A New Swing-contract Design for Wholesale Power Markets

by Tesfatsion, Leigh

• ISBN13: 9781119670124
• ISBN10: 1119670128
• Edition: 1st
• Format: Hardcover
• Copyright: 2020-12-30
• Publisher: Wiley-IEEE Press

Summary

Provides comprehensive information on swing contracts for flexible reserve provision in wholesale power markets

This book promotes a linked swing-contract market design for centrally-managed wholesale power markets to facilitate increased reliance on renewable energy resources and demand-side participation. The proposed swing contracts are firm or option two-part pricing contracts permitting resources to offer the future availability of dispatchable power paths (reserve) with broad types of flexibility in their power attributes.

A New Swing-Contract Design for Wholesale Power Markets begins with a brief introduction to the subject, followed by two chapters that cover: general goals for wholesale power market design; history, operations, and conceptual concerns for current U.S. RTO/ISO-managed wholesale power markets; and the relationship of the present study to previous swing-contract research. The next eight chapters cover: a general swing-contract formulation for centrally-managed wholesale power markets; illustrative swing-contract reserve offers; inclusion of reserve offers with price swing; inclusion of price-sensitive reserve bids; and extension to a linked collection of swing-contract markets. Operations in current U.S. RTO/ISO-managed markets are reviewed in the following four chapters, and conceptual and practical advantages of the linked swing-contract market design are carefully considered. The book concludes with an examination of two key issues: How might current U.S. RTO/ISO-managed markets transition gradually to a swing-contract form? And how might independent distribution system operators, functioning as linkage entities at transmission and distribution system interfaces, make use of swing contracts to facilitate their participation in wholesale power markets as providers of ancillary services harnessed from distribution-side resources? In summary, this title:

• Addresses problems with current wholesale electric power markets by developing a new swing-contract market design from concept to practical implementation
• Provides introductory chapters that explain the general principles motivating the new market design, hence why a new approach is required
• Develops a new type of swing contract suitable for wholesale power markets with increasing reliance on renewable energy and active demand-side participation

A New Swing-Contract Design for Wholesale Power Markets is an ideal book for electric power system professionals and for students specializing in electric power systems.

Author Biography

LEIGH TESFATSION received the Ph.D. degree in economics from the University of Minnesota, Mpls., in 1975, with a minor in mathematics. She is Research Professor of Economics, Professor Emerita of Economics, and Courtesy Research Professor of Electrical & Computer Engineering, all at Iowa State University. Her principal current research areas are electric power market design and the development of Agent-based Computational Economics (ACE) platforms for the performance testing of these designs. She is the recipient of the 2020 David A. Kendrick Distinguished Service Award from the Society for Computational Economics (SCE) and an IEEE Senior Member. She has served as guest editor and associate editor for a number of journals, including the IEEE Transactions on Power Systems, the IEEE Transactions on Evolutionary Computation, the Journal of Energy Markets, the Journal of Economic Dynamics and Control, the Journal of Public Economic Theory, and Computational Economics.

