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Designations used by companies to distinguish their products are often claimed as trademarks In all instances where John Wiley & Sons, Inc., is aware of a claim, the product names appear in initial capital or ALL CAPITAL LETTERS Readers, however, should contact the appropriate companies for more complete information regarding trademarks and registration Copyright 2002 by John Wiley & Sons, Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic or mechanical, including uploading, downloading, printing, decompiling, recording or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012, (212) 850-6011, fax (212) 850-6008, E-Mail: PERMREQ@WILEY.COM This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering professional services If professional advice or other expert assistance is required, the services of a competent proafessional person should be sought This title is also available in print as ISBN 0-471-44337-9 For more information about Wiley products, visit our web site at www.Wiley.com Contents Preface XIII CHAPTER Market Overview in Electric Power Systems 1.1 Introduction 1.2 Market Structure and Operation 1.2.1 1.2.2 1.2.3 1.2.4 1.2.5 1.2.6 1.3 Objective of Market Operation Electricity Market Models Market Structure Power Market Types Market Power Key Components in Market Operation Overview of the Book 1.3.1 1.3.2 1.3.3 1.3.4 1.3.5 1.3.6 1.3.7 Information Forecasting Unit Commitment in Restructured Markets Arbitrage in Electricity Markets Market Power and Gaming Asset Valuation and Risk Management Ancillary Services Auction Transmission Congestion Management and Pricing Introduction Short-Term Load Forecasting 2.1 13 14 15 15 17 18 19 19 19 19 21 21 V VI CONTENTS 2.2 2.1.1 Applications of Load Forecasting 2.1.2 Factors Affecting Load Patterns 2.1.3 Load Forecasting Categories 21 22 23 Short-Term Load Forecasting with ANN 25 25 29 31 2.2.1 Introduction to ANN 2.2.2 Application of ANN to STLF 2.2.3 STLF using MATLAB’S ANN Toolbox 2.3 ANN Architecture for STLF 2.3.1 2.3.2 2.3.3 2.3.4 2.4 2.5 Proposed ANN Architecture Seasonal ANN Adaptive Weight Multiple-Day Forecast Numerical Results 2.4.1 2.4.2 2.4.3 2.4.4 2.4.5 Training and Test Data Stopping Criteria for Training Process ANN Models for Comparison Performance of One-Day Forecast Performance of Multiple-Day Forecast Sensitivity Analysis 2.5.1 Possible Models 2.5.2 Sensitivity to Input Factors 2.5.3 Inclusion of Temperature Implicitly Electricity Price Forecasting Introduction 3.2 Issues of Electricity Pricing and Forecasting 3.3 38 38 42 43 45 51 53 53 54 55 57 3.1 3.2.1 3.2.2 3.2.3 3.2.4 33 33 34 36 37 Electricity Price Basics Electricity Price Volatility Categorization of Price Forecasting Factors Considered in Price Forecasting Electricity Price Simulation Module 3.3.1 A Sample of Simulation Strategies 3.3.2 Simulation Example 3.4 Price Forecasting Module based on ANN 3.5 Performance Evaluation of Price Forecasting 57 60 60 61 63 64 65 66 67 69 3.4.1 ANN Factors in Price Forecasting 70 3.4.2 118-Bus System Price Forecasting with ANN 72 77 CONTENTS 3.6 VII 3.5.1 Alternative Methods 3.5.2 Alternative MAPE Definition 77 78 Practical Case Studies 81 82 84 86 89 90 3.6.1 3.6.2 3.6.3 3.6.4 3.6.5 Impact of Data Pre-Processing Impact of Quantity of Training Vectors Impact of Quantity of Input Factors Impact of Adaptive Forecasting Comparison of ANN Method with Alternative Methods 3.7 Price Volatility Analysis Module 91 3.7.1 Price Spikes Analysis 91 3.7.2 Probability Distribution of Electricity Price 105 3.8 Applications of Price Forecasting 111 3.8.1 Application of Point Price Forecast to Making Generation Schedule 3.8.2 Application of Probability Distribution of Price to Asset Valuation and Risk Analysis 3.8.3 Application of Probability Distribution of Price to Options Valuation 3.8.4 Application of Conditional Probability Distribution of Price on Load to Forward Price Forecasting Price-Based Unit Commitment 111 112 112 112 115 4.1 Introduction 115 4.2 PBUC Formulation 4.3 PBUC Solution 4.4 Discussion on Solution Methodology 4.5 Additional Features of PBUC 117 4.2.1 System Constraints 118 4.2.2 Unit Constraints 118 119 4.3.1 Solution without Emission or Fuel Constraints 120 4.3.2 Solution with Emission and Fuel Constraints 129 134 4.4.1 Energy Purchase 134 4.4.2 Derivation of Steps for Updating Multipliers 134 4.4.3 Optimality Condition 137 4.5.1 4.5.2 4.5.3 4.5.4 139 Different Prices among Buses 139 Variable Fuel Price as a Function of Fuel Consumption 140 Application of Lagrangian Augmentation 141 Bidding Strategy based on PBUC 145 VIII CONTENTS 4.6 Case Studies 150 4.6.1 Case Study of 5-Unit System 150 4.6.2 