Course EE 394V Restructured
Electricity Markets: Locational Marginal Pricing
Fall 2018
Unique Number 17075
Meeting time: Tuesday and Thursday, 2:00pm to
3:15pm.
Meeting
location: EER 1.504 
Ross
Baldick
Professor
Department of Electrical
and Computer Engineering
EER 7.872 The University of Texas
at Austin
Tel: (512) 4715879
Email: baldick@ece.utexas.edu
www.ece.utexas.edu/~baldick
Office
hours: Tuesday and Thursday, 3:30pm to 4:45pm, EER 7.872.
Please email me if you want to see me outside of
these office hours. 


Course description of "Restructured Electricity Markets: Locational Marginal Pricing"
This course focuses on the "locational marginal
pricing" (or "nodal") model of "organized" or "centralized" dayahead and realtime electricity markets, which is in place in the Eastern
United States, the Midwest United States, California, the Southwest Power Pool, and Texas (the Electric Reliability Council of Texas, ERCOT). The course uses the ERCOT nodal market as its main example, but features of other North American markets, such as capacity markets, are also discussed. We will consider the solution of power flow, formulate
optimal dispatch as an optimization problem, consider offerbased economic dispatch, transmission and unit commitment
issues, and discuss pricing rules and incentives in markets, particularly in the context of transmission limits. The pedagogical approach is to first discuss pricing in organized electricity markets in the absence of transmission constraints and then introduce transmission constraints and their implications. We will also discuss
a number of other topics including energy and transmission price risk
hedging, network models, and capacity adequacy.
This course covers technical topics in power systems,
optimization, and economics at a graduate level and is presented in a mathematically rigorous fashion. A challenge in such a course is that few students will have background in all of these areas, and different students will have different backgrounds. Typical students should
have at least an undergraduate technical background in at least two of these areas and
expect to read outside of the class for any background material that they
have not studied prior to this class. The first half of the semester will rapidly review the background material for the class. The second half of the semester will then integrate this background material.
The slides for this course are available for downloading from www.ece.utexas.edu/~baldick/classes/394V/EE394V.html, and the links are highlighted below.
Downloadable video of the course materials are available from the CUSP website at the University of Minnesota.
Topics include:
 Recent history of electricity market restructuring in Texas:
 Regional entities,
 Texas and ERCOT,
 Regulatory jurisdiction,
 Milestones in Texas electricity restructuring,
 The locational marginal pricing market,
 Capacity adequacy concerns,
 based on Ross Baldick and Hui Niu, "Lessons Learned: The Texas Experience.'' In James Griffin and Steven Puller, Editors, Electricity Deregulation: Where to from
here? University of Chicago Press, 2005.
 Review of background material:
 There are three main areas of background material for this class: power systems, optimization, and economics, divided into six topics.
 The power systems material includes solution of nonlinear simultaneous equations and formulation and solution of power flow.
 The optimization material includes basic results in optimization theory and the formulation and solution of economic dispatch.
 The economics material includes microeconomics and economicdecision making in the electricity industry.
 You do not need to be familiar with all three areas at the start of the course. However, if you are not familiar with at least two of these areas then you may find that you struggle during the semester. You should also have familiarity with Matlab and Powerworld for use in the homework exercises.
 Solution of nonlinear simultaneous equations:
 Formulation,
 Linear equations,
 Nonlinear equations,
 Examples,
 NewtonRaphson algorithm,
 Discussion of NewtonRaphon update,
 based on parts of Chapter 7 of Applied Optimization: Formulation and Algorithms for Engineering Systems, Cambridge University Press 2006.
 Power flow:
 Review of power flow concepts,
 Formulation of power flow,
 Problem characteristics and solution,
 Linearized power flow,
 Fixed voltage schedule,
 Line flow,
 DC power flow,
 Losses,
 Contingency analysis,
 based on parts of Chapters 6, 7, 8, and 9 of Applied Optimization: Formulation and Algorithms
for Engineering Systems, Cambridge University Press 2006.
 Optimization:
 Basic definitions,
 Duality,
 Continuous unconstrained problems,
 Continuous equalityconstrained problems,
 Continuous linear inequalityconstrained problems,
 Continuous nonlinear inequalityconstrained problems,
 Integer problems,
 Mixedinteger problems,
 Uncertainty,
 based on parts of Chapters 2, 13, 17, and 19 of Applied Optimization: Formulation and Algorithms for Engineering Systems, Cambridge University Press 2006.
 Economic
dispatch:
 Formulation,
 Problem characteristics,
 Optimality conditions,
 Examples,
 Merit order,
 Linear programming approximation,
 based on Chapters 12, 13, and 15 of Applied Optimization: Formulation and Algorithms for Engineering
Systems.
 Microeconomics:
 Nomenclature,
 Example of apartment rental,
 Market clearing price and surplus,
 Longer term issues,
 Operating costs,
 Inelastic demand,
 Spot and forward markets,
 based on Chapter 1 of Hal R. Varian, Intermediate Microeconomics,
Norton, 2006 and Chapter 2 of Daniel S. Kirschen and Goran Strbac, Fundamentals of
Power System Economics, Wiley, Chichester, England, 2004.
 Economic decisionmaking in both short and longterm:
 Construction and operation,
 Central planning versus markets,
 Goals of decisionmaking,
 Central planning,
 Markets,
 Market idealizations,
 Competition in electricity,
 Ideal central planning,
 Bilateral contracts versus auctions,
 Capacity markets,
 based on "Competition in Generation: The Economic Foundations," by Richard Green, Proceedings of the IEEE, 88(2):128—139, February 2000.
 We will occasionally use the PowerWorld power flow and optimal power flow solver in class and in homework exercises.
 You should Download and install the Educational version of the PowerWorld Simulator.
 A tutorial on how to use the solver is available at PowerWorld.
 The tutorial uses a 13 Bus System, and the tutorial demonstrates how to extract data from the system, as contained in 13 Bus Extracted Data.
 A PowerWorld implementation of the example system used in the Summary, with baseload and peaking generation, is available at 3 Bus System.
 Some of the exercises will use matlab, the matlab optimization toolbox and yalmip.
 A tutorial on how to use yalmip is available at yalmip.
 Offerbased economic
dispatch in the absence of transmission constraints,
 Surplus,
 Feasible production set,
 Need for centralized coordination,
 Optimization formulation,
 Generation offers,
 Demand specification,
 Demand bids,
 Dispatch calculation,
 Pricing rule,
 Incentives,
 Value of lost load and
implications for pricing and incentives,
 Dispatch supporting prices,
 Generalