Participating in Electricity Markets

Daniel Kirschen
 Perspective

• Generator
• Consumer
• Retailer
• Operator of a pumped-hydro plant

© 2018 D. Kirschen and the University of Washington 2

Participating in Electricity Markets:
The consumer’s perspective
 Consumer’s perspective

• Microeconomic theory
• VoLL
• Low price elasticity of the demand
• Demand reduction
• Demand shifting

© 2018 D. Kirschen and the University of Washington 4

Participating in Electricity Markets:
The retailer’s perspective
 The retailer’s perspective
• Sell energy to consumers, mostly at a flat rate (fixed price)
• Buy energy in bulk:
– Spot market
– Contracts
• Must forecast the load of its customers
• Regional monopoly: traditional top-down forecasting
• Retail competition: bottom-up forecasting
– Difficult problem: customer base changes
– Much less accurate than traditional load forecasting

© 2018 D. Kirschen and the University of Washington 6

 Fig. 4.1: Forecast demand, average forward purchase
price and retail rate for the case of a flat retail tariff

© 2018 D. Kirschen and the University of Washington 7

 Fig. 4.2: Cost of forward purchases and retail hourly
retail revenues for the case of a flat retail tariff

© 2018 D. Kirschen and the University of Washington 8

 Table 4.1: Retail operations over a 12-hour period for
the case of flat retail tariff of 37 $/MWh

Hour 1 2 3 4 5 6 7 8 9 10 11 12 Totals

Load Forecast (MWh) 221 219 254 318 358 370 390 410 382 345 305 256 3828

Forward Purchases (MWh) 221 219 254 318 358 370 390 410 382 345 305 256 3828

Average Forward Prices

24.70 24.50 27.50 35.20 40.70 42.40 45.50 48.60 44.20 38.80 33.40 27.70
($/MWh)

Cost of Forward Purchases

5459 5366 6985 11194 14571 15688 17745 19926 16884 13386 10187 7091 144482
($)

Hourly Revenues ($) 8177 8103 9398 11766 13246 13690 14430 15170 14134 12765 11285 9472 141636

Hourly Profits
2718 2737 2413 572 -1325 -1998 -3315 -4756 -2750 -621 1098 2381 -2846
($)

© 2018 D. Kirschen and the University of Washington 9

 Fig 4.3: Forecast demand, average forward purchase prices and
retail rate for the case of an on-peak/off-peak retail tariff

© 2018 D. Kirschen and the University of Washington 10

 Fig 4.4: Cost of forward purchases and retail hourly retail
revenues for the case of an on-peak/off-peak retail tariff

© 2018 D. Kirschen and the University of Washington 11

 Table 4.2: Retail operations over a 12-hour period for an on-peak
retail rate of 38 $/MWh and an off-peak retail rate of 36 $/MWh

Hour 1 2 3 4 5 6 7 8 9 10 11 12 Totals
Load Forecast
264 262 297 299 337 348 367 385 359 324 287 299 3828
(MWh)

Forward Purchases
264 262 297 299 337 348 367 385 359 324 287 299 3828
(MWh)

Average Forward
24.70 24.50 27.50 35.20 40.70 42.40 45.50 48.60 44.20 38.80 33.40 27.70
Prices ($/MWh)

Cost of Forward
6521 6419 8168 10525 13716 14755 16699 18711 15868 12571 9586 8282 141821
Purchases ($)

1069 1076
Revenues ($) 9504 9432 11362 12806 13224 13946 14630 13642 12312 10906 143220
2 4
Profits ($) 2983 3013 2524 837 -910 -1531 -2753 -4081 -2226 -259 1320 2482 1399

© 2018 D. Kirschen and the University of Washington 12

 Fig 4.5: Imbalances between forward purchases and actual
energy consumed and corresponding balancing costs

© 2018 D. Kirschen and the University of Washington 13

 Fig. 4.6: Spot prices and average forward prices

© 2018 D. Kirschen and the University of Washington 14

 Table 4.3: Retail operations over a 12-hour period for a flat retail
rate of 37 $/MWh considering forecasting errors and implied
spot market trades.
Hour 1 2 3 4 5 6 7 8 9 10 11 12 Totals
Forecast load 221 219 254 318 358 370 390 410 382 345 305 256 3828
Forward
energy 221 219 254 318 358 370 390 410 382 345 305 256 3828
purchases
Average 24.70 24.50 27.50 35.20 40.70 42.40 45.50 48.60 44.20 38.80 33.40 27.70
forward price
Forward 5459 5366 6985 11194 14571 15688 17745 19926 16884 13386 10187 7091 144482
purchase costs
Actual loads 203 203 259 328 413 401 415 450 377 355 331 268 4003

Imbalances -18 -16 5 10 55 31 25 40 -5 10 26 12 175

Spot prices 20.30 25.40 30.30 37.50 69.70 75.40 70.10 102.3 81.40 63.70 46.90 28.90

Balancing costs -365 -406 152 375 3834 2337 1753 4092 -407 637 1219 347 13568
Total hourly
5094 4960 7137 11569 18405 18025 19498 24018 16477 14023 11406 7438 158050
cost
Hourly
7511 7511 9583 12136 15281 14837 15355 16650 13949 13135 12247 9916 148111
revenues
Hourly profits 2417 2551 2446 567 -3124 -3188 -4143 -7368 -2528 -888 841 2478 -9939

© 2018 D. Kirschen and the University of Washington 15

 Participating in Electricity Markets:
The Generator’s Perspective

© 2018 D. Kirschen and the University of Washington 16

 Market Structure

Monopoly Oligopoly Perfect Competition

• Monopoly:
– Monopolist sets the price at will
– Must be regulated
• Perfect competition:
– No participant is large enough to affect the price
– All participants act as “price takers”
• Oligopoly:
– Some participants are large enough to affect the price
– Strategic bidders have market power
– Others are price takers

© 2018 D. Kirschen and the University of Washington 17

 Perfect competition
• All producers have a small share of the market

• All consumers have a small share of the market

• Individual actions have no effect on the market

price

• All participants are “price takers”

© 2018 D. Kirschen and the University of Washington 18

 Short run profit maximization for a price taker

y: Output of one of the generators

max {p .y - c(y)}
y
Production cost
Revenue
d {p .y - c(y)}
=0
dy
Independent of quantity
produced because price taker

dc(y)
p= Adjust production y until the marginal
dy cost of production is equal to the
price π
© 2018 D. Kirschen and the University of Washington 19
 Example 4.2
Coal fired unit with minimum output 100 MW and
maximum output 500 MW

H1(P1 )=110+8.2P1 +0.002P12

C1 (P1 ) = 110F + 8.2F P1 + 0.002F P12

C1 (P1 ) = 143+10.66 P1 + 0.0026 P12

dC1 (P1 )
dP1
= 10.66 + 0.0052P1 = 12 P1 = 257.7MW

© 2018 D. Kirschen and the University of Washington 20

 Unit limits

dCi (Pi )
£p Pi max
dPi P max
i

dCi (Pi )
>p ?
dPi P min
i

© 2018 D. Kirschen and the University of Washington 21

 Piecewise linear cost curves
[$/h]

Breakpoints or
elbow points

[MW]

© 2018 D. Kirschen and the University of Washington 22

 Piecewise constant marginal cost curve

[$/MWh]

[MW]

© 2018 D. Kirschen and the University of Washington 23

 Dispatch with piecewise curves

p < MC1,i Þ Pi = Pi min

MC1,i < p < MC2,i Þ Pi = e1,i

MC2,i < p < MC3,i Þ Pi = e2,i
MC3,i < p Þ Pi = Pi max

© 2018 D. Kirschen and the University of Washington 24

 Example 4.4
100 £ P1 £ 250 : C1 (P1 ) = 11.57P1 + 78.0
250 £ P1 £ 400 : C1 (P1 ) = 12.35P1 - 117.0
400 £ P1 £ 500 : C1 (P1 ) = 13.00P1 - 377.0

© 2018 D. Kirschen and the University of Washington 25

 Example 4.5

© 2018 D. Kirschen and the University of Washington 26

 Scheduling

• Startup cost
• Operating constraints
• Environmental constraints
• Other revenue opportunities
• Forecasting errors