Table of Contents

1 Introduction 9

2 U.S. RTO/ISO-Managed Wholesale Power Markets: Overview 15

2.1 Chapter Preview 15

2.2 General Goals for Wholesale Power Market Design 15

2.3 U.S. RTO/ISO-Managed Market Operations 16

2.4 Stresses Faced by Current U.S. RTO/ISO-Managed Markets 19

3 Motivation for Current Study 21

3.1 Chapter Preview 21

3.2 Problematic Design Aspects of U.S. RTO/ISO-Managed

Wholesale Power Markets 21

3.2.1 Artificial Distinction Between Energy and Reserve 21

3.2.2 Problematic Use of Hedonic Pricing 22

3.2.3 Revenue Insufficiency and Incentive Problems 23

3.2.4 Computational Fragility of LMP Derivations 24

3.2.5 Performance Payment in Advance of Performance Delivery 26

3.2.6 Minimal Direct Representation of Retail Customer Interests 27

3.2.7 Reliance on Overly Simplistic Cost Conceptions 28

3.2.8 Use of Spot-Market Pricing for Forward Markets 30

3.3 Relation of Current Study to Previous Swing-Contract Work 30

4 Swing Contracts for ISO-Managed Wholesale Power Markets 33

4.1 Swing Contract Overview 33

4.2 Swing Contracts: General Formulation 33

4.3 Swing Contracts in Firm or Option Form 35

5 Illustrative Swing-Contract Reserve Offers 37

5.1 Chapter Preview 37

5.2 A Simple Energy-Block Swing Contract in Firm Form 38

5.3 An Energy-Block Swing Contract in Option Form 42

3

4 Contents

5.4 Swing-Contract Implementation of Standard Supply Offers 43

5.5 A Swing Contract Offering Continuous Swing (Flexibility) in

Power and Ramp 48

5.6 A Swing Contract Offering Battery Services 50

5.7 Swing-Contract Facilitation of Private Bilateral Contracting 52

6 Swing-Contract Market Design 55

6.1 Chapter Preview 55

6.2 General Swing-Contract Market Formulation 55

6.3 Financial and Physical Feasibility of Swing-Contract Offers 57

6.4 Reserve Bids 58

6.5 Handling of Fixed Reserve Bids and Non-Dispatched Power 59

6.6 Performance Penalties and Incentives 60

6.7 ISO Cost Allocation 61

7 Swing-Contract Market Optimization: Base-Case MILP Formulation 65

7.1 Chapter Preview 65

7.2 General Assumptions and Notation 66

7.3 Discretization of the ISO’s Optimization Problem 67

7.4 ISO Objective Function 71

7.5 Complete Analytical MILP Formulation 72

7.6 Additional Discussion of Optimization Aspects 74

7.7 Five-Bus Test Case 76

7.8 Thirty Bus Test Case with Adaptive Reserve Zones 79

8 Inclusion of Reserve Offers with Price Swing 83

8.1 Chapter Preview 83

8.2 Cost Function Preliminaries 83

8.3 MILP Tractable Form of Reserve Offers with Price Swing 85

9 Inclusion of Price-Sensitive Reserve Bids 91

9.1 Chapter Preview 91

9.2 Incorporation of Benefits 92

9.3 Modeling of Price-Sensitive Reserve Bids 94

9.3.1 Standard Demand Function Formulation 94

9.3.2 Reserve Bids with Time-of-Use Pricing 95

9.3.3 Reserve Bids with Price Swing 95

9.3.4 Reserve Bids Directly Expressed as Benefit Functions 97

9.4 MILP Tractable Approximation of Benefit Functions 98

10 The Linked Swing-Contract Market Design 101

10.1 Chapter Preview 101

10.2 Multistage Optimization and Time Inconsistency 102

10.3 Settlement Time-Consistency of Swing-Contract Markets 105

10.4 Swing-Contract Long-Term Forward Markets 106

10.5 Swing-Contract Short-Term Forward Markets 107

Contents 5

10.6 Swing-Contract Very Short-Term Forward Markets 109

10.7 Swing-Contract Deployment in Real-Time Operations 110

11 Illustration: Linked Day-Ahead and Hour-Ahead Swing-Contract

Markets 113

11.1 Chapter Preview 113

11.2 Hour-Ahead Market with Reserve Offers Consisting of

Swing-Contract Portfolios 114

11.3 SCED Solution for Hour-Ahead Swing-Contract Market 117

