IDEAS home Printed from https://ideas.repec.org/a/eee/energy/v200y2020ics0360544220306496.html
   My bibliography  Save this article

Revisit the electricity price formulation: A formal definition, proofs, and examples

Author

Listed:
  • Wang, Yi
  • Yang, Zhifang
  • Yu, Juan
  • Fang, Xinxin

Abstract

Reasonable electricity pricing is the foundation of electricity markets. Locational marginal price is a commonly used electricity pricing mechanism. However, the formulations of locational marginal price are not consistent in existing studies. Also, the properties of this pricing method, such as incentive compatibility and market surplus, are not formally proved in a general dispatch formulation. In this study, we generalize the price formulation and revisit the definition and property of electricity prices. We find that electricity price should be a service-level concept rather than a node-level concept, which means that the electricity price may deviate for different market participants at the same node due to their different contributions to the system-wide constraints. Under this service-level concept, the properties of the incentive compatibility and non-negative market surplus are proved. The specific price formulation is analyzed based on a co-optimization model of energy and reserve. Case studies show that using the proposed pricing method, the prices for wind power and load include an additional component as a charge for the requirement of spinning reserve. The nice pricing properties maintain for the proposed method, which has distinct advantages compared with the node-based LMP formulation.

Suggested Citation

  • Wang, Yi & Yang, Zhifang & Yu, Juan & Fang, Xinxin, 2020. "Revisit the electricity price formulation: A formal definition, proofs, and examples," Energy, Elsevier, vol. 200(C).
    • Handle: RePEc:eee:energy:v:200:y:2020:i:c:s0360544220306496
    DOI: 10.1016/j.energy.2020.117542
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0360544220306496
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.energy.2020.117542?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Norouzi, Hadi & Abedi, Sajjad & Jamalzadeh, Reza & Rad, Milad Ghiasi & Hosseinian, Seyed Hossein, 2014. "Modeling and investigation of harmonic losses in optimal power flow and power system locational marginal pricing," Energy, Elsevier, vol. 68(C), pages 140-147.
    2. Meeus, L. & Vandezande, L. & Cole, S. & Belmans, R., 2009. "Market coupling and the importance of price coordination between power exchanges," Energy, Elsevier, vol. 34(3), pages 228-234.
    3. Wu, Felix & Varaiya, Pravin & Spiller, Pablo & Oren, Shmuel, 1996. "Folk Theorems on Transmission Access: Proofs and Counterexamples," Journal of Regulatory Economics, Springer, vol. 10(1), pages 5-23, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dranka, Géremi Gilson & Ferreira, Paula & Vaz, A. Ismael F., 2021. "A review of co-optimization approaches for operational and planning problems in the energy sector," Applied Energy, Elsevier, vol. 304(C).
    2. Karhinen, Santtu & Huuki, Hannu, 2020. "How are the long distances between renewable energy sources and load centres reflected in locational marginal prices?," Energy, Elsevier, vol. 210(C).
    3. Michelfelder, Richard A. & Pilotte, Eugene A., 2021. "The electricity production cost curve during extreme winter weather," Journal of Economics and Business, Elsevier, vol. 117(C).
    4. Tomasz Rokicki & Piotr Bórawski & Barbara Gradziuk & Piotr Gradziuk & Aldona Mrówczyńska-Kamińska & Joanna Kozak & Danuta Jolanta Guzal-Dec & Kamil Wojtczuk, 2021. "Differentiation and Changes of Household Electricity Prices in EU Countries," Energies, MDPI, vol. 14(21), pages 1-21, October.
    5. Wang, Yi & Yang, Zhifang & Yu, Juan & Liu, Junyong, 2023. "An optimization-based partial marginal pricing method to reduce excessive consumer payment in electricity markets," Applied Energy, Elsevier, vol. 352(C).
    6. Wang, Yi & Yang, Zhifang & Yu, Juan & Liu, Sixu, 2023. "Pricing in non-convex electricity markets with flexible trade-off of pricing properties," Energy, Elsevier, vol. 274(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dávid Csercsik & László Á. Kóczy, 2017. "Efficiency and Stability in Electrical Power Transmission Networks: a Partition Function Form Approach," Networks and Spatial Economics, Springer, vol. 17(4), pages 1161-1184, December.
