of Electricity Markets Daniel Kirschen Differences between electricity and other commodities Electricity is inextricably linked with a physical delivery system Physical delivery system operates much faster than any market ID: 433751
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Slide1
Organization of Electricity Markets
Daniel
KirschenSlide2
Differences between electricity and other commodities
Electricity is inextricably linked with a physical delivery system
Physical delivery system operates much faster than any market
Generation and load must be balanced at all timesFailure to balance leads to collapse of systemEconomic consequences of collapse are enormousBalance must be maintained at almost any costPhysical balance cannot be left to a market
© 2011 D. Kirschen and the University of Washington
2Slide3
Differences between electricity and other commodities
Electricity produced by different generators is pooled
Generator cannot direct its production to some consumers
Consumer cannot choose which generator produces its loadElectrical energy produced by all generators is indistinguishablePooling is economically desirable
A breakdown of the system affects everybody
© 2011 D. Kirschen and the University of Washington
3Slide4
Differences between electricity and other commodities
Demand for electricity exhibits predictable daily, weekly and seasonal variations
Similar to other commodities (e.g. coffee)
Electricity cannot be stored in large quantitiesMust be consumed when it is producedProduction facilities must be able to meet peak demandVery low price elasticity of the demand in the short runDemand curve is almost vertical
© 2011 D. Kirschen and the University of Washington
4Slide5
Balancing supply and demand
Demand side:
Fluctuations in the needs
Errors in forecastSupply side:Disruption in the productionSpot market:Provides an easy way of bridging the gap between supply and demandSpot market is used for adjustmentsSpot market is the market of last resort
© 2011 D. Kirschen and the University of Washington
5Slide6
Spot market for electrical energy
Demand side:
Errors in load forecast
Supply side: Unpredicted generator outagesGaps between load and generation must be filled quickly
Market mechanismsToo slow
Too expensive
Need fast communication
Need to reach lots of participants
© 2011 D. Kirschen and the University of Washington
6Slide7
“Managed” spot market
Balance load and generation
Run by the system
operator to maintain the security of the systemMust operate on a sound economic basisUse competitive bids for generation adjustmentsShould ideally accept demand-side bids
Determine a cost-reflective spot priceNot a true market because price is not set through interactions of buyers and sellers
Indispensable for treating electricity as a commodity
© 2011 D. Kirschen and the University of Washington
7Slide8
“Managed” spot market
© 2011 D. Kirschen and the University of Washington
8
Managed Spot Market
Bids to
increase
production
Bids to
increase
load
Bids to
decrease
production
Bids to
decrease
load
Generation
surplus
Generation
deficit
Load
surplus
Load
deficit
System operator
Control
actions
Spot
priceSlide9
“Managed” spot market
Also
known
as:Reserve marketBalancing mechanismAs technology and confidence continue to improve, the frequency of these markets keeps increasing1 day to 1 hour to 5 minutes
© 2011 D. Kirschen and the University of Washington
9Slide10
Other markets
Well-functioning spot market is essential
Ensures that imbalances will be settled properly
Makes the development of other markets possibleMost participants want more certainty because the spot price is volatileTrade
ahead of the spot market on forward markets to reduce risks
Forward markets must close before the managed spot market
© 2011 D. Kirschen and the University of Washington
10Slide11
Forward markets
Two approaches:
Centralized
trading – Pool tradingDecentralized trading - Bilateral trading© 2011 D. Kirschen and the University of Washington
11Slide12
Pool trading
All producers submit
bids to the market operator
All consumers submit offers to the market operatorMarket operator determines successful bids and offers and the market priceIn many electricity pools, the demand side is passive. A forecast of demand is used instead.
© 2011 D. Kirschen and the University of Washington
12Slide13
Example of pool trading
Bids and offers in the Electricity Pool of Syldavia for the period from 9:00 till 10:00 on 11 June:
© 2011 D. Kirschen and the University of Washington
13Slide14
Example of pool trading
© 2011 D. Kirschen and the University of Washington
14Slide15
Example of pool trading
© 2011 D. Kirschen and the University of Washington
15
Quantity traded
Market price
Accepted offers
Accepted bidsSlide16
Example of pool trading
Market price: 16.00 $/MWh
Volume traded: 450 MWh
© 2011 D. Kirschen and the University of Washington
16Slide17
Unit commitment-based pool trading
Reasons for not treating each market period separately:
Operating constraints on generating units
Minimum up and down times, ramp ratesSavings achieved through schedulingStart-up and no-load costsReduce risk for generatorsUncertainty on generation schedule leads to higher prices© 2011 D. Kirschen and the University of Washington
17Slide18
Pool Trading using Unit Commitment
© 2011 D. Kirschen and the University of Washington
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Unit
Commitment
Program
Minimum
Cost
Schedule
Load
Forecast
Generators
Bids
Market
PricesSlide19
Generator Bids
All units are bid separately
Components:
piecewise linear marginal price curvestart-up priceparameters (min MW, max MW, min up, min down,...)Bids do not have to reflect costsBidding very low to “get in the schedule”
is allowed© 2011 D. Kirschen and the University of Washington
19Slide20
Load Forecast
Load is usually treated as a passive market participant
Assume that there is no demand response to prices
© 2011 D. Kirschen and the University of Washington20
MW
TimeSlide21
Generation Schedule
© 2011 D. Kirschen and the University of Washington
21
MW
TimeSlide22
Marginal Units
© 2011 D. Kirschen and the University of Washington
22
MW
Time
Most expensive unit needed to meet the load at each periodSlide23
Market price
Bid from marginal unit sets the market clearing price at each period
System Marginal Price (SMP)
All energy traded through the pool during that period is bought and sold at that price© 2011 D. Kirschen and the University of Washington
23
MW
TimeSlide24
Why trade all energy at the SMP?