11.3.1 Overview 117

11.3.2 Power Balance 117

11.3.3 Coverage of the ISO’s Uncertainty Set 119

11.3.4 Constrained Minimization of Expected Cost 121

11.4 Linked Day-Ahead and Hour-Ahead Markets 121

12 Standard Modeling of a Competitive Market 125

12.1 Chapter Preview 125

12.2 Key Definitions 125

12.3 Standard Competitive Market Assumptions 126

12.4 Law of One Price for Commodities 126

12.5 Competitive Market: Basic Formulation 127

12.6 Net Surplus Extraction 130

12.7 Market Efficiency Metric 131

12.8 Market Efficiency and Pricing Rules 133

12.9 Strategic Trade Behavior and Trader Market Power 134

13 U.S. RTO/ISO-Managed Markets: Efficiency and Market Power 137

13.1 Chapter Preview 137

13.2 Daily Market Operations 137

13.3 Illustrative Analytical DAM Formulation 140

13.4 Net Surplus Extraction in the Illustrative DAM 141

13.5 Market Power in the Illustrative DAM: Type-I Error 145

13.6 Market Power in the Illustrative DAM: Type-II Error 149

13.7 Market Inefficiency in the Illustrative DAM. 153

13.8 DAM Performance: General Assessment 156

13.9 Scheduling of Bilateral Contracts 158

14 Comparisons with Swing-Contract Markets 161

14.1 Chapter Preview 161

14.2 Product Definition in U.S. RTO/ISO-Managed Markets 162

14.3 Wholesale Power and the Law of One Price (Not) 164

14.4 Differential vs. Uniform Pricing 165

14.5 Comparison of SC and Current U.S. DAM Designs 166

6 Contents

15 Advantages of the Linked Swing-Contract Market Design 169

15.1 Chapter Preview 169

15.2 SC Markets are Physically-Covered Insurance Markets 170

15.3 Longer-Term SC Markets Support New Investment 171

15.4 SC Markets Ensure Revenue Sufficiency 176

15.5 SC Markets Ameliorate Merit-Order Concerns 177

15.6 SC Markets are Robust-Control Mechanisms 178

15.7 SC Markets Reduce Rule Complexity 179

15.8 SC Markets Reduce Gaming Opportunities 180

15.9 SC Markets Have Smaller-Sized Optimizations 182

15.10 Additional Advantages of SC Markets 183

15.10.1 Ensure a Level Playing Field for Resource Participation 183

15.10.2 Permit Co-Optimization of Diverse Reserve 184

15.10.3 Appropriately Remunerate Diversity and Flexibility 184

15.10.4 Encourage Accurate Forecasting and Dispatch Following 184

15.10.5 Ensure Settlement Time-Consistency 184

16 Gradual Transmission to Linked Swing-Contract Markets 185

16.1 Chapter Preview 185

16.2 A DAM Formulation Permitting Gradual Transition 187

16.3 Cost Function Preliminaries for the Transitional DAM189

16.4 MILP SCUC/SCED Optimization for the Transitional DAM 192

17 Swing-Contract Support for Integrated Transmission and

Distribution Systems 201

17.1 Chapter Preview 201

17.2 Transactive Energy System Design for ITD Systems 203

17.3 Role of Distribution Utilities 207

17.4 An IDSO-Managed Bid-Based TES Design for Households 208

17.5 IDSOs as Grid-Edge Resource Aggregators 211

17.6 Swing-Contract Support for IDSO Participation in Wholesale

Power Markets 212

18 Design Evaluation via the ITD TES Platform 213

18.1 Chapter Preview 213

18.2 Design Readiness Levels 213

18.3 An ITD TES Platform Permitting TES Design Evaluation 216

18.4 Illustrative Test Cases: Overview218

18.5 Illustrative Test Cases: Report 221

19 Potential Future Research Directions 227

20 Conclusion: The Dots Keep Connecting 231

Contents 7

21 Appendices 233

21.1 Quick-Reference Glossary of Standard Acronyms 233

21.2 Quick-Reference Glossary of Transmission System Terms 234

21.3 Quick-Reference Glossary of Economic Terms 235

21.4 Nomenclature for a Swing-Contract Market 236

21.5 Nomenclature for a Distribution System 238

References 239