Case Study of 36-Unit System 154 4.7 Conclusions Arbitrage in Electricity Markets 5.1 Introduction 5.2 Concept of Arbitrage 5.3 Arbitrage in a Power Market 5.4 161 163 Same-Commodity Arbitrage 163 Cross-Commodity Arbitrage 164 Spark Spread and Arbitrage 164 Applications of Arbitrage Based on PBUC 165 Arbitrage Examples in Power Market 5.4.1 5.4.2 5.4.3 5.4.4 5.4.5 5.5 161 161 5.2.1 What is Arbitrage 161 5.2.2 Usefulness of Arbitrage 162 5.3.1 5.3.2 5.3.3 5.3.4 160 166 Arbitrage between Energy and Ancillary Service 166 Arbitrage of Bilateral Contract 171 Arbitrage between Gas and Power 174 Arbitrage of Emission Allowance 182 Arbitrage between Steam and Power 186 Conclusions 188 Market Power Analysis Based on Game Theory 191 6.1 Introduction 191 6.2 Game Theory 6.3 Power Transactions Game 6.4 Nash Bargaining Problem 192 6.2.1 An Instructive Example 192 6.2.2 Game Methods in Power Systems 195 195 6.3.1 Coalitions among Participants 197 6.3.2 Generation Cost for Participants 198 6.3.3 Participant’s Objective 201 202 6.4.1 Nash Bargaining Model for Transaction Analysis 203 6.4.2 Two-Participant Problem Analysis 204 6.4.3 Discussion on Optimal Transaction and Its Price 206 CONTENTS IX 6.4.4 Test Results 207 6.5 Market Competition with Incomplete Information 6.5.1 6.5.2 6.5.3 6.5.4 Participants and Bidding Information Basic Probability Distribution of the Game Conditional Probabilities and Expected Payoff Gaming Methodology 215 215 216 217 218 6.6 Market Competition for Multiple Electricity Products 222 6.6.1 Solution Methodology 222 6.6.2 Study System 223 6.6.3 Gaming Methodology 225 6.7 Conclusions 230 Generation Asset Valuation and Risk Analysis 233 7.1 Introduction 233 7.1.1 Asset Valuation 233 7.1.2 Value at Risk (VaR) 234 7.1.3 Application of VaR to Asset Valuation in Power Markets 235 7.2 VaR for Generation Asset Valuation 7.2.1 7.2.2 7.2.3 7.2.4 7.2.5 Framework of the VaR Calculation Spot Market Price Simulation A Numerical Example A Practical Example Sensitivity Analysis 7.3 Generation Capacity Valuation 7.4 Conclusions 236 236 238 240 246 258 267 7.3.1 Framework of VaR Calculation 268 7.3.2 An Example 268 7.3.3 Sensitivity Analysis 270 273 Security-Constrained Unit Commitment 275 8.1 Introduction 275 8.2 SCUC Problem Formulation 8.3 Benders Decomposition Solution of SCUC 276 8.2.1 Discussion on Ramping Constraints 280 285 8.3.1 Benders Decomposition 286 8.3.2 Application of Benders Decomposition to SCUC 287 X CONTENTS 8.3.3 Master Problem Formulation 287 8.4 SCUC to Minimize Network Violation 8.4.1 8.4.2 8.4.3 8.4.4 Linearization of Network Constraints Subproblem Formulation Benders Cuts Formulation Case Study 290 290 293 296 296 8.5 SCUC Application to Minimize EUE - Impact of Reliability 303 8.5.1 Subproblem Formulation and Solution 303 8.5.2 Case Study 306 8.6 Conclusions 310 Ancillary Services Auction Market Design 311 9.1 Introduction 311 9.2 Ancillary Services for Restructuring 9.3 Forward Ancillary Services Auction – Sequential Approach 315 9.3.1 Two Alternatives in Sequential Ancillary Services Auction 317 9.3.2 Ancillary Services Scheduling 318 9.3.3 Design of the Ancillary Services Auction Market 320 9.3.4 Case Study 322 9.3.5 Discussions 334 9.4 Forward Ancillary Services Auction – Simultaneous Approach 334 313 9.4.1 Design Options for Simultaneous Auction of Ancillary Services 9.4.2 Rational Buyer Auction 9.4.3 Marginal Pricing Auction 9.4.4 Discussions 9.5 Automatic Generation Control (AGC) 9.5.1 9.5.2 9.5.3 9.5.4 9.5.5 9.6 AGC Functions AGC Response AGC Units Revenue Adequacy AGC Pricing Discussions 336 338 347 354 354 354 356 357 358 366 Conclusions 367 CONTENTS XI 10 Transmission Congestion Management and Pricing 369 10.1 Introduction 369 10.2 Transmission Cost Allocation Methods 372 372 373 373 374 376 376 376 379 379 386 10.2.1 Postage-Stamp Rate Method 10.2.2 Contract Path Method 10.2.3 MW-Mile Method 10.2.4 Unused Transmission Capacity Method 10.2.5 MVA-Mile Method 10.2.6 Counter-Flow Method 10.2.7 Distribution Factors Method 10.2.8 AC Power Flow Method 10.2.9 Tracing Methods 10.2.10 Comparison of Cost Allocation Methods 10.3 Examples for Transmission Cost Allocation Methods 387 10.3.1 Cost Allocation Using Distribution Factors Method 388 10.3.2 Cost Allocation Using Bialek’s Tracing Method 389 10.3.3 Cost Allocation Using Kirschen’s Tracing Method 391 10.3.4 Comparing the Three Cost Allocation Methods 392 10.4 LMP, FTR, and Congestion Management 10.4.1 10.4.2 10.4.3 10.4.4 10.4.5 393 393 405 408 412 421 Locational Marginal Price (LMP) LMP Application in Determining Zonal Boundaries Firm Transmission Right (FTR) FTR Auction Zonal Congestion Management 10.5 A Comprehensive Transmission Pricing Scheme 