjhH11) = q1E [p1 ] + j h 1
q(hjh1 ) j h1 , j h q(hj h )
hH 1 j h 1 =1 j h =1
n (q(hj H )(k ,L, k ) =
J J
h 1 1 n 1 ) j h1
q(hj h1 )(k1 ,L, k n1 ) j h1 , jh p(hjh ) , n > 1
j h1 =1
n
hH n j h =1
St. (h, n, j , k1 , k 2 , L, k n 1 ) ,
( k1 ,L, k n1 ) ( k1 ,L, k n1 )
zhMin
H n q(hj hH1 n)(k1 ,L, k n1 ) zhMax
H n
n 1
Min ( k1 ,L, k n 1 )
Y (
i =1
k i 1 )
i 1 + z
hH n
h Tnl
77
n 1
Max ( k1 ,L, k n1 )
Y (
i =1
k i 1 )
i 1 + z
hH n
h Tnu
( j )( k1 ,L, k n1 ) ( j )( k1 ,L, k n1 )
qhD qhE
( j )( k1 ,L, k n1 )
qhC = hq(hj )(k1 ,L, k n1 ) qhC
doing hourly multi-market generation scheduling for 1 month (30 days, 24 hours per day).
Corresponding to weekly and monthly targets, the whole time horizon is divided into
N = 4 stages with the first 3 weeks being the first 3 stages and the rest being the 4 stage.
th
water inflow target for the month is T N = 200000 , and for targets of intermediate stage
n , we set,
[T n
d
]
, Tnu = [1 n ,1 + n ]
In
IN
TN
The rationale for the decreasing tolerance levels for target deviations is that the
monthly target is normally a hard target and there is more leeway for adjustment in the
beginning of the month than toward the end of the month. Actually, in reality, small
deviation (1% to 2%, and up to 5% in emergency cases) is allowed for monthly targets.
However, for scheduling purposes, monthly targets are normally treated as hard targets,
78
Using Southern California Edisons historical (June - August 2005) market prices
data, we calibrate the joint distribution of market prices as follows. The price vector p h
with triangular marginal distributions Tri ( T , T ) where T and T denote the mean
and width of the support, respectively. The parameters are listed in the table 3.1,
U = D = 0.3 , and the ad hoc capacity constraints and the regulatory constraints are:
U U D D
qHR P = 200, qHR / H P = 450, q H P = 150, q H / H P = 300, q H P = 200, q H / H P = 50
79
Considering the co-movement of ancillary service prices, the following discrete price
Note that the co-movement follows the correlation matrix and the standard
deviation of each market price is assumed to be of the same percentage of the mean.
We assume the Markovian price level process to be mean reverting and set the state
transition matrix to be
1
14 (j
1 3)(j2 3) > 0
1
= [ j , j ], j , j
1 2 1 2
= (j
1 3)(j2 3) = 0
7
3
14
(j
1 3)(j2 3) < 0
all circumstances. Using the above parameters and probability measures, we model and
sections 3.4, 3.5, and 3.6 (referred to as models S1, S2, and S3 hereinafter) and compare
With the price process parameters given above, we simulate a projected price process
~
h for h H . We solve the models D, S1, S2, and S3 using GAMS and obtain their
80
solutions. An immediate comparison between the models D and S1 is to plot their
accommodates the uncertainty of regulation service calls, as shown in figure 3.2, its
To show the advantages of stochastic programming models which imply the hedging
By generating Bernoulli random variables ~hU and ~hD for h H A to simulate the
regulation service calls. The realized revenue according to the generation scheduling
Repeating the simulation for 200 times, the realized revenues are plotted in figure 3.3.
Note that the S1 solutions lead to higher revenues under most if not all circumstances.
81
21 Deterministic Model
Stochastic Model
20.5
Revenue ($ in Millions)
20
19.5
19
18.5
18
17.5
20 40 60 80 100 120 140 160 180 200
Simulation Path ID
Similarly, by simulating the market price level transition process with random starting
level at h = 1 , the realized revenue according to models D and S2 solutions are compared
20
Revenue ($ in Millions)
19.5
19
18.5
18
solution.
To mimic the contemporary uncertainties of both regulation service call and market
prices, we simulate the regulation service call process and market price level transition
82
simultaneously and plot the realized revenues according the model D and S3 solutions in
20
Revenue ($ in Millions)
19.5
19
18.5
18
Figure 3. 5 Comparison of simulated revenues with regulation service call and market
price uncertainties
the comparison of the revenue distributions resulting from the stochastic programming
Deterministic Model
3
Stochastic Model
2.5
Probability Density
1.5
0.5
0
18 18.5 19 19.5 20
Revenue ($ in Millions)
83
The minimum variance unbiased estimates of the parameters of the normal
distribution N ( , ) and the 95% confidence intervals (CI) of the simulated revenue by
the deterministic and the stochastic models are displayed in the following table 3.2,
To study the effect of considering more price levels, we set J = 13 and set the
LE = [0.834 0.861 0.889 0.917 0.945 0.972 1 1.028 1.055 1.083 1.111 1.139 1.166] .
T
Note that more intermediate levels are considered compared with setting J = 7 , and the
price levels are adjusted to keep the hourly price volatility level unchanged. Considering
the co-movement of ancillary service prices, the following discrete price level matrix is
LE 0.834 0.861 0.889 0.917 0.945 0.972 1 1.028 1.055 1.083 1.111 1.139 1.166
LU 0.915 1.048 0.691 1.002 1.036 1.089 1.048 1.028 1.012 0.928 1.076 1.020 1.107
LD 1.119 1.064 1.027 1.061 1.071 1.043 1.020 1.006 1.073 0.925 0.981 0.908 0.700
L= S =
L 0.837 1.051 0.864 0.978 0.932 0.948 0.981 0.992 0.997 1.061 1.277 1.044 1.039
LN 0.987 0.856 0.857 1.021 0.972 0.967 0.991 0.992 0.985 0.970 1.294 1.016 1.092
B
L 0.756 0.901 1.035 1.050 0.924 0.936 1.048 1.081 1.100 0.923 1.084 1.002 1.160
The Markovian price level state transition matrix is changed, correspondingly, to be,
1
26 (j
1 6 )(j2 6 ) > 0
1
= [ j , j ], j , j
1 2 1 2
= (j
1 6 )(j2 6 ) = 0
13
3
26
(j
1 6 )(j2 6) < 0
84
with the limiting probability vector being = [ j ], j = 1 , j = 1,2,L,13 .
13
Apply the parameters above to the stochastic formulation S2 which considers market
price uncertainty, and formulation S3 which considers both regulation service and market
price uncertainties. And repeat the procedures above to simulate regulation service calls
and market price levels and calculate the realized revenues accordingly. Assuming
normality of the revenues calculated, the statistics are illustrated in table 3.3 as follows.
Note that the intensified modeling of market price levels can increase both expected
participation and market price uncertainties into the hydroelectric generation capacity
scheduling strategies which effectively hedge the potential revenue loss cause by
unfavorable market price changes and the ancillary service requests. The computational
study with realistic data provided by a hydroelectric producer illustrates the advantages of
the proposed approach. Since the effectiveness of the scheduling strategies depends on
the assumed distributions of the uncertain variables, with the evolving of market
85
accommodate other sources of uncertainties such as unplanned unit maintenance and
water inflow.
incorporate the market price uncertainty without a projected hourly market price process,
an improvement can be made to augment the model described in section 3.5 by using
market prices. Impact of a producers decisions on the market prices, especially on the
ancillary service prices, can be modeled to make the model more realistic. Another
fruitful direction is to extend the model to address the co-optimization problem for a
power producer who owns a portfolio of hydro, thermal and other types of generation
units.
86
CHAPTER 4
This chapter tackles the issues of optimal hedging and equilibrium price discovering
for market participants in the electricity day-ahead forward and spot wholesale markets
forward and spot markets are derived by formulating the individual market participants
decision problems and solving them with respect to the market clearing conditions.
Consequently, the locational forward risk premium, defined as the difference between the
day-ahead forward price and the spot price, is expressed as a function of network
topology, shadow prices of transmission flowgates, and other economic measures of the
market participants. The implications of the model are illustrated through a series of
numerical experiments with a three bus study-system. Empirical studies with New York
electricity market data indicate that the forward risk premium determining model
captures key economic features based on the hypothesis that the market prices are
Acronyms
GEN Generator
87
LSE Load serving entity
MW Mega watts, unit for real power, the rate of energy consumption
on flowgate k for one unit of power injection into bus n paired with one unit
gi Bus index of where the i th GENs units are connected. We assume that
different GENs do not compete at the same location, i.e. if i i ' , then g i g i ' .
lj Bus index of where the j th LSE is located. We assume that all LSEs have
K Set of flowgates, K = {k }, k = 1, L K .
{A i
G
, A jL } Risk aversion coefficients of the i th GEN or the j th LSE, assume that
88
Vector of forward/spot positions taken by GENs, G {F , S } = [Gi{F , S } ] , i = 1,L, I .
T
G {F ,S }
G {F ,S }* = [G i{F ,S }* ] , i = 1,L, I .
T
L{F , S } [ ]
Vector of forward/spot positions taken by LSEs, L{F , S } = L{jF , S } , j = 1,L, J .
T
L [ ]T
Vector of total positions by LSEs, L = L j , j = 1,L, J , and L = LF + LS .
{ , }
i
G L
j GEN i or LSE j s profit without forward hedging.
