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Faculty of Economics

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van der Weijde, A. H. and Hobbs, B. F.

Locational-based Coupling of Electricity Markets: Benefits from Coordinating Unit Commitment and Balancing Markets


Abstract: We formulate a series of stochastic models for committing and dispatching electric generators subject to transmission limits. The models are used to estimate the benefits of electricity locational marginal pricing (LMP) that arise from better coordination of day-ahead commitment decisions and real-time balancing markets in adjacent power markets when there is significant uncertainty in demand and wind forecasts. The unit commitment models optimise schedules under either the full set of network constraints or a simplified net transfer capacity (NTC) constraint, considering the range of possible real-time wind and load scenarios. The NTC-constrained model represents the present approach for limiting day-ahead electricity trade in Europe. A subsequent redispatch model then creates feasible real-time schedules. Benefits of LMP arise from decreases in expected start-up and variable generation costs resulting from consistent consideration of the full set of network constraints both day-ahead and in real-time. Meanwhile, using LMP to coordinate adjacent balancing markets provides benefits because it allows intermarket flow schedules to be adjusted in real-time in response to changing conditions. These models are applied to a stylised four-node network, examining the effects of varying system characteristics on the magnitude of the locational-based unit commitment benefits and the benefits of intermarket balancing. Although previous EPRG WORKING PAPER studies have examined the benefits of LMP, these usually examine one specific system, often without a discussion of the sources of these benefits, and with simplifying assumptions about unit commitment.

We conclude that both categories of benefits are situation dependent, such that small parameter changes can lead to large changes in expected benefits. Although both can amount to a significant percentage of operating costs, we find that the benefits of balancing market coordination are generally larger than the unit commitment benefits.

Keywords: Electricity prices, international electricity exchange, electricity market model, electricity transmission

JEL Codes: L94


EPRG Paper Link: 1022

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