© 2018 D. Kirschen and the University of Washington 27

 Example 4.6
Hour 1 2 3 4 5 6 7
Price [$/MWh] 12.0 13.0 13.5 10.5 12.5 13.5 11.5
Generation[MW] 257.7 450.0 500.0 100.0 353.8 500.0 161.5
Revenue [$] 3,092 5,850 6,750 1,050 4,423 6,750 1,858
Running cost[$] 3,063 5,467 6,123 1,235 4,240 6,123 1,933
Startup cost[$] 600 0 0 0 0 0 0
Total cost [$] 3,663 5,467 6,123 1,235 4,240 6,123 1,933
Profit [$] -571 383 627 -185 183 627 -75
Cumulative profit [$] -571 -188 439 254 437 1,064 989

© 2018 D. Kirschen and the University of Washington 28

 Produce vs. Purchase
N N
Minimize åC (P ) i i subject to åP = Li
i=1 i=1

N
æ N
ö
ℓ( P1, P2 ,… , PN , l ) = å Ci ( Pi ) + l ç L - å Pi ÷
i=1 è i=1 ø
¶ℓ dCi
º - l = 0 "i = 1,… N
¶Pi dPi
¶ℓ æ N
ö
º ç L - å Pi ÷ = 0
¶l è i=1 ø

dC1 dC2 dCN

= =! =l
dP1 dP2 dPN

dC1 dC2 dC N
= =! =p
dP1 dP2 dPN

© 2018 D. Kirschen and the University of Washington 29

 Example 4.7

CA = 20 +1.7PA + 0.04PA2 $/hour

CB =16+1.8PB +0.03P $/hour 2
B

ℓ= CA (PA )+CB (PB )+ l(L - PA - PB ) L = 260 MW

¶ℓ
¶ PA
º 1.7 + 0.08PA - l = 0 l =10.67 $/MWh
¶ℓ PA =112.13 MW
º 1.8 + 0.06PB - l = 0
¶ PB
PB =147.87 MW
¶ℓ
º L - PA - PB = 0 C = CA (PA )+CB (PB )=1,651.63 $/hour
¶l
© 2018 D. Kirschen and the University of Washington 30
 Bidding under perfect competition
• Since there are lots of small producers, a
change in bid causes a change in the
order of the bids
• If I bid at my marginal cost Price supply
– I get paid the market clearing price if
marginal or infra-marginal producer
• If I bid higher than my marginal cost
– I could become extra-marginal and
miss an opportunity to sell at a
profit
• If I bid lower than my marginal cost
– I could have to produce at a loss demand

• No incentive to bid anything else than Quantity

marginal cost of production

© 2018 D. Kirschen and the University of Washington 31

 Marginal, infra-marginal, extra-marginal producers

• Everything is sold at the

market clearing price
Price
• Price is set by the “last” unit supply
sold
• Marginal producer:
– Sells this last unit
– Gets exactly its bid Extra-marginal
• Infra-marginal producers:
– Get paid more than their
bid
demand
– Collect economic profit
Infra-marginal
• Extra-marginal producers: Quantity
– Sell nothing
• No difference between
centralized auction and Marginal producer
bilateral market
© 2018 D. Kirschen and the University of Washington 32
 Profit of an infra-marginal producer
$/MWh

Economic profit
π
dC
dP dC
ò dP dP
MWh
Variable cost of producing energy

© 2018 D. Kirschen and the University of Washington 33

 Profit of an infra-marginal producer
• Selling at marginal cost covers the variable cost of
production
• The difference between the market price and the
marginal cost must pay for the fixed costs:
– No-load cost, startup cost
– Cost of building the plant
– Interest payments for the bank, dividends for the
shareholders
• A plant must therefore be infra-marginal often enough to
cover its fixed costs
– Market price > marginal cost for enough hours of the
year
© 2018 D. Kirschen and the University of Washington 34
 Profit of a marginal producer
$/MWh

No economic profit!
dC
=p
dP

MWh
Variable cost of producing energy

© 2018 D. Kirschen and the University of Washington 35

 Profit of a marginal producer
• If a marginal generator bids at its marginal cost, it makes no
economic profit
– Covers only its variable cost of production
– Does not cover its fixed cost
• Generators that are too often marginal or just below marginal
will not recover their fixed costs if they bid at their marginal
cost of production
– They must include part of their fixed costs in their offer price
– Their offer price is therefore higher than their marginal cost
– They can do it because competition is not perfect when the load is
high because most generators are already producing

© 2018 D. Kirschen and the University of Washington 36

 Imperfect Competition

© 2018 D. Kirschen and the University of Washington 37

 Game theory and Nash equilibrium
• Each firm must consider the possible actions
of others when selecting a strategy
• Classical optimization theory is insufficient
• Two-person non-co-operative game:
– One firm against another
– One firm against all the others
• Nash equilibrium:
– Given the action of its rival, no firm can increase
its profit by changing its own action

© 2018 D. Kirschen and the University of Washington 38

 Imperfect Competition – Game theory

W f = p ×Pf -C f (Pf )
W f = W f (X f ,X- f )

W f (X *f ,X-* f ) ³ W f (X f ,X-* f ) "f Nash equilibrium

© 2018 D. Kirschen and the University of Washington 39

 Bertrand model – Game in price

X f = p f "f

p ×Pf = p ×Pf (p f , p -* f )

Pf (p f , p -* f ) = Pf if p f £ p -* f
= 0 otherwise

© 2018 D. Kirschen and the University of Washington 40

 Bertrand Competition
• Example 1 PA PB
– CA = 35 . PA $/h
– CB = 45 . PB $/h A B p = 100 - D [$/MWh]
CA(PA) CB(PB)
• Bid by A?
• Bid by B?
• Market price?
• Quantity traded? Inverse demand curve

© 2018 D. Kirschen and the University of Washington 41

 Bertrand Competition
• Example 1
PA PB
– CA = 35 . PA $/h
– CB = 45 . PB $/h
A B
p = 100 - D [$/MWh]
• Marginal cost of A: 35 $/MWh CA(PA) CB(PB)
• Marginal cost of B: 45 $/MWh
• A will bid just below 45 $/MWh
• B cannot bid below 45 $/MWh because it would lose money on every
MWh
• Market price: just below 45 $/MWh
• Demand: 55 MW
• PA = 55MW
• PB = 0

© 2018 D. Kirschen and the University of Washington 42

 Bertrand Competition
• Example 2 PA PB
– CA = 35 . PA $/h
– CB = 35 . PB $/h
A B
p = 100 - D [$/MWh]
CA(PA) CB(PB)
• Bid by A?
• Bid by B?
• Market price?
• Quantity traded?

© 2018 D. Kirschen and the University of Washington 43

 Bertrand Competition
• Example 2 PA PB
– CA = 35 . PA $/h
A B
– CB = 35 . PB $/h p = 100 - D [$/MWh]
CA(PA) CB(PB)

• A cannot bid below 35 $/MWh because it would lose money on every

MWh
• A cannot bid above 35 $/MWh because B would bid lower and grab the
entire market
• Market price: 35 $/MWh

• Paradox of Bertrand model of imperfect competition

– Identical generators: bid at marginal cost
– Non-identical generators: cheapest gets the whole market
• Is this a realistic model of imperfect competition?

© 2018 D. Kirschen and the University of Washington 44

 Cournot model – Game in quantity

maxp ( y 1 + y ) y 1 - c ( y 1 )
e
2
y1

e
y1 = f 1 ( y 2 )
e
y2 = f2 (y1 )

y1 = f 1 ( y 2 )
* *

Cournot equilibrium
y = f 2 (y )
*
2
*
1

© 2018 D. Kirschen and the University of Washington 45

 Short run profit maximization with market power

max { y i × p (Y ) - c ( y i ) } yi : Production of generator i

yi
Y = y1 + + yn
d
{ y i × p (Y ) - c ( y i ) } = 0
is the total industry output

dy i
Not zero because of
market power
dp (Y ) dc ( y i )
p (Y ) + y i =
dy i dy i

