Price formation in short-term electricity market scheduling

by Mazaher Haji Bashi, Hassan Gharibpour, Padraig Lyons, Iman Rahmati, Meysam Doostizadeh


Price formation is important for monitoring/development of an electricity market since the short/long-run efficiencies depend on the prices representing the economic signals. However, existing approaches cannot capture the contribution of suppliers’ bidding behavior to short-term price formation. As a result, regulators cannot evaluate these contributions. This can result in market monitoring failure/inefficient regulatory decisions that entail short-run market distortion or compromised investment respectively. This paper proposes a novel approach enabling regulators to retrace these contributions for every single non-zero shadow price formed in a dynamic security-constrained economic dispatch (SCED) problem. The decomposition of dual variables in a linear representation of SCED is adopted to evaluate the marginal contribution of the offered prices. The proposed theory yields explicit functions mapping the SCED shadow prices (i.e., locational marginal prices, and marginal values of (i) binding generation capacity limits, (ii) binding transmission capacity limits, and (iii) binding ramping limits) to the offered prices. Counterintuitively, the results show that increasing the offered prices will not necessarily leads to an increase in the shadow prices, especially the locational marginal prices. In addition, it is shown that the offered prices can pose long-run implications by contributing to the shadow prices associated with the marginal value of transmission/generation capacity.

Published in: Electric Power Systems Research Volume 223, October 2023, 109670