Why not pay the generators what they bid?
Cheaper generators would not want to
“leave money on the table”Would try to guess the SMP and bid close to itOccasional mistakes get left out of the scheduleIncreased uncertainty
increase in price
© 2011 D. Kirschen and the University of Washington
24Slide25
Bilateral trading
Bilateral
trading is the classical form of trading
Involves only two parties:SellerBuyerTrading is a private arrangement between these partiesPrice and quantity negotiated directly between these partiesNobody else is involved in the decision
© 2011 D. Kirschen and the University of Washington
25Slide26
Bilateral trading
Unlike pool trading, there is no “official price”
Occasionally facilitated by brokers or electronic market operators
Takes different forms depending on the time scale© 2011 D. Kirschen and the University of Washington26Slide27
Types of bilateral trading
Customized
long-term contracts
Flexible termsNegotiated between the partiesDuration of several months to several yearsAdvantage: Guarantees a fixed price over a long period
Disadvantages:Cost of negotiations is highWorthwhile only for large amounts of energy
© 2011 D. Kirschen and the University of Washington
27Slide28
Types of bilateral trading
“Over the Counter” trading
Smaller amounts of energy
Delivery according to standardized profilesAdvantage:Much lower transaction costUsed to refine position as delivery time approaches© 2011 D. Kirschen and the University of Washington
28Slide29
Types of bilateral trading
Electronic trading
Buyers and sellers enter bids directly into
computerized marketplaceAll participants can observe the prices and quantities offeredAutomatic matching of bids and offersParticipants remain anonymousMarket operator handles the settlement
Advantages:Very fastVery cheapGood source of information about the market
© 2011 D. Kirschen and the University of Washington
29Slide30
Example of bilateral trading
Generating units owned by Borduria Power:
© 2011 D. Kirschen and the University of Washington
30Slide31
Example of bilateral trading
Trades of
Borduria
Power for 11 June from 2:00 pm till 3:00 pm© 2011 D. Kirschen and the University of Washington
31
Net position: Sold 570 MW
Production capacity: 750 MWSlide32
Example of bilateral trading
Pending offers and bids on Borduria Power Exchange at mid-morning on 11 June for the period from 2:00 till 3:00 pm:
© 2011 D. Kirschen and the University of Washington
32Slide33
Example of bilateral trading
Electronic trades made by Borduria Power:
© 2011 D. Kirschen and the University of Washington
33
Net position: Sold 630 MW
Self schedule: Unit A: 500 MW
Unit B: 130 MW
Unit C: 0 MW Slide34
Example of bilateral trading
Unexpected problem: unit B can only generate 80 MW
Options:
- Do nothing and pay the spot price for the missing energy - Make up the deficit with unit C
- Trade on the power exchange
© 2011 D. Kirschen and the University of Washington
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Buying is cheaper than producing with C
New net position: Sold 580 MW
New schedule: A: 500 MW, B: 80 MW, C: 0 MWSlide35
Pool vs. bilateral trading
Pool
Unusual because administered centrally
Price not transparentFacilitates security functionMakes possible central optimizationHistorical origins in electricity industry
BilateralEconomically purer
Price set by the parties
Hard bargaining possible
Generator assume scheduling risk
Must be coordinated with security function
More opportunities to innovate
© 2011 D. Kirschen and the University of Washington
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Both forms of trading can coexist to a certain extent
Slide36
Bidding in managed spot market
Borduria Power’s position:
© 2011 D. Kirschen and the University of Washington
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Borduria Power’s spot market bids:
Spot market assumed imperfectly competitive
Bids/offers can be higher/lower than marginal costSlide37
Settlement process
Pool trading:
Market operator collects from consumers
Market operator pays producersAll energy traded at the pool priceBilateral trading:Bilateral trades settled directly by the parties as if they had been performed exactlyManaged spot market:Produced more or consumed less
receive spot price
Produced less or consumed more
pay spot price
© 2011 D. Kirschen and the University of Washington
37Slide38
Example of settlement
11 June between 2:00 pm and 3:00 pm
Spot price: 18.25 $/MWh
Unit B of Borduria Power could produce only 10 MWh instead of 80 MWhBorduria Power thus had a deficit of 70 MWh for this hour40 MW of Borduria
Power’s spot market bid of 50 MW at 17.50 $/MWh was called by the operator
© 2011 D. Kirschen and the University of Washington
38Slide39
Borduria Power’s Settlement
© 2011 D. Kirschen and the University of Washington
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