Electricity market prices and shadow prices associated with transmission flowgates
89
4.1 Introduction
The deregulation of the electric power industry separates the production and delivery
integrated monopoly. Wholesale electricity markets and retail electricity markets are
established to allow trading between bulk suppliers, retailers and other financial
electricity is traded in large quantities between these market participants. With an annual
consumption of over 3.6 billion MWh, the US power market is becoming one of the most
active commodity markets in the world. In the first few years following the conception
of deregulation, the complexity of electricity trading and the market risks were more or
predetermined in the regulated regime. Until the late 1990s, electricity marketers had
enjoyed substantial latitude in capital markets. However, the turmoil of the California
power market in 2000-2001 and the collapse of the energy giant Enron in late 2001
created unease and reminded market participants of the harsh realism in the rapidly
although it was not the exclusive driver to such crisis. In 2002, stock depreciation and
credit downgrades haunted the industry and increased the cost of capital access. The
came to the close attention of market participants. Stakeholders and potential investors
extreme volatility of its price and the illiquid of its trading. The following figure 4.1
illustrates the day-ahead (left panel) and spot (right panel) market hourly electricity prices
90
on the reference bus in the New York power pool over the period from February 2005
600 600
400 400
Price ($/MWh)
Price ($/MWh)
200 200
0 0
-200 -200
Figure 4. 1 Hourly day-ahead forward and spot prices on the reference bus in NYEM
From figure 4.1, electricity price spikes are observed frequently especially in the spot
market. In contrast to the general observation that in most commodity markets derivative
prices are more volatile than the fundamentals, figure 4.1 shows the opposite: electricity
prices in the day-ahead forward market are generally less volatile than in the underlying
in the spot market. Actually, the standard deviation of percentage changes of the hourly
electricity prices as displayed in figure 4.1 is 10.7% in the day-ahead forward market (the
left panel) and 121.7% in the spot market (the right panel), respectively. Compared with
the stock market, the standard deviation of daily returns on the S&P 500 index during the
most volatile single month in recent decades, October 1987, was 5.7% (Bessembinder
and Lemmon, 2002). The extreme price volatilities put market participants at significant
risk exposure in the spot market, which may lead to serious financial difficulties. It lead
to the future trading of bulk electricity. Soon after the conception of the electric power
industrys deregulation, the market for electricity futures emerged in the New York
mercantile exchange in March 1996. Financially settled monthly futures contracts for on-
peak and off-peak electricity transactions provide a channel for risk transferring between
91
market agents who have different market projections and risk preferences. Nowadays,
standardized futures contract trading for electricity delivery at specific locations provides
unfavorable price fluctuations. Options on the monthly futures have been structured and
offer market agents additional trading opportunities and risk management tools.
Compared with electricity spot prices which clear the transactions in the spot market,
electricity forward prices clear the forward transactions and reflect the pricing of the
corresponding forward contracts. There usually exist forward risk premiums which
measure the difference between the forward and expected spot prices. Economic theories
participants for bearing the systematic risk. Although classical literatures suggest that a
typical forward premium is negative due to the systematic hedging-pressure effect, recent
literature (e.g., Longstaff and Wang, 2004) provide examples of positive forward
expectations model of storage is employed to study the impact of the embedded timing
option of spot commodity which is absent in the future contracts. However, the results
do not necessarily extend to electricity futures. The cost-of-carry relationship links spot
and forward prices by the no arbitrage condition. A forward contract can be synthesized
by taking a long position in the underlying asset and holding it till the maturity of the
contract. Since there lacks efficient technology to store electricity economically, the
does not exist. Consequently, in addition to the resulting extreme intertemporal and
92
conform to the cost-of-carry relationship (Eydeland and Geman, 1999; Pirrong and
Jermakyan, 1999), and the no-arbitrage approach does not apply to power derivatives
valuing directly. Pirrong and Jermakyan (1999) note that electricity forward prices differ
from expected delivery date spot prices due to an endogenous market price of power
demand risk. However, no attempt to explicitly model the determinants of the forward
market price risks is made. Eydeland and Geman (1999) focus on electricity options and
asset cannot be implemented and using the spot price evolution models for pricing power
options is not helpful. Their option pricing model relies on assumptions regarding the
evolution of forward power prices instead. A recent study of forward price premiums in
the natural gas market (Borenstein et al., 2006) argues that since gas local distribution
companies (LDCs) choose to pay to guarantee access to gas at times when gas
exist. However, this conclusion is back up by the fact that LDCs face a much higher
penalty for inadequate gas input than for storing excessive gas. Inspired by the fact that
storable natural gas can be converted into electricity in industrialized size, Routledge et al.
(2001) tackle the equilibrium pricing of electricity contracts by studying the spark
spreads between the natural gas and electricity markets. Their research indicates mean
reversion and positive skewness of electricity prices. Also revealed is the unstable
correlation between electricity and natural gas prices. These literatures suggest relying
on equilibrium-based models to derive how electricity forward prices are related to spot
relationship between electricity forward prices and the expected underlying spot price
and load demand. The forward price is a biased forecast of the future spot price, with the
93
forward premium being a decreasing function of the expected variance of the wholesale
spot price and an increasing function of the expected skewness of wholesale spot prices.
More specifically, the forward premium is negative (termed normal backwardation) when
price volatility over-dominates the positive skewness effect, and positive (termed
contango) otherwise. Generally, it shows that fundamental economic factors and market
participants risk attitude determine the forward premium. Following the equilibrium
model proposed by Bessembinder and Lemmon (2002), Longstaff and Wang (2004)
implement empirical studies using high frequent electricity price data from the PJM
(Pennsylvania, New Jersey, and Maryland) electricity market. Their study confirms the
relationship between forward risk premium and the moment statistics of spot prices and
finds that the forward premiums are higher in peak hours compared with non-peak hours.
In addition to the markets for long-maturity futures, in many U.S. power pools, a two-
settlement mechanism has been established which involves the market clearing in a day-
ahead forward market and a real-time spot-market. Assisted with market monitoring
which deters market speculation behaviors, the creation of the day-ahead forward market
allows the system operators to collect information and make more accurate projections of
the next-days demand and available generation supply. The opening of the day-ahead
forward markets also moderates the impact of the otherwise more volatile spot market
prices and provides market participants a channel to hedge the market risks involved.
Since the establishment of the two-settlement mechanism, the day-ahead forward markets
have grown rapidly. The price dynamics in the day-ahead forward markets and the
relation between day-ahead forward and spot prices have become one of the major
economic characterization of forward risk premium for monthly settled futures contracts,
94
it implicitly assumes single forward and spot prices apply to every market participant
within the broad delivery locations of their transactions with the transmission congestion
related price dynamics being smeared over the model parameters. However, if applied
directly to the day-ahead forward market, the same model would over-simplify the
realism since limited transmission capacity lead to different LBMPs at different locations.
constraints. Since physics laws determine the transmission of electricity power flows,
exhibit at different locations even within a market. The following figure 4.2 illustrates
the day-ahead forward (left panel) and spot (right panel) market hourly LBMP
differences between the zone CENTRL and the reference bus in NYEM over February
20 20
10 10
Price ($/MWh)
Price ($/MWh)
0 0
-10 -10
-20 -20
-30 -30
Mar2005 Oct2005May2006 Mar2005 Oct2005May2006
Date Date
Figure 4. 2 Day-ahead forward and spot price differences between zone CENTRL and
the reference bus in NYEM
capacity. Note that spatial price differences make significant percentages of the market
prices, especially in the spot market. Actually, the spatial price differences between the
zone N.Y.C and the reference bus are more dramatic due to the tighter transmission
95
capacity connection. Consequently, to understand the relationship between the day-ahead
forward LBMPs and the spot LBMPs in a practical system, the model presented in
The research work presented in this chapter intents to model the pricing of electricity
forward contracts in the day-ahead market while considering the impact of transmission
congestion. We assume that in both the day-ahead and the spot markets, market clearing
prices are determined by industry participants rather than outside speculators. We also
assume that electricity bulk suppliers and retailers are risk averse and pursue risk-
which implies that the forward risk premium can be expressed as a function of network
topology, shadow prices of transmission flowgates, and other economic measures of the
electricity prices and transmission congestion information form the New York electricity
wholesale market. The data used in this study consist of hourly day-ahead and spot
electricity prices, hourly day-ahead and spot flowgate shadow prices, and hourly load
level for the period from February 2005 to August 2006. The rational for using hourly
data instead of daily-averaged data, as mostly adopted in other literatures, is that the
occurrences of transmission congestions usually last no more than a few hours instead of
days. The congestion effect may become smeared if it is scaled into daily averaged data.
The observations from the empirical study are in general supportive of the relation
indicated in the proposed model. They confirm that the regression model for day-ahead
forward risk premium in power prices captures many of the key economic features based
on the hypothesis that the market prices are determined by rational risk-averse market
96
market risks and is valuable for leading to broader insights regarding market perceptions.
the modeling framework and the insights obtained apply to other non-storable commodity
markets as well.
The rest of the chapter is organized as follows. Section 4.2 describes the general
setup of the day-ahead forward and spot markets for electricity wholesale. The decision
problems of each market participant in the day-ahead and spot markets are formulated.
Section 4.3 discusses the market clearing conditions and solves for economic
adjusted profit with respect to market clearing conditions, the model gives closed form
solutions for the equilibrium forward prices and optimal forward positions. The
implications of the model and impacts of various system parameters on the forward risk
premium are illustrated through a series of simulation studies with a 3-bus study system.
4.4. Empirical statistical studies with New York electricity market data are conducted.
The observations indicate that the proposed model captures many of the key economic
features which determine the forward risk premium. The model is then used for spot
market price prediction and tested against out-of-sample historical data. Finally,
conclusions and directions for future research are presented in section 4.5.