ì y i Y dp (Y ) ü dc ( y i )
p (Y ) í1 + ý=
î Y dy i p (Y ) þ dy i

© 2018 D. Kirschen and the University of Washington 46

 Short run profit maximization with market power

ì y i Y dp (Y ) ü dc ( y i )
p (Y ) í1 + ý=
î Y dy i p (Y ) þ dy i
dy
y p dy
e=- =- × is the price elasticity of demand
dp y dp
p
yi
si = is the market share of generator i
Y
< 1  at the optimum production, the
ìï si üï dc ( y i ) marginal cost of generator i is less
p (Y ) í1- ý= than the market price.
ïî e (Y ) ïþ dy i

© 2018 D. Kirschen and the University of Washington 47

 Cournot competition: Example 1
PA PB
• CA = 35 . PA $/h
• CB = 45 . PB $/h A B
• p = 100 - D [$/MWh] CA(PA) CB(PB)

• Suppose PA= 15 MW and PB = 10 MW

• Then D = PA + PB = 25 MW
• π = 100 - D = 75 $/MW

• RA= 75 . 15 = $ 1125 CA= 35 . 15 = $ 525

• RB= 75 . 10 = $ 750 CB= 45 . 10 = $ 450

• Profit of A = RA - CA = $ 600
• Profit of B = RB - CB = $ 300
© 2018 D. Kirschen and the University of Washington 48
 Cournot competition: Example 1
Summary:
For PA=15MW and PB = 10MW, we have:

Demand Profit of A

25 600
300 75

Profit of B Price

© 2018 D. Kirschen and the University of Washington 49

 Cournot competition: Example 1
PA=15 PA=20 PA=25 PA=30
25 600 30 700 35 750 40 750
PB=10 300 75 250 70 200 65 150 60
30 525 35 600 40 625 45 600
PB=15 375 70 300 65 225 60 150 55
35 450 40 500 45 500 50 450
PB=20 400 65 300 60 200 55 100 50
40 375 45 400 50 375 55 300
PB=25 375 60 250 55 125 50 0 45

Demand Profit A
Profit B Price

© 2018 D. Kirschen and the University of Washington 50

 Cournot competition: Example 1
PA=15 PA=20 PA=25 PA=30
25 600 30 700 35 750 40 750
PB=10 300 75 250 70 200 65 150 60
30 525 35 600 40 625 45 600
PB=15 375 70 300 65 225 60 150 55
35 450 40 500 45 500 50 450
PB=20 400 65 300 60 200 55 100 50
40 375 45 400 50 375 55 300
PB=25 375 60 250 55 125 50 0 45

• Price decreases as supply increases

Demand Profit A • Profits of each affected by other
Profit B Price • Complex relation between production
and profits
© 2018 D. Kirschen and the University of Washington 51
 Let’s play the Cournot game!
PA=15 PA=20 PA=25 PA=30
25 600 30 700 35 750 40 750
PB=10 300 75 250 70 200 65 150 60
30 525 35 600 40 625 45 600
PB=15 375 70 300 65 225 60 150 55
35 450 40 500 45 500 50 450
PB=20 400 65 300 60 200 55 100 50
40 375 45 400 50 375 55 300
PB=25 375 60 250 55 125 50 0 45

Equilibrium solution!
Demand Profit A A cannot do better without B doing worse
Profit B Price B cannot do better without A doing worse
Nash equilibrium
© 2018 D. Kirschen and the University of Washington 52
 Cournot competition: Example 1
Demand Profit of A
PA=25
40 625 CA = 35 . PA $/h
PB=15
225 60 CB = 45 . PB $/h

Profit of B Price

• Generators achieve price larger than their marginal costs

• The cheapest generator does not grab the whole market
• Generators balance price and quantity to maximize profits
• Warning: price is highly dependent on modeling of demand
curve and are thus often not realistic

© 2018 D. Kirschen and the University of Washington 53

 Cournot competition: Example 2
PN
• CA = 35 . PA $/h PA PB
...
A B N
• CB = 45 . PB $/h CN(PN)
CA(PA) CB(PB)
• …
p = 100 - D [$/MWh]
• CN = 45 . PN $/h

• A is a “strategic” player
– i.e. with market power
• The others are “the competitive fringe”