    2. Neuhoff, Karsten & Barquin, Julian & Boots, Maroeska G. & Ehrenmann, Andreas & Hobbs, Benjamin F. & Rijkers, Fieke A.M. & Vazquez, Miguel, 2005. "Network-constrained Cournot models of liberalized electricity markets: the devil is in the details," Energy Economics, Elsevier, vol. 27(3), pages 495-525, May.
    3. Ahmadi, Seyed Ehsan & Sadeghi, Delnia & Marzband, Mousa & Abusorrah, Abdullah & Sedraoui, Khaled, 2022. "Decentralized bi-level stochastic optimization approach for multi-agent multi-energy networked micro-grids with multi-energy storage technologies," Energy, Elsevier, vol. 245(C).
    4. Figueiredo, Nuno Carvalho & Silva, Patrícia Pereira da & Cerqueira, Pedro A., 2016. "It is windy in Denmark: Does market integration suffer?," Energy, Elsevier, vol. 115(P2), pages 1385-1399.
    5. Paul Joskow & Jean Tirole, 2005. "Merchant Transmission Investment," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 233-264, June.
    6. Ochoa, Camila & Dyner, Isaac & Franco, Carlos J., 2013. "Simulating power integration in Latin America to assess challenges, opportunities, and threats," Energy Policy, Elsevier, vol. 61(C), pages 267-273.
    7. Dávid Csercsik, 2016. "Competition and Cooperation in a Bidding Model of Electrical Energy Trade," Networks and Spatial Economics, Springer, vol. 16(4), pages 1043-1073, December.
    8. Makoto TANAKA, 2005. "Optimal Transmission Capacity under Nodal Pricing and Incentive Regulation for Transco," Discussion papers 05021, Research Institute of Economy, Trade and Industry (RIETI).
    9. Katrin Schmitz & Christoph Weber, 2013. "Does One Design Fit All? On The Transferability Of The PJM Market Design To The German Electricity Market," EWL Working Papers 1302, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Apr 2013.
    10. Giovanni Goldoni, 2007. "Un bilancio delle liberalizzazioni dei settori dell’energia elettrica e del gas naturale in Italia e in Europa," Working Papers 40/2007, University of Verona, Department of Economics.
    11. Brijs, Tom & De Jonghe, Cedric & Hobbs, Benjamin F. & Belmans, Ronnie, 2017. "Interactions between the design of short-term electricity markets in the CWE region and power system flexibility," Applied Energy, Elsevier, vol. 195(C), pages 36-51.
    12. Angélique Palle & Yann Richard, 2022. "Multilevel Governance or Scalar Clashes: Finding the Right Scale for EU Energy Policy," Tijdschrift voor Economische en Sociale Geografie, Royal Dutch Geographical Society KNAG, vol. 113(1), pages 1-18, February.
    13. Ilic, M. & Hsieh, E. & Remanan, P., 2003. "Transmission Pricing of Distributed Multilateral Energy Transactions to Ensure System Security and Guide Economic Dispatch," Cambridge Working Papers in Economics 0311, Faculty of Economics, University of Cambridge.
    14. Francisco Munoz & Enzo Sauma & Benjamin Hobbs, 2013. "Approximations in power transmission planning: implications for the cost and performance of renewable portfolio standards," Journal of Regulatory Economics, Springer, vol. 43(3), pages 305-338, June.
    15. Ghasemi, Mojtaba & Ghavidel, Sahand & Ghanbarian, Mohammad Mehdi & Gharibzadeh, Masihallah & Azizi Vahed, Ali, 2014. "Multi-objective optimal power flow considering the cost, emission, voltage deviation and power losses using multi-objective modified imperialist competitive algorithm," Energy, Elsevier, vol. 78(C), pages 276-289.
    16. Ioannidis, Filippos & Kosmidou, Kyriaki & Makridou, Georgia & Andriosopoulos, Kostas, 2019. "Market design of an energy exchange: The case of Greece," Energy Policy, Elsevier, vol. 133(C).
    17. Mariola Ndrio & Anna Winnicki & Subhonmesh Bose, 2019. "Pricing Economic Dispatch with AC Power Flow via Local Multipliers and Conic Relaxation," Papers 1910.10673, arXiv.org, revised Oct 2021.
    18. Juan Rosellón, Ingo Vogelsang, and Hannes Weigt, 2012. "Long-run Cost Functions for Electricity Transmission," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    19. Milad Ghaisi & Milad Rahmani & Pedram Gharghabi & Ali Zoghi & Seyed Hossein Hosseinian, 2017. "Scheduling a Wind Hydro-Pumped-Storage Unit Considering the Economical Optimization," Post-Print hal-01478231, HAL.
    20. Wolf-Peter Schill & Jonas Egerer & Juan Rosellón, 2015. "Testing regulatory regimes for power transmission expansion with fluctuating demand and wind generation," Journal of Regulatory Economics, Springer, vol. 47(1), pages 1-28, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:energy:v:200:y:2020:i:c:s0360544220306496. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/energy .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.