In an open electricity pool market, the transactions of electric power are primarily
the total demand. Generators and load serving entities choose to sell or procure on either
day-ahead forward or spot markets and at what quantities. They interact continuously
97
through projected and real-time electricity transactions. There exist an independent
system operator t monitors the transmission network status and dispatches the system to
minimize the social energy acquisition cost. The winning electricity selling and buying
bids determine the market clearing prices consequently. However, the objective of each
market participant is to maximize the individual risk adjusted profit. At the market
equilibrium, each market participant cannot gain profit by making unilateral moves.
optimal hedging positions for market participants in the day-ahead forward and spot
period for electricity wholesale transactions when market participants choose their
forward market positions by estimating the spot market conditions. When it comes close
to the settlement of spot market, electricity load, the fundamental factor of the market
uncertainty, can be estimated with substantial precision in the immediate future. A same
assumption in (Bessembinder and Lemmon, 2002) is made that market participants can
make decisions regarding spot market positions at precisely projected spot prices.
This section presents the decision problems of the major market participants.
Contingency events such as outages of generation units and transmission facilities are
Assume an electric power system with the transmission network consisting of a set
98
In the day-ahead wholesale forward market, electricity power suppliers (i.e., GENs)
and buyers (i.e., LSEs) choose their forward positions G F and LF , respectively. The
In the wholesale spot market, the suppliers and buyers chose their spot positions G S
The load serving entities act as electricity buyers in the wholesale markets and sell
electricity procured from the wholesale markets to the end consumers in a retail market.
Although LSEs have to buy bulk electricity at time-varying competitive market clearing
prices P F or P S in the day-ahead forward or spot market, respectively, the retail prices
to end consumers are under regulation and set fixed at P R . Usually, the regulated retail
price P R to end consumers is set based on the expected spot price P S plus a certain retail
profit margin.
Suppose there exist I generators acting as power suppliers selling electricity into the
competitive wholesale markets with J load serving entities being the wholesale buyers
and suppliers in the retail market. To ensure the economical efficiency of the wholesale
market, prevent discriminatory access to the transmission network, and encourage open
prices P {F ,S } and shadow prices {F , S } associated with the congested flowgates are
determined by the system dispatch and informed to the public. The aggregated electricity
demands in the LSEs franchised service territories are denoted by a vector of exogenous
99
The cost function of the i th generator is assumed to be a quadratic function of the
generation output Gi ,
iG
C (Gi ) = Fi + Gi
2
(4.1)
2 iG
In the model proposed in (Bessembinder and Lemmon, 2002), to account for the missed
market price dynamics do to ignored transmission congestion, the term of Gi in the cost
network constraints are modeled explicitly in the proposed model, we use quadratic
functions to represent supply curves, which are, according to (Wood and Wollenberg,
The market participants generally optimize market decisions expecting to reach high
profit on average. Suppose that the information can be viewed as a random variable
with support and known probability distributions, for example, with cumulative
the profit resulted could be very different from the corresponding expected value. The
deviation may be quite considerable if the underlying randomness has a large variance.
Relying on the corporate risk hedging literatures which argue that market agents can
benefit from hedging market risks by avoiding suboptimal decisions, and given the
extreme volatility of the electricity wholesale prices, electricity market participants are
modeled as risk averse and willing to seek hedges in forward market against adverse real
time price changes, that is, they take both expected profits and the imbedded volatilities
into consideration. A utility function linear in expected value and variance of profit is
100
A{G , L}
E [U {G , L} ] = E [ {G , L} ( )] Var ( {G , L} ( )) (4.2)
2
where A{G , L} 0 represents the weight given to the conservative part of the decision.
To simplify the problem, the forward and spot wholesale markets are modeled as
closed systems where market participation is limited to generators and load serving
entities with the prices determined by their physical delivery backed electricity trades.
The rational for this assumption is that currently the activities of market agents, who take
financial positions in the forward market and offset their positions prior to the next day
delivery, are under strict regulation. Actually, due to the lack of electricity price indices
(Ong, 1996), the speculative power transactions only account for a very limited
percentage compared with the overall volume. Although no explicit model is build to
expected spot price. Nevertheless, the existence of nonzero electricity forward premiums
as observed from the empirical data provides incentives for financial intermediaries to
include power positions in their portfolios (Bessembinder and Lemmon, 2002). The
commodities is that electricity flow over the transmission network following the law of
electricity is priced at each distinct location, the existence of network constraints presents
complications to the electricity markets. Since we are concerned with the real power
only, we use the DC instead of AC power flow equations based system dispatch model in
our analysis. The DC model identifies thermal limits constraints and eases the
101
understanding of economical issues in congestion management. We have the ISOs
system dispatch problems with network constraints as follows, note that the market prices
Definition 4.1: (ISOs system dispatch problem in the day-ahead forward wholesale
market) The ISO collects the load serving entities electricity demands in the day-ahead
forward market and dispatches the available generation resources accordingly to meet the
forward demand while minimizing the forward electricity energy acquirement cost. By
clearing the supply and demand at each location with respect to the transmission capacity
constraints on each monitored flowgates, the market clearing day-ahead forward location
marginal prices and flowgate shadow prices are determined by solving the following
optimization problem,
( ) ( )
I
Min C G F = C GiF (4.3a)
i =1
I J
St. GiF = LFj
i =1 j =1
(4.3b)
F T (G F LF ) T (4.3c)
GF 0 (4.3d)
Definition 4.2: (ISOs system dispatch problem in the spot wholesale market) The
ISO collects the load serving entities projected electricity demands in the spot market,
market, the ISO adjusts the available generation resources accordingly to meet the spot
demand while minimizing the total electricity energy acquirement cost. By clearing the
supply and demand at each location with respect to the transmission capacity constraints
on each monitored flowgates, the market clearing forward location marginal prices and
flowgate shadow prices are determined by solving the following optimization problem,
102
I
Min C (G ) = C (Gi ) (4.4a)
i =1
I J
St. G = L
i =1
i
j =1
j (4.4b)
FT (G L ) T (4.4c)
G0 (4.4d)
Locational marginal pricing is the marginal cost of supplying the next increment of
power demand at a specific location on the network, taking into account the marginal cost
of generation and the physical aspects of the transmission system. Without the network
constraints, electricity would be traded at a unique price wherever the physical delivery
were located in the system. The demands would be met by the merit-order generations,
i.e., the cheapest group of generation units, to incur the minimum social cost. However,
the limited transmission network capacity may limit the transactions as congestion occurs,
preventing the access to the cheapest generation resource while resorting to out of merit-
order generations instead with respect to the specific location of the demands. As a
consequence, the market clearing prices are differentiated across spatial locations. The
optimality conditions of (4.3) and (4.4) characterize the relation between location prices
The problem (4.3), with a convex objective function and linear constraints, is a
I
( ) ( ) ( ) (F (G ) )
J
L G F , F , F = C G F + F G iF LFj + F
T T F
LF T
i =1 j =1
where F is the Lagrange multiplier associated with constraints (4.3b) and F is a vector
103
In order for a solution (G F * , F , F ) to be optimal, in addition to constraints (4.3b-c),
j =1 i =1
(F (G
T F
LF ) T ) , it requires C (G F ) be normal to G iF L Fj
I
i =1
J
j =1
and
(FT (G F LF ) T ) , that is, be linearly dependent vectors, the gradient of the objective
L
G F
(
G F* , F , F = 0)
plus the complementary slackness condition,
( ) (F (G
F T T F*
LF * ) T ) = 0 , F 0
Due to the convexity of (4.3a-c), the second-order optimality conditions are satisfied.
In the economical sense, the Lagrange multiplier F * associated with the system-wise
power supply and demand balance can be interpreted as the locational marginal price at
the reference since it quantifies the electricity procurement cost for an additional unit of
load at the system reference bus. On the other hand, the Lagrange multiplier vector F *
associated with the power flow limit of the monitored transmission flowgate are
relaxed, called flowgate shadow price hereinbelow. Therefore, the necessary conditions
P F = PrefF F F (4.5a)
P S = PrefS F S (4.5b)
104
Note that the day-ahead forward prices P F re used to settle the day-ahead forward
market transactions, and the settlements of spot market position deviations from the day-
as homogeneous as in (Bessembinder and Lemmon, 2002). Even if they share the same
production technology, their trading activities vary since they may experience diversified
market prices due to their respective spatial locations. Similarly, same arguments require
the LSEs been treated heterogeneously in their respective franchised service areas. With
the unbundling of generation and retail services, market agents pursue their individual
goals simultaneously. The market equilibrium under the multi-agent perspective can be
and clears according to the market coordination conditions. A variety of models have
on choosing different variables to compete against their rivals. Bertrand, Cournot, and
Stackelberg models have been employed in Hogan (1997), Borestein et al. (1995), and
Otero-Novas et al. (2000) to study market participants activities. The Bertrand model
takes price decision as the move of each supplier while conjecturing that the rivals will
not react to its actions by changing their prices. In the Cournot model, the quantity is the
driver for market equilibrium. It is also termed as Nash equilibrium and can be reached
strategy. A leader is assumed in the Stackelberg model to take the first move while
leaving other agents behaving as in the Cournot set up. In this section, a two-period
105
participants in diverse locations. Specifically, we evaluate GENs and LSEs forward
hedging and spot positions and obtain closed form solutions for the equilibrium
We start with assessing the real-time spot wholesale market while taking into account
the day-ahead forward positions selected beforehand. Then step back to the day-ahead
forward market, the optimal decisions can be determined assuming that each GEN and
LSE would behave optimally in the spot market the next day.
