Getting prices right on electricity spot markets: On the economic impact of advanced power flow models

Martin Bichler and Johannes Knörr

Energy Economics, 2023, vol. 126, issue C

Abstract: As the share of variable renewable energy increases, adequate prices on electricity spot markets become increasingly important as they set signals for scarcity, investment, or demand response. Market prices are derived from the underlying welfare maximization problem. On electricity spot markets, this optimization problem is based on the non-convex and non-linear Alternating Current Optimal Power Flow (ACOPF) model. Since the ACOPF is intractable, electricity markets around the world use a linear approximation, the Direct Current Optimal Power Flow (DCOPF) model. Recent research has led to better non-linear relaxations of the ACOPF. We show that these non-linear relaxations increase welfare and imply significantly lower redispatch costs and side-payments. Most importantly, we show that the price signals obtained from non-linear relaxations are much improved. The DCOPF often yields high price differences between nodes when there is no line congestion in the AC-feasible solution or vice versa. Such biased price signals pose a significant problem in practice as they lead to inefficient demand response, distorted investment signals, and incorrect congestion incomes. The use of non-linear relaxations mitigates this problem and provides an important advantage of the resulting prices over prices based on the DCOPF.

Keywords: Electricity pricing; Power flow; Pricing with non-convexities; Convex programming; Non-linear programming (search for similar items in EconPapers)
JEL-codes: C61 D44 D47 D61 Q41 Q49 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:126:y:2023:i:c:s0140988323004668

DOI: 10.1016/j.eneco.2023.106968

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