431 10.5.1 Outline of the Proposed Transmission Pricing Scheme 432 10.5.2 Prioritization of Transmission Dispatch 434 10.5.3 Calculation of Transmission Usage and Congestion Charges and FTR Credits 439 10.5.4 Numerical Example 443 10.6 Conclusions 453 APPENDIX A List of Symbols 455 XII CONTENTS B Mathematical Derivation 461 B.1 Derivation of Probability Distribution 461 B.2 Lagrangian Augmentation with Inequality Constraints 462 C RTS Load Data 467 D Example Systems Data 469 D.1 5-Unit System D.2 36-Unit System D.3 6-Unit System 469 472 476 D.4 Modified IEEE 30-Bus System D.5 118-Bus System 477 479 E Game Theory Concepts 483 E.1 Equilibrium in Non-Cooperative Games E.2 Characteristics Function E.3 N-Players Cooperative Games E.4 Games with Incomplete Information 483 484 F Congestion Charges Calculation 485 486 489 F.1 Calculations of Congestion Charges using Contributions of Generators 489 F.2 Calculations of Congestion Charges using Contributions of Loads 493 References Index 495 509 Preface During the last five years, Illinois Institute of Technology in Chicago has been offering a master’s degree program in electricity markets which is a joint venture between the College of Engineering and the School of Business The subject of this book is currently offered as a required course for students majoring in the master of electricity markets We believe that the subject of this book will be of interest to power engineering faculty and students, consultants, vendors, manufacturers, researchers, designers, and electricity marketer, who will find a detailed discussion of electricity market tools throughout the book with numerous examples We assume that the readers have a fundamental knowledge of power system operation and control Much of the topics in this book are based on the presumption that there are two major objectives in establishing an electricity market: ensuring a secure operation and facilitating an economical operation Security is the most important aspect of the power system operation be it a regulated operation or a restructured power market In a restructured power system, security could be ensured by utilizing the diverse services available to the market The economical operation facilitated by the electricity market is believed to help reduce the cost of electricity utilization, which is a primary motive for restructuring and a way to enhance the security of a power system through its economics To accomplish these objectives, proper market tools must be devised and efficient market strategies must be employed by participants based on power system requirements The topics covered by this book discuss certain tools and procedures that are utilized by the ISO as well as GENCOs and TRANSCOs These topics include electricity load and price forecasting, security-constrained unit commitment and price-based unit commitment, market power and monitoring, arbitrage in electricity markets, generation asset valuation and risk analysis, auction market design for energy and ancillary services, as well as transmission congestion management and pricing For instance, XIII XIV PREFACE chapters that discuss price forecasting, price-based unit commitment, market power, arbitrage, and asset valuation and risk analysis, present market tools that can be utilized by GENCOs for analyzing electricity market risks, valuation of GENCO’s assets and formulation of their strategies for maximizing profits The chapters that discuss load forecasting, gaming methods, security-constrained unit commitment, ancillary services auction, and transmission congestion management and pricing present market tools that can be utilized by certain market coordinators (such as the ISOs) In addition, the chapter that discusses transmission congestion management and pricing present the role of TRANSCOs in restructured electric power systems We have intended to preserve the generality in discussing the structure and the operation of electricity markets so that the proposed tools can be applied to various alternatives in analyzing the electricity markets We take this opportunity to acknowledge the important contributions of Professor Muwaffaq Alomoush of the Yarmouk University to our book He provided much of the presentation in Chapter 10 on transmission congestion management and pricing We thank Dr Ebrahim Vaahedi (Perot Systems) and Professor Noel Schulz (Mississippi State University) who reviewed an earlier version of this book and provided several constructive comments This book could not have been completed without the unconditional support of our respective families We thank them for their sacrifice and understanding Mohammad Shahidehpour Hatim Yamin Zuyi Li