Spot Market
the real-time spot market, market participants can make decisions regarding spot market
positions at precisely projected load demand and spot prices. LSEs can procure exactly
the amount of power as needed and meanwhile, GENs are able to decide spot positions
Definition 4.3: (Generators profit pursuing problem in the spot wholesale market)
The ex post profit of generator is the sum of revenues from electricity transactions in
forward and spot markets minus the total generation cost. Therefore, given the day-ahead
profit as follow,
2
Max GS (GiS ) = PgF *GiF * + PgS ( )GiS Fi + G (GiF * + GiS ) (4.6)
i i
2 i
GS (GiS )
= PgSi ( ) G (GiF * + GiS ) = 0
Gi S
i
106
gives the profit-maximizing spot market position by GEN i being,
iG S
GiS * = Pg ( ) GiF * (4.7)
i
( )=
2 GS GiS
<0
GiS
2
iG
Note that as implied in the generation cost function (4.1), the locational marginal
price at the bus g i defined as the marginal cost of supplying the next increment of power
dC (Gi )
Pg i = = G Gi
dGi i
which increases with Gi and implies that the supplier can set the market price at which it
sells the power. However, due to the correlations between market prices at various
locations of the same system as revealed by (4.5), this price-setting cannot be decided
market clearing conditions presented in section 4.3 combined with price relation (4.5)
Definition 4.4: (Load serving entities obligation fulfillment problems in the spot
wholesale market) For LSEs, by regulation they need to fulfill the real time demand of
L j dl j
(4.8)
Therefore, LSE j has little control over LSj and simply buy in the shortage of
107
Therefore, the ex post profit of LSE j can be determined as,
j j j j
(
LS (LSj ) = Pl R d l Pl F * LFj * Pl S ( ) d l LFj *
j
) (4.10)
( ) (
= Pl Rj Pl Sj ( ) d l j + Pl Sj ( ) Pl Fj * )L
F*
j
Note that the profit gain (loss) from taking day-ahead forward position LFj * is
is subject to the spot market price surging risk. On the other side, the regulated retail
price Pl R should be high enough to create a profit margin and keep LSE j in the market
j
for service.
We next step back in time to formulate the day-ahead forward market decisions of
market participants.
Forward Market
In the day-ahead forward market, GENs and LSEs face uncertain load demands to be
revealed in the next day retail market. Given the uncertain P S ( ) and unrevealed
optimal decisions in the spot market G S and LS , the GENs and LSEs have to rely on the
projections of the spot market conditions and decide their forward market positions.
Given the subsequent optimal spot market positions G S * as reveal in (4.7) to be taken
by GEN i , his total profit with forward market position GiF can be determined as follow,
GF (GiF ) = PgF GiF + PgS * ( )GiS * ( ) (GiF + GiS * ( ))
2
(4.11)
i i
2 i
G
hedged profit by assuming no position in forward market is taken, that is, GiF = 0 , that is,
108
iG S
iG ( ) = PgS ( )GiS * ( )
i
2 i
G
(Gi
S*
( ))2
=
2
(Pg ( ))
i
2
(4.12)
transmission flowgate which has tight capacity and non-zero associated shadow price in
the system.
Taking the GiS * revealed in (4.7) and the iG ( ) defined in (4.12) into consideration,
generator i s utility maximization problem in the form of (4.2) in the day-ahead forward
market is as follow,
Max [ ( )] [ ( )]
E U GF GiF = E GF GiF
AG
2
( ( ))
Var GF GiF (4.14)
Given the rational that the un-hedged profit iG ( ) is calculated when no forward
market position is taken, we can assume that E [ iG ( )] and Var ( iG ( )) are independent
AG
2
[ ( ) ( ) ( )
Var iG ( ) + GiF Var PgSi ( ) 2GiF Cov iG ( ), PgSi ( )
2
( )]
The first order necessary condition for optimality
[
E U GF (GiF ) ] [ ] [ ( ) ( )]
= PgFi E PgSi * ( ) AG GiF Var PgSi * ( ) Cov iG ( ), PgSi * ( ) = 0
Gi F
gives the expected utility maximizing GEN i s forward market position being,
109
GiF * =
[
PgFi E PgSi * ( ) ] + Cov( ( ), P ( )) G
i
S*
gi
A Var (P ( )) Var (P ( ))
S* S*
(4.15)
G gi gi
2 E [U GF (GiF )]
= AGVar (PgS * ( )) < 0
GiF
2 i
As described in (4.15), the optimal forward position consists of two components with
the first reflects the position taken in response to the bias in the forward price as
compared to the expected spot prices. Note that since iG ( ) is positively correlated
with PgS * ( ) for i , the second term of GEN i s forward market position accounts for
i
the effort to reduce the total profits risk exposure to the spot market prices as compared
to without forward hedging. Note that in (4.15), the E [PgS * ( )] denotes the conditional i
expectation of PgS * ( ) , similarly, Var (PgS * ( )) and Cov( iG ( ), PgS * ( )) are both
i i i
conditional measures.
Taking (4.15) back into (4.7), the optimal position to take in the wholesale spot
( )
= Pl Rj Pl Sj * ( ) L j ( ) + Pl Sj * ( ) Pl Fj LFj ( )
By assuming no position to be taken in forward market, that is, LFj = 0 , we define
110
( )
Lj ( ) = Pl R Pl S * ( ) L j ( )
j j
where, Pl Sj ( ) = PRef
S
( ) fl j , k kS ( )
Note that LSE j s profit without forward hedging is exposed to risks of electricity
acquiring cost in wholesale spot market and revenue in the retail market. The retail
revenue co-varies positively with the electricity wholesale spot price since electricity
price is positively correlated with the locational demand in general. And this correlation
can be amplified by the regulated retail price level. However, the cost to acquire the
Therefore, take in the LSj* revealed in (4.9) and the Lj ( ) defined in (4.17) into
(
LF (LFj ) = Lj ( ) LFj Pl F Pl S * ( )
j j
) (4.18)
entity j s utility maximization problem in the form of (4.2) in the day-ahead forward
market is as follow,
AL
Max E[U LF (LFj )] = E[ LF (LFj )] Var ( LF (LFj )) (4.19)
2
[ ( )] [ ]
E U LF LFj = E Lj ( ) LFj Pl Fj + LFj E Pl Sj * ( ) [ ]
AL
2
( ( 2
) ( ) ( ) ( ))
Var Lj ( ) + LFj Var Pl Sj * ( ) + 2 LFj Cov Lj ( ), Pl Sj * ( )
111
[ ( )] = E [P
E U LF LFj S*
( )] Pl F AL (LFjVar (Pl S * ( ))+ Cov ( Lj ( ), Pl S * ( ))) = 0
lj
LFj j j j
gives the expected utility maximizing LSE j s forward market position being,
[ ]
E Pl Sj * ( ) Pl Fj (
Cov Lj ( ), Pl Sj * ( ) )
L =
( )
( )
F*
(4.20)
ALVar Pl j ( ) Var Pl j ( )
j S* S*
( ) ((
where, Cov Lj ( ), Pl Sj * ( ) = Cov Pl Rj Pl Sj * ( ) L j ( ), Pl Sj * ( ) ) )
= Pl R Cov (L j ( ), Pl S * ( )) Cov (Pl S * ( )L j ( ), Pl S * ( ))
j j j j
[ ( )] = A Var (P
2 E U LF LFj S*
( )) < 0
F2 L lj
L j
Similar to what is revealed in (4.15) for generators, the optimal forward position for
LSEs consists of two components with the first reflects the position taken in response to
the bias in the forward price as compared to the expected spot prices. Since Lj ( ) is
negatively correlated with Pl S * ( ) for l j , the second term of LSE j s forward market
j
position accounts for the effort to reduce the total profits risk exposure to the spot
Therefore, taking (4.20) back to (4.9), the optimal position to take in the wholesale
[ ]
E Pl Sj * ( ) Pl Fj Cov Lj ( ), Pl Sj * ( )
L = L j ( )
( )
( ) ( )
S*
(4.21)
j
ALVar Pl S * ( ) Var Pl Sj * ( )
j
Since GENs and LSEs take balanced forward and spot market positions in day-ahead
and spot markets according to projected demand, the market risks imbedded are shared
by the market participants. The retail price regulation prevents LSEs from transporting
112
all of their market risk to end consumers who are vulnerable to price fluctuations due to
The equilibrium of the market can be reached when, in addition to every market
participant choosing the optimal decision from each individual optimization problem
given others behavior strategies, the market reaches its coordination. In our case, it
requires the balance of supply and demand with respect to transmission capability.
G
i =1
i
F
= LFj
j =1
(4.22)
flowgate k , we have,
F, k (G F LF ) = Tk
T
(4.23)
2 ( 5 7 + Tk ) 3 ( 4 6 )
F
PRef = (4.24a)
2 2 1 3
1 ( 5 7 + Tk ) 2 ( 4 6 )
kF = (4.24b)
2 2 1 3
PnF =
( 2 f n ,k 1 )( 5 7 Tk ) ( 3 f n ,k 2 )( 4 6 )
(4.24c)
2 2 1 3
I J
1 1
where, 1 =
i =1 (S*
+
) (
AGVar Pg i ( ) j =1 ALVar Pl Sj * ( ) )
113
I f g ,k J f l ,k
2 = +
F F
i j
3 =
I (f ) 2
J (f ) 2
) + A Var (P ( ))
gi ,k F l j ,k F
i =1 (
AGVar PgSi * ( ) j =1 L
S*
lj
4 =
I [
E PgSi * ( ) ] +
J [
E PLjS * ( ) ]
i =1 (
AGVar PgSi * ( ) ) j =1 ALVar PLjS * ( ) ( )
I [f g ,k F E PgSi * ( ) ] f E[P J
S*
( )]
=
( )) A Var (P
l j ,k F lj
5
l ( ))
+
A Var (P
i
S* S*
i =1 G gi j =1 L j
6 =
I (
Cov iG ( ), PgSi * ( ) )+ J (
Cov Lj ( ), Pl Sj * ( ) )
i =1 Var P ( ) ( S*
) j =1 Var Pl j ( )( S*
)
gi
I (
f g ,k F Cov iG ( ), PgSi * ( ) ) J fl ( )
Cov Lj ( ), Pl Sj * ( )
7 = +
F
j ,k
( ) ( )
i
And the optimal day-ahead forward market positions GiF * and LFj * can be derived by
combining (4.24c) with (4.15) and (4.20), respectively. The optimal forward positions
derived are useful in evaluating which market participants have comparative advantage in
In the spot market, similar to (4.22), the coordination of the market requires the
I f g i ,k J f l j ,k
kF
i =1 AGVar PgS * ( ) ( )
+
k
i
(
j =1 ALVar Pl j ( )
S*
)
114
=
I [
E PgSi * ( ) ] +
J [
E Pl Sj * ( ) ]
i =1 AGVar PgSi * ( )( ) j =1 (
ALVar Pl Sj * ( ) )
I (
Cov iG ( ), PgSi * ( ) ) J (
Cov Lj ( ), Pl Sj * ( ) )+ I
iG S J
Pg L j ( )
i =1 (
Var PgSi * ( ) ) j =1 (
Var Pl Sj * ( ) )
i =1
i
j =1
Combining (4.22) and (4.25), since the total generation should equal to the total
demand, we have,
I
iG S J
i =1
Pg = L j = d l
j =1 l
i j
(4.26a)
j
iG S
(PRef f g ,k Sk ) = d n
I
i =1 n
i
(4.26b)
I I
S
or, PRef iG Sk f gi ,k gi = L j
i =1 i =1
(4.26c)
Also, according to the characterization of PTDF matrix and for the congesting flowgate
F, k
T
((G F
) (
+ G S LF + LS = Tk )) (4.27a)
That is,
( )
I I J
S
f gi ,k iG Sk f gi ,k iG = Tk + f l j ,k L j
2
PRef (4.27b)
i =1 i =1 j =1
We get,
2 (Tk + 4 ) 3 d n
P S
Ref = n
(4.28a)
2 1 3
2
1 (Tk + 4 ) 2 d n
=
S
k
n
(4.28b)
2 2 1 3
115
( 2 f n ,k 1 ) (Tk + 4 ) ( 3 f n ,k 2 ) d n
P =
n
S n
(4.28c)
2 2 1 3
I
where, 1 = iG
i =1
I
2 = iG f g ,k i
i =1
I
3 = iG f g ,k
2
i
i =1
J
4 = f l ,k d l j j
j =1
And the optimal spot market positions GiS * and LSj* can be derived by combining
The admittances of all transmission lines are assumed to be equal. Bus2 is the
reference bus. There exist I = 2 generators (GEN1 and GEN2) located at bus 1 and 2,
116
respectively, and J = 2 load serving entities (LSE 2 and LSE3) with respective
franchised service territory whose demands are aggregated at bus 2 and 3, respectively.
The ingoing and outgoing arrows illustrate power injections and ejections represented by
GENs and LSEs, respectively. Transmission flowgate 1-3 is monitored for transmission
All market participants have the same risk aversion. We also assume the regulated retail
price by LSEs are 1.2 times the average spot market price.
Since the bus aggregated demands of end consumers are the most fundamental drivers
for market price uncertainty and transmission flowgate congestions, we study the
and 3. For simplicity, the demands are assumed to follow normal distribution N ( , ) .
In addition to the demand level, we study the impact of demand volatility as well by
The parameter of demands assumptions at bus 2 and 3 at each scenario are listed in
table 4.1,
117
When control over the explanatory variables is exercised through random
assignments, since the randomization tends to balance out the effects of other variables
that might affect the response variable, the resulting experimental data provide strong
information about the cause-and-effect relationships than observational data. For each of
the following experiment setup, the results are based on system dispatching conditions
The spot market prices, the day-ahead forward market prices, and the forward
premiums in each scenarios are listed in tables 4.2-13 are listed as bellows,
Scenario A:
118
Table 4. 6 Scenario B Day-ahead forward market prices (in $/MWh)
Risk-aversion Coefficient Bus 1 Bus 2 Bus 3 FG Shadow Price
0.05 52.57 55.11 57.65 44.30
0.005 54.56 68.21 81.87 40.97
0.0005 54.75 69.52 84.29 7.62
Table 4. 7 Scenario B Day-ahead forward premium (in $/MWh)
Risk-aversion Coefficient Bus 1 Bus 2 Bus 3 FG Shadow Price
0.05 -2.21 -14.56 -26.91 21.08
0.005 -0.22 -1.46 -2.69 17.75
0.0005 -0.02 -0.15 -0.27 -15.60
Scenario C:
119
Table 4. 13 Scenario D Day-ahead forward premium (in $/MWh)
Risk-aversion Coefficient Bus 1 Bus 2 Bus 3 FG Shadow Price
0.05 -8.63 42.00 92.63 158.72
0.005 -0.86 4.20 9.26 22.03
0.0005 -0.09 0.42 0.93 8.36
made,
a. According to tables 4.4, 4.7, 4.10, and 4.13, the lower the risk aversion coefficients
of market participants are, that is, the more risk-neutral the market participants become,
the closer the forward prices, including on the reference bus, are to the expected spot
prices
b. By comparing tables 4.2, 4.5, 4.8, and 4.11, the higher the demands, the more
frequently the flow-gate gets congested in the spot market, and the higher the market
prices at load buses and the lower the market prices at the generation buses are. Also, by
comparing tables 4.3, 4.6, 4.9, and 4.12, similar results can be observed from the day-
c. By comparing scenario B and scenario D results, for the same expected load level,
the more volatile the load gets, the larger the forward prices at load buses and the lower
By applying the relation of locational marginal prices as revealed by (4.5) to the day-
ahead forward and spot markets, we get the following (4.29a) and (4.29b), respectively,
PnF = PRef
F
f n ,k kF (4.29a)
[ ] [
E PnS ( ) = E PRef
S
] [ ]
( ) f n,k E Sk S ( ) (4.29b)
120
Note that they reflect the effect of transmission capacity constraints on market
clearing conditions. Following the forward market coordination (4.22), with the utility
maximizing forward market positions of GENs and LSEs given in (4.15) and (4.20),
respectively, we get
I [
PgFi E PgSi * ( ) ] + P E [P
J
F S*
( )]
A Var (P ( )) A Var (P
lj lj
l ( ))
S* S*
(4.30a)
i =1 G gi j =1 L j
=
I (
Cov iG ( ), PgSi * ( ) ) J (
Cov Lj ( ), Pl Sj * ( ) )
i =1 (
Var PgSi * ( ) )
j =1 (
Var Pl Sj * ( ) )
which leads to (see appendix C),
I
(P [ ])
J
1 1
E PRef +
( )
F S
Ref
S*
i
(
i =1 AGVar Pg ( ) j =1 ALVar Pl S * ( )
j
)
(4.30b)
I f l j ,k
= (kF E Sk ) [ ] f gi ,k J
+ (
i =1 AGVar PgS * ( ) j =1 ALVar Pl S * ( ) ) ( )
i j
(
I Cov iG ( ), PgS * ( )
+
L
j )
J Cov ( ), P ( )
S*
lj ( )
( ) ( )
i
i =1
Var Pg
S*
i
( ) j =1 Var Pl Sj * ( )
Equation (4.30b) connects the forward premium on the reference bus with the forward
between the un-hedged profits of generators and load serving entities with their
Model (4.30b) can be extended to the following more general form when the effect of
I
(P E[PRefS ])
1 J 1
F
Ref
i =1 A Var(P S * ( ))
+
j =1 A Var(P S * ( ))
(4.31)
G g i L l j
121
I f g ,k f l ,k
= (kF E [Sk ])
J
i
+ j
i =1 A Var (P S * ( )) j =1 A Var (P S * ( ))
kK
G g i L l j
{F , S } play an important role and consist a non-negligible component of the forward risk
premium on the reference bus. Similarly, the effect on the forward risk premium on other
We start with an overview of the structure and functions performed by the New York
(New York power pool), which was created by New York's eight largest electric utilities
to coordinate the statewide interconnection following the big Northeast blackout of 1965.