© 2018 D. Kirschen and the University of Washington 54

 Cournot competition: Example 2

© 2018 D. Kirschen and the University of Washington 55

 Cournot competition: Example 2

© 2018 D. Kirschen and the University of Washington 56

 Cournot competition: Example 2

© 2018 D. Kirschen and the University of Washington 57

 Other competition models

• Supply functions equilibrium

– Bid price depends on quantity
• Agent-based simulation
– Represent more complex interactions
• Maximising short-term profit is not the only
possible objective
– Maximizing market share
– Avoiding regulatory intervention

© 2018 D. Kirschen and the University of Washington 58

 Plants that do not burn fossil fuels

• Nuclear power plants

• Hydro-electric power plants

© 2018 D. Kirschen and the University of Washington 59

 Wind and solar generation

• Intermittency and stochasticity

• Government policies and subsidies
– Renewable portfolio standards
– Investment tax credits
– Production tax credits
– Feed-in tariffs
– Contracts for difference
– Renewable energy certificates
• Effects on the market
© 2018 D. Kirschen and the University of Washington 60
 Self scheduling of storage
T
W = å p (t) ( PD (t) - PC (t)) Dt
t=1

E(t) = E(t -1)+[hPC (t)- PD (t)]Dt

0 £ E(t) £ E max
"t =1,… T
0 £ PD (t) £ P max
"t =1,… T
0 £ PC (t) £ P max
"t =1,… T
E(T ) = E(0) = E0
© 2018 D. Kirschen and the University of Washington 61
 Centralized scheduling of storage

å P (t)+ P (t) - P (t) = L(t) "t = 1,…

i D C T
i=1

© 2018 D. Kirschen and the University of Washington 62

 Example 4.12
𝑃𝑖𝑚𝑖𝑛 (MW) 𝑃𝑖𝑚𝑎𝑥 (MW)
𝛼𝑖 ($/MWh) 𝛽𝑖 ($/h)
Generating unit 𝑖 minimum maximum
marginal cost fixed cost
generation generation
1 0 500 10 500
2 100 350 25 250
3 0 200 50 100

Time period 𝑡 1 2 3

𝐿(𝑡) (MW) 495 750 505

© 2018 D. Kirschen and the University of Washington 63

 Market settlement without storage
Hour Price $/MWh Unit 1 Unit 2 Unit 3
Output (MWh) 495 0 0
Revenue ($) 4950 0 0
1 10
Cost ($) 5450 0 0
Profit ($) -500 0 0
Output (MWh) 500 250 0
Revenue ($) 12500 6250 0
2 25
Cost ($) 5500 6500 0
Profit ($) 7000 -250 0
Output (MWh) 500 0 5
Revenue ($) 25000 0 250
3 50
Cost ($) 5500 0 350
Profit ($) 19500 0 -100
Total profit ($) 26,000 -250 -100
Total cost ($) 23,300

© 2018 D. Kirschen and the University of Washington 64

 Market settlement with a 1MW/10MWh battery

Hour Price $/MWh Unit 1 Unit 2 Unit 3 Battery

Output (MWh) 496 0 0 -1
Revenue ($) 4960 0 0 -10
1 10
Cost ($) 5460 0 0 0
Profit ($) -500 0 0 -10
Output (MWh) 500 251 0 -0.2
Revenue ($) 12500 6275 0 -5
2 25 0
Cost ($) 5500 6525 0
Profit ($) 7000 -250 0 -5
Output 1
500 0 3.3
(MWh)
3 50 Revenue ($) 25000 0 165 50
Cost ($) 5500 0 265 0
Profit ($) 19500 0 -100 50
Total Profit ($) 26,000 -250 -100 35
Total Cost ($) 23,250

© 2018 D. Kirschen and the University of Washington 65

 Market settlement with a 10MW/10MWh battery

Hour Price $/MWh Unit 1 Unit 2 Unit 3 Battery

Output (MWh) 500 0 0 -5
Revenue ($) 5000 0 0 -50
1 10
Cost ($) 5500 0 0 0
Profit ($) -500 0 0 -50
Output (MWh) 500 251 0 -1
Revenue ($) 12500 6275 0 -25
2 25
Cost ($) 5500 6525 0 0
Profit ($) 7000 -250 0 -25
Output
500 0 0 5
(MWh)
3 10 Revenue ($) 5000 0 0 50
Cost ($) 5500 0 0 0
Profit ($) -500 0 0 50
Total Profit ($) 6,000 -250 0 -25
Total Cost ($) 23,025

