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

Yi Wang, Zhifang Yang, Juan Yu and Xinxin Fang

Energy, 2020, vol. 200, issue C

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.

Keywords: Locational marginal price (LMP); Market clearing; Optimal power flow (OPF); Incentive compatibility; Market surplus (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:200:y:2020:i:c:s0360544220306496

DOI: 10.1016/j.energy.2020.117542

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