In responding to the Federal Energy Regulatory Commission (FERC)s acts and related
state policies issued in mid 90s intended to create more competition in the nations
wholesale electricity markets, the transmission system gradually became open and
restructuring of the electric power industry evolved, NYPOOL was dissolved in 1998 and
replaced with the not-for-profit NYISO. The NYISOs mission is to ensure the reliable,
secure and efficient operation of the interconnected transmission system and to create and
which power is traded on the basis of competitive bidding. It enables the transactions to
be settled at competitive prices, rather than regulated rates. Currently, the NYISO system
oversees over 160,000 GWh energy transactions each year with a recorded summer load
122
peak of over 32,075MW (July 26, 2005) and winter load peak of 25,540MW (December
20, 2004), which represent about $8 billion market value. Specifically, NYISO
electricity power from generation source to consumption centers, and clears the markets
Compared with many other ISOs, where only partial, if any, markets have been
created, the NYISO adopts a full, two-settlement system with comprehensive markets for
In the day-ahead markets (DAM), a set of forward prices are determined on an hourly
basis for each zone within the control area (and the neighboring areas) at a pre-specified
time (11AM) by matching generation and energy transaction bids offered in advance to
the ISO. The ISO runs a security constrained unit commitment and determine the amount
of energy needed for each day. Transmission losses, congestion, shift factors, penalty
factors and other system mathematical quantities are calculated against a reference bus
(physically located at the Marcy 345 kV substation in Marcy, New York). The DAM
123
zonal locational based marginal prices (LBMPs) are obtained by adding the marginal
costs of energy, losses and congestion and used as the basis for settlements. Generating
units that can most economically satisfy the energy needed to supply customers' demand
and allow a sufficient reserve for contingencies are scheduled. Typically, most (>90%)
energy transactions processed by the NYISO occur in the DAM since market participants
In the real-time market (RTM), the ISO runs a security constrained dispatch (SCD)
determines the amount of energy needed on a continual basis. SCD makes adjustments to
previous schedules to regulate generating units that can most economically satisfy the
energy needed to supply customers' real-time demand and allow a sufficient reserve for
Typically less (<10%) energy transactions processed by ISO occur in the RTM. The
dispatch quantity from what is pre-determined in the DAM. The total settlement is
intended to balance the most updated system situations with pre-schedules (sell excess
and buy shortage). Since it serves the same function as the RTM as far as the proposed
Note that the market settlements are based on LBMPs, which differ from the market-
clearing price determined at New York mercantile exchange in that the spatial location of
124
a. Power producers that own generation units and sell to the wholesale markets
b. Load serving entities that buy from the wholesale markets and sell electricity at
c. End consumers that have access to electricity through load serving entities. They
are generally immune to the market price risks since the prices are generally stable.
Although in reality most market participants are not exclusively electricity sellers or
buyers but tend to appear on both sides of the market as the needs to fulfill contractual
commitments or as the opportunities to generate extra profit come up, the primary
business function of each market participant generally dominates its market activities and
in our model, such subsidiary functions can be ignored without missing the major
One problem with empirical tests is the availability of market data. Since the market
functions changed gradually following the conception of the deregulation, the historical
data do not necessarily reflect the same market structure. Besides, market participants do
not behave consistently due to the ever-evolving of the market design. Therefore, the
historical market equilibrium prices over a long period of time bear discrete biases caused
choose the time-horizon from February 1st 2005 to August 31st 2006 when the NYISO
market structure was relatively stable. The data used for this study consist of hourly
LBMPs and flowgate shadow prices in day-ahead and spot markets, and houly zonal
loads as well. These data are acquired from NYISO website. The Zonal LBMPs are
A summary of statistics for the electricity forward and spot prices on the system
125
Table 4. 14 Statistics of forward and spot LBMPs (in $/MWh)
Forward Market Spot Market
Mean Median Volatility Mean Median Volatility
Ref. Bus 66.99 63.21 21.95 63.67 58.56 40.72
CAPITL 74.67 70.42 25.11 69.82 64.32 45.43
CENTRL 63.72 59.80 21.95 61.46 56.22 41.29
DUNWOD 79.78 75.60 27.26 73.78 68.13 48.06
GENESE 60.48 56.33 21.30 58.89 53.04 41.64
HUD VL 78.38 74.37 26.64 73.17 67.52 47.87
LONGIL 82.76 78.33 27.88 76.26 70.87 48.76
MHK VL 68.19 64.40 22.67 65.79 60.49 43.35
MILLWD 79.79 75.73 27.35 73.58 67.93 48.03
N.Y.C. 83.42 78.68 29.25 76.24 70.19 49.85
NORTH 63.72 59.70 20.64 61.72 56.57 39.41
WEST 54.42 49.53 20.38 53.64 47.77 38.81
Table 4.14 shows that there is considerable forward premium for the reference bus
and each individual zone. It also indicates the right-skewness of the electricity prices,
which is consistent with the implication of the model presented in (Routledge, 2001).
The forward premiums reflect the market buyers willingness to pay to secure the
procurement of electricity.
premium on the reference bus PRefF E [PRefS ] and the forward premium of shadow prices
on the flowgates kF E [Sk ] . The PTDF matrix F determines the effect of kF E [Sk ] on
PRefF E [PRefS ] . However, since the topology of the NYISO transmission network is not
accessible to the public, we can not derive a regression model between PRefF E [PRefS ] and
kF E [Sk ] to test the empirical data. To estimate the PTDF structure of the system, we
resort to relationship between locational marginal prices and the reference bus price as
revealed in (4.5). Given empirical data of hourly locational based marginal prices on the
system reference and each zone, and shadow prices associated with transmission
126
flowgates over the time horizon of h = 1,L, H , the following multiple regression model
Yn ,h price difference between zone n and the system reference bus at hour h .
variance 2
Yn = X + n (4.32b)
H 1 H K K 1 H 1
plane in this case since it is more than 2 dimensions) X . To set up interval estimates
and make tests, the distributions of the residual terms n are assumed to be normal. We
The normality assumption for the error terms is justifiable since the error terms
represent the effect of random flowgate congestions omitted from the model (4.32) that
affect the response to some extend and that vary at random without reference to the
not depart significantly from normality, the t-distribution based tests results are reliable.
In equation (4.32b), components of are the partial regression coefficients since they
reflect the partial effect of one explanatory variable when other explanatory variables are
127
held constant. Since the explanatory variables have additive effects, the effect of X k on
1
In a large electric power system such the New York power pool, as indicated by the
empirical date, the system situation can be very complicated. To reduce the reality to a
manageable proportion for the regression model (4.32), we choose an incomplete list of
flowgates as the explanatory variables for the spatial price differences. However, the
flowgates enlisted are the most prominent ones for both day-ahead market and the real-
time spot market and can make good sense for the purpose of the analysis. The major
consideration for their choice is the extent to which the chosen flowgate contributes to
reducing the remaining variation in the dependent spatial price difference after allowance
is made for the contributions of other flowgate shadow prices as predictor variables that
have tentatively been included in the regression model. Accordingly, in the formulation
of the regression model (4.32), we restrict the coverage of the empirical data
corresponding time intervals when the selected predictor variables are non-trivial. The
shape of the regression function substantially outside this range should be treated
differently.
frequently in both the day-ahead and the real-time spot markets are picked. The
corresponding IDs in the NYISO network are 25091, 23330, and 25546. They are
denoted as FG1, FG2, and FG3 respectively hereinafter. The statistics of the shadow
prices associated with the capacity constraints represented by them in the market dispatch
128
Table 4. 15 Statistics of forward and spot shadow prices of the flowgates (in $/MWh)
Forward Market Spot Market
Mean Median Volatility Mean Median Volatility
FG1 16.20 11.96 23.12 23.79 10.47 48.61
FG2 1.10 0.00 5.39 5.53 0.00 143.52
FG3 3.02 0.00 17.19 3.48 0.00 54.30
As shown in table 4.15, FG1 is the most active transmission flowgate of the three.
The time series of shadow prices associated with FG1 in the day-ahead and spot markets
1000 1000
900 900
800 800
Shadow Price ($/MWh)
700 700
600 600
500 500
400 400
300 300
200 200
100 100
0 0
Mar2005 Oct2005 May2006 Mar2005 Oct2005 May2006
Date Date
According to table 4.10 and figure 4.5, it is observed that shadow prices of flowgates
are generally less volatile in the forward market compared in the spot market, which
flowgate shadow prices take less extreme values in the day-ahead forward market and the
The seasonality of electric load demands lead to similar pattern changes in market
prices and system conditions. For instance, high market prices and frequent transmission
129
topology may be changed by equipment maintenances which are usually scheduled in
sprint and fall when load demands are relatively low. Since later in the section, the
inferred PTDF coefficients are used for the projection of out-of-sample (August 2006)
market prices using model (4.31), we limit the historical data to be taken from June to
August in 2005 and June to July in 2006 when the system structure is relatively stable
and the explanatory variables variation ranges are comparable to their counterparts in
August 2006. Preprocessing of the data also include getting ride of price spikes (we use
150$/MWh as the criteria for spikes) in locational market prices and shadow prices
According to the subset of active flowgates selected for the study of the imbedded
statistical relation with the spatial price difference of electricity prices as modeled above,
the unbiased maximum likelihood squares estimates of the set of PTDF coefficients ,
variability of the probability distributions of Y . Its unbiased estimate error mean square
(MSE) is calculated and displayed in the second column of table 4.17. The adjusted
coefficients of multiple determination shown in the third column of table 4.17 measure
the proportionate reduction of total variation in Y associated with the use of the set of
130
X variables, and in contrast to un-adjusted coefficient of multiple determination, it takes
the associated degrees of freedom of each sum of squares into consideration.
To test whether there is a regression relation between the response variable Y and
H 0 : 1 = 2 = L = K = 0 , H : not all k = 0, k = 1, L , K
MSR
F=
MSE
Apply regression model (4.32a) to all NYISO zones, the statistical measures
including MSE, R 2 , F, and p values, together with the serial correlation ( ) of error
Given the wide support of explanatory variable X , together with moderate MSE
values, high R 2 values imply good inference power. The p-value reported in table 4.17
is the probability of observing the given sample result under the assumption that the H 0
131
hypothesis of the F test is true, depend on assumptions about the independence and
normality assumptions of the random disturbances i in the model equation (4.32). Since
all but one of the p-values are less than = 0.05 in general, This is a quite significant
and strong indication that the null hypothesis can be rejected. F statistic values as
extreme as the observed ones in table 4.17 would rarely occur if the differences between
zonal prices and the reference bus prices are independent of the flowgate shadow prices.