© 2018 D. Kirschen and the University of Washington 66

 Flexible consumer’s perspective

• Storage vs. flexible demand

• Remunerating flexible demand
– Price-based
– Incentive-based

© 2018 D. Kirschen and the University of Washington 67

 Overall market perspective

© 2018 D. Kirschen and the University of Washington 68

 Offer curve
1000

800

600
Offer Price (US $/MWh)

400

200

0
0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 22000

-200
Offered Generation Capacity (MW)

© 2018 D. Kirschen and the University of Washington 69

 Variations in the price of electricity

Load
Peak load

Minimum load
Time
00:00 06:00 12:00 18:00 24:00

© 2018 D. Kirschen and the University of Washington 70

 Bid curve
1000

900

800

700
Bid Price (US $/MWh)

600
Hour 3 Hour 11
500

400

300

200

100

0
0 2000 4000 6000 8000 10000 12000
Demand (MW)

© 2018 D. Kirschen and the University of Washington 71

 Market clearing
1000

800
Offer Price (US $/MWh)

600

400

Hour 3 Hour 11
200

0
0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 22000

-200
Demand (MW)

© 2018 D. Kirschen and the University of Washington 72

 ISO-NE Price-duration curve
300.00

250.00

200.00
Price (US $/MWh)

150.00

100.00

Average price
50.00

0.00
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Percentage of Hours

© 2018 D. Kirschen and the University of Washington 73

 AESO Price duration curve

Figure courtesy of AESO 74

 Price spikes because of increased demand
$/MWh
πext
Extreme
peak
Normal peak
πnor

MWh
Small increases in peak demand cause
large changes in peak prices
© 2018 D. Kirschen and the University of Washington 75
 Price volatility in the balancing mechanism

© 2018 D. Kirschen and the University of Washington 76

 Market power
• A firm exercises market power when

– It reduces its output (physical withholding)

or

– It raises its offer price (economic withholding)

in order to change the market price

© 2018 D. Kirschen and the University of Washington 77

 Example
• If a firm sells 10 units, the market price is $15

– Option 1: offer to sell only 9 units and hope that the

price rises enough to compensate for the loss of
volume

– Option 2: offer to sell the 10th unit for a price higher

than $15 and hope that this will increase the price

• Profit increases if price rises sufficiently to compensate

for possible decrease in volume

© 2018 D. Kirschen and the University of Washington 78

 Price spikes because of reduced supply
$/MWh Normal supply
πext

Reduced supply

πnor

Normal peak

MWh
Small reductions in supply cause
large changes in peak prices
© 2018 D. Kirschen and the University of Washington 79
 When is market power more likely?

• Imperfect correlation with market share

• Demand does not have a high price elasticity
• Supply does not have a high price elasticity:
– Highly variable demand
– All capacity sometimes used
– Output cannot be stored

Electricity markets are more vulnerable than

others to the exercise of market power

© 2018 D. Kirschen and the University of Washington 80

 Mitigating market power

• Increase elasticity
• Increase number of competitors

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 Increasing the elasticity reduces price spikes and the
generators’ ability to exercise market power
$/MWh

πmax

πmin

MWh
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 Increasing the elasticity of the demand
• Obstacles
– Fixed prices
– Need for communication
– Need for storage (heat, intermediate products, dirty clothes)

• Not everybody needs to respond to price signals to get

substantial benefits

• Increased elasticity reduces the average price

– Not in the best interests of generating companies
– Impetus will need to come from somewhere else

© 2018 D. Kirschen and the University of Washington 83

 Further comments on market power

• ALL firms benefit from the exercise of market

power by one participant
• Unilaterally reducing output or increasing
offer price to increase profits is legal
• Collusion between firms to achieve the same
goal is not legal
• Market power interferes with the efficient
dispatch of generating resources
– Cheaper generation is replaced by more expensive
generation

© 2018 D. Kirschen and the University of Washington 84