To test whether there is a regression relation between the response variable Y and
each of the X variables [ X k ], k = 1,2, L , K , i.e., the tests whether or not k = 0 for each
H 0 : k = 0 , H : k 0
bk
We use the statistics t * =
s{bk }
If t * t 1 ; H (K + 1) , conclude H 0 , otherwise, conclude H .
2
where s (bk ) are square root of the diagonal components of s 2 {b} = MSE (X' X )1 and
( K +1)( K +1)
132
The following table 4.19 shows the t-values of the PTDF regression estimations,
For most of the t-values associated with FG1 and FG2, the corresponding null
hypothesis H 0 s can be rejected at confidence level higher than 95%. Even for FG3, the
bk k
~ t (H (K + 1)) , k = 0,1,L, K
s (bk )
Note that if only the probability distributions of Y do not depart significantly from
normality, the sampling distributions of estimates b are approximately normal and the t-
distribution based tests can provide approximately the specified confidence coefficient.
Even if Y depart seriously from normality, the estimators b have the property of
asymptotic normality and approach normality under the general conditions as the sample
size increases. Therefore, the confidence intervals and the conclusions still apply. The
bk t 1 , H (K + 1) s (bk ) , k = 0,1,L, K
2
Table 4.20 shows the confidence interval of PTDF estimates with 95% confidence level.
133
Table 4. 20 Confident Interval of PTDFs estimation
FG1 FG2 FG3
Zone-CAPITL [-0.1908, -0.0550] [-0.2209, 0.0053] [-0.0030, 0.0120]
Zone-CENTRL [-0.1105, 0.0353] [0.0039, 0.0361] [-0.0025, 0.1589]
Zone-DUNWOD [-0.2494, -0.0368] [-0.3729, -0.0417] [-0.0233, 0.0785]
Zone-GENESE [-0.1344, 0.0134] [0.0133, 0.1097] [0.0354, 0.4670]
Zone-HUD VL [-0.2294, -0.0524] [-0.3245, 0.0199] [-0.0053, 0.0393]
Zone-LONGIL [-0.2553, -0.0433] [-0.3850, 0.0494] [-0.0069, 0.0721]
Zone-MHK VL [-0.0353, -0.0077] [-0.0995, 0.0463] [-0.0246, 0.0908]
Zone-MILLWD [-0.2441, -0.0585] [-0.3247, 0.0303] [-0.0231, 0.0863]
Zone-N.Y.C. [-0.3072, -0.0528] [-0.5630, 0.0998] [-0.1458, 0.1824]
Zone-NORTH [0.0118, 0.1464] [-0.0332, 0.1636] [-0.1171, 0.0489]
Zone-WEST [-0.1747, 0.0161] [-0.0251, 02779] [-0.0225, 0.5845]
Since the regression model (4.32) assumes that the congestion shadow prices are
known constants, the confidence coefficient and risks of errors are interpreted with
respect to taking repeated samples in which the congestion conditions are kept at the
zones, the statistical measures provide evidence for a significant relation between the
flowgate shadow prices and electricity price spatial differences. We conclude that the
PTDF coefficients are estimated with satisfactory statistical significance. Note that the
PTDF matrix as inferred above is different from what PTDF is defined in the traditional
way since there does not exist a specific bus in a zone into which the power injection
cause a portion of power flow indicated as the PTDF coefficient. Nevertheless, the PTDF
matrix indicates the impact of aggregated power injection changes in one zone on a
specific transmission flowgate. This is of special meaning when the locational based
marginal prices are calculated for each zone of the NYISO system.
Previous research find that the forward risk premiums in electricity forward prices
vary systematically throughout the day and the forward premium manifests most
significant during on-peak hours when spot market prices are most volatile. In (Longstaff
134
and Wang, 2004), hour-by hour forward premiums in PJM market are tested showing that
forward premium tend to be positive in on-peak hours but negative in off-peak hours.
By examining the empirical data with NYISO, we find the similar patter in forward
Mean
Forward Premium ($/MWh) 7 Media
1
5 10 15 20
Hour
Bessembinder and Lemmon (2002) note that the existence of large forward premiums
reflect the lack of risk-sharing in electricity markets with market risk being bear by a
subset of participants. The higher forward premiums during on-peak hours represent the
time period within a day when the market participants face the greatest economic risks.
Note that the period of high forward risk premium corresponds to the high load period.
Taking the CENTRL zone as an example (and each zonal load has a similar daily pattern),
135
Mean
2100 Media
1900
1800
1700
5 10 15 20
Hour
One interesting observation is that the forward risk premium of the shadow prices on
the transmission flowgate FG1 as plotted in figure 4.8 shows the opposite direction: the
premium is high during off-peak hours while low during on-peak hours.
2 Mean
Media
Forward Premium ($/MWh)
-2
-4
-6
-8
-10
-12
5 10 15 20
Hour
This is not surprising if we look back at the equation (4.31) and the estimated PTDF
matrix illustrated in table 4.16. Since the power transfer distribution factors of most
zones on the flowgate FG1 are negative numbers, the forward premium on the system
136
reference bus is negatively correlated to the forward premium of flowgate shadow prices.
This observation provides more insights to the forward premium in the electricity
wholesale contracts. Actually, part of the premium can be attributed to the transmission
To evaluate the forward risk premium determining model shown by (4.31), the same
set of empirical data as used for system PTDF coefficient inference is used to test the
Zh system reference bus locational based marginal price forward premium term
I
(P [ ])
J
1 1
F
E PRef
S
+ at hour h .
Ref
Gi
*
(
i =1 Var P ( ) j =1 Var P ( )
S S
Lj
*
) ( )
h ,k for k = 1,2,3 , transmission flowgate shadow price forward premium term
I
( [ ]) f Gi ,k f Lj ,k
J
F
E Sk + at hour h .
k
(
Gi )
i =1 Var P S * ( ) j =1 Var P S * ( )
Lj ( )
h,4 the summation of covariance between GENs un-hedged profit and the spot
I
Cov Gi
*
( )
( ), PGiS * ( ) at hour h .
market price
i =1 (
Var PGiS * ( ) )
h,5 the summation of covariance between LSEs un-hedged profit and the spot
J (
Cov Lj* ( ), PLjS * ( ) ) at hour h .
market price j =1 (
Var P ( ) S*
)
Lj
variance 2
137
or, in the matrix form
Z = H6 61 + H1
H 1
(4.33)
hyperplane in this case since it is more than 2 dimensions) . Since the model (4.33)
does not take all flowgates into consideration, beside, the empirical prices are subject to
some exogenous factors which are not modeled in our model, we take normality
assumption for the error terms h to represent the effect of random factors that affect the
response to some extend and that vary at random without reference to the modeled
We used rolling average of corresponding empirical data at the specific hour in the
S
previous 14 days for the conditional expectation measures E PRef [ ] and E[ ] . S
k For
( )
conditional variance and covariance measures, Var PGiS * ( ) , Cov Gi
*
( )
( ), PGiS * ( ) , and
Cov ( Lj* ( ), PLjS * ( )) at hour h , we use the corresponding empirical data at the specific
hour in the previous 14 days also. The regulated retail price at each zone is assumed to
be 1.2 times the average of the spot market price throughout the interested time period.
To distinguish the difference between on-peak and off-peak hours, we assume on-peak
and off-peak retail prices and the averages are taken over on-peak and off-peak hours,
respectively.
Since the parameters AG and AL in equation (4.31) are not directly observable based
on the empirical data, we do not incorporate them explicitly in the regression function but
keeping in mind that they are positive numbers for risk-averse market participants as in
the assumptions indicated above. Given that AG and AL should be comparable for the
138
the (4.33) as compared with (4.31) would reveal, approximately, the values of parameters
AG and AL .
The estimates for the regression model coefficients are given in table 4.21,
Based on the normality assumption of the error terms, to test whether there is a
regression relation between the response variable Z and the set of variables, i.e., to
test whether or not for each of its component, an F test can also be conducted to
H 0 : 1 = 2 = L = 6 = 0 , H : not all p = 0, p = 1, L ,6
value, and p-value, together with the serial correlation ( ) of error terms of the
Since the p-values shows that a F statistic as extreme as the observed F would occur
by chance close to once in 200 times if the forward premium term is independent of the
flowgate shadow prices forward premium and the covariance between market
participants un-hedged profit and the spot market price, We conclude that H 0 can be
139
Corresponding to the tests of whether there exists regression relation between the
response variable Z and each of the variables, i.e., the tests whether or not p = 0 for
each p , p = 1,L,5 ,
H 0 : p = 0 , H : p 0
the t values corresponding to each partial regression coefficient p are calculated and
The null hypothesis H 0 s can be rejected with confidence as high as 95% for all p s
expect for 4 . Given the small sample size and the difficulty of estimating the
conditional measures, however, we think the results support the model in general.
coefficient, the statistical measures do suggest strong relations exist between the forward
risk premium and the economic factors modeled. The estimates of s are different from
1 as suggested by the model (4.31) can be attributed to the scale difference between AG
and AL and to the fact that, as mentioned in earlier part of the section, the flowgate list as
constructed is not a complete list of flowgates which affect the forward risk premium.
The values of 4 and 5 also indicate that the risk-aversion coefficients AG and AL are
of the magnitudes of 10 3 ~ 10 2 , which are comparable to the values we adopted for the
To further test the implications of the forward risk premium model, using the
regression model based estimates of PTDF coefficients listed in table 4.19 and the
140
reference bus forward premium regression coefficients listed in table 4.21, the equation
The out-of-sample spot price data and their projections are plotted in figure 4.9,
800
Historical Price
Forecasted Price
600
Price ($/MWh)
400
200
-200
Figure 4. 9 Historical and forecasted spot price at the reference bus in August 2006
Note that except for a few spikes of the spot market price and sags of the forecasted
price, the rest sections of the curves fit quite closely. By looking at the shadow price on
the flowgate FG1 as illustrated in figure 4.10, we understand the sags come from the
141
500
400
Price ($/MWh)
300
200
100
0
08/01 08/06 08/11 08/16 08/21 08/26 08/31
Date
Assuming the normality of the forecast error term (defined as the absolute deviation
of forecasted prices from the realized spot prices), its distribution parameters and their
By excluding the LBMP and flowgate shadow price (FGP) spikes (defined at certain
Table 4. 25 Estimates of forecast error term parameters by excluding LBMP and FGP
spikes defined at different quantiles of their distributions ($/MWh)
Quantile LBMP Spike FGP Spike 95% CI of 95% CI of
95.00% 98.44 76.41 6.98 [5.92, 8.04] 12.96 [12.28, 13.70]
97.50% 120.17 131.45 7.03 [5.93, 8.13] 13.37 [12.67, 14.13]
99.00% 199.79 266.67 11.93 [10.65,13.21] 17.04 [16.20, 17.97]
142
The empirical study with the NYISO data confirms the relations between the forward
premium and the factors revealed in model (4.31). The functional relation is insightful
for the understanding of how the forward premium can be affected by the market
tables 4.24 and 4.25 not indicate a price forecasting with high accuracy as compared with
some existing models (for example, see Conejo et al., 2005), we expect the predictive
power of the forward premium model can be greatly improved when we have more
information about the transmission network topology. In that case, the PTDF coefficients
can be calculated accurately without using the regression model for inference. At the
same time, more transmission flowgates can be taken into account to determine the
forward premium. With more accurate model coefficients and more explanatory
This chapter studies the risk premium present in the electricity day-ahead forward
price over the real-time spot price. This study establishes a quantitative model for
the more frequently transmission congestion happens, the higher the forward prices get at
the load buses. Consistent with the implications of the model, evidences from empirical
studies with the New York electricity market data confirm the significant statistical
relationship between the day-ahead forward risk premium and the shadow price
premiums on transmission flowgates. When applied for the forecasting of next day spot
prices, the accuracy of this model is yet to be improved. One important factor is that the
PTDF coefficients are inferred using historical market price data without the knowledge
143
specific power pool, who is more familiar with the system transmission conditions, these
transmission flowgates and use their shadow price premiums as explanatory variables in
the regression model as well. With such changes, it is foreseeable that the forecasting
Despite the empirical evidences from the New York electricity market, caution should
be exercised in generalizing the results to other markets where factors, such as market
power and regulators price intervention, play important roles in market clearing.
Future expansion of the model can be made to take into account the generation
reserve markets in addition to the energy wholesale markets since market participants
decisions in these markets are interdependent. In addition, since the existence of non-
zero forward risk premiums provide incentives for market speculators to take positions in
the electricity derivatives markets, their behaviors and the impact on forward premiums
144
CHAPTER 5
Through integrated modeling of power system operations and market risks, this
forward trading. The findings of the research and the directions for future research are
summarized below.
question which enjoys on-going debate among academic and industry researchers. By
addressing the central problem of modeling market signals, chapter two investigates the
transmission capacity scarcity and reliability enhancements. In contrast with the common
practice of using DC power flow formulations for market dispatch, we advocate the use
constraints in the market dispatch, the resulting market prices yield incentives for market
electricity market. To combine the strength of the market simulation based fundamental
approach and the stochastic model based technical approach, market prices obtained
GARCH model. The changes of system conditions can be captured by the stochastic
145
model parameters. This research work builds a power tool for projecting the dynamics of
future market signals, which is essential for the evaluation of transmission adequacy
investments.
participants in the electricity markets need to find operational strategies to hedge against
the market risks imbedded. The operation of a hydroelectric unit considering market
hydroelectric producer, who participates in the electricity energy spot market and
ancillary services markets as a price taker, need to balance the market opportunities on
both sides with respect to limited water resource over a pre-specified time horizon. A co-
optimization modeling framework that incorporates market participation and market price
potential revenue loss cause by unfavorable market price changes and the ancillary
service requests. The advantages of the proposed model are illustrated through a
146
Extensions of this model deserve further research include: To incorporate the market
price uncertainty without a projected hourly market price process, an improvement can be
ancillary service market prices. Impact of a producers decisions on the market prices,
especially on the ancillary service prices, can be modeled to make the model more
realistic. Another fruitful direction is to extend the model to address the co-optimization
problem for a power producer who owns a portfolio of hydro, thermal and other types of
generation units.
By modeling market participants trading strategies in the day-ahead forward and spot
electricity wholesale markets, chapter four of the dissertation analyzes the risk premium
present in the electricity day-ahead forward price over the real-time spot price. The
decision problems of generators and load serving entities are formulated to maximize
their respective risk-adjusted profits. These problems are solved simultaneously with
respect to the market equilibrium conditions and transmission network constraints. This
study establishes a quantitative model for incorporating transmission congestion into the
happens, the higher the forward prices get at the load buses. Evidences from empirical
studies with the New York electricity market data confirm the significant statistical
relationship between the day-ahead forward risk premium and the shadow price
Future expansion of the model can be made to take into account the generation
reserve markets in addition to the energy wholesale markets since market participants
decisions in these markets are interdependent. In addition, since the existence of non-
147
zero forward risk premiums provide incentives for market speculators to take positions in
the electricity derivatives markets, their behaviors and the impact on forward premiums
148
APPENDIX A
d h
hk = k + x Q (x Q )
T
akh,,ns = (A.1)
d (s n ) sn
where: Pmn = Gmn (Vmr2 + Vmi2 VmrVnr VmiVni ) + Bmn (VmrVni VmiVnr ) + Gsmn (Vmr2 + Vmi2 )
Qmn = Gmn (VmrVni VmiVnr ) + Bmn (VmrVnr + VmiVmi Vmr2 Vmi2 ) Bsmn (Vmr2 + Vmi2 )
hk
Since hk is not an explicit function of sn , we have =0.
sn
g (x , u )
1
d h
hk = k Q Q (x Q ) (A.3)
d (s n ) x Q x Q
g (x , u )
1
=
1 Pmn Pmn + Qmn Qmn Q Q (x Q )
hk x Q x Q x Q
where the non-zero components of the partial differential vector corresponds to the
149
0 0
M M
Gmn (2Vmr Vnr ) + BmnVni + 2GsmnVmr GmnVni + Bmn (Vnr 2Vmr ) 2 BsmnVmr
Gmn (2Vmi Vni ) BmnVnr + 2GsmnVmi GmnVnr + Bmn (Vni 2Vmi ) 2 BsmnVmi
Pmn , Qmn = G V + B V
= GmnVmr BmnVmi
x Q x Q mn mi mn mr
GmnVmi + BmnVmr GmnVmr + BmnVmi
0 0
M M
0 0
150
APPENDIX B
wholesale market, take equations (4.15) and (4.20) into (4.23), we get the following,
I PRef
F
[ ]
f Gi ,k kF E PGiS * ( ) Cov Gi
*
(
( ), PGiS * ( ) )
f Gi ,k
(
AGVar PGiS * ( ) ) +
Var PGiS * ( ) ( )
i =1
J
f Lj ,k
[ ]
E PLjS * ( ) PRef
F
(
+ f Lj ,k kF Cov Lj* ( ), PLjS * ( )
) = T
j =1
A LVar (
P S*
Lj ( ) ) Var PLjS * ( ) ( )
k (B.1)
I f Gi ,k J f Lj ,k
F
PRef (+ )
i =1 A Var P S * ( ) j =1 A Var P S * ( ) ( )
G Gi L Lj
I
( f Gi ,k )
2 J ( f Lj ,k )
2
i =1 AGVar PGiS * ( )
F
+
k
( )
j =1 ALVar PLj ( )
S*
( )
I f E PGiS * ( )
= Gi ,k
[ J ]
f Lj ,k E PLjS * ( ) [ ] + T
i =1 A Var P S * ( )
+
G Gi ( )
j =1 ALVar PLj ( )
S*
( ) kF
I f Gi ,k Cov Gi
*
( +
) (
( ), PGiS * ( ) J f Lj ,k Cov Lj* ( ), PLjS * ( ) )
i =1
Var PGiS * ( ) ( )
j =1 Var PLjS * ( ) ( )
(B.2)
151
APPENDIX C
Q
i =1
F
Gi = QLjF
j =1
(C.1)
J
=
[ ]
E PLjS * ( ) PLjF Cov Lj* ( ), PLjS * ( )
( )
j =1 ALj Var PLj ( )
S*
(
Var PLjS * ( ) ) ( )
(C.2)
Based on
[
E PnS ( ) = E PRef
S
] [
( ) f n,k S E FGkSS ( ) ] [ ] (C.3)
AGVar P ( ) ( S*
)
i =1 (
Var PGiS * ( ) )
Gi
=
I (E [P ( )] fS
Ref Lj , k [
E Sk ( ) ) (PRef
F
] f Lj ,k kF )
J Cov ( Lj* ( ), PLjS * ( ))
ALVar (PLjS * ( )) Var (PLjS * ( ))
(C.4)
i =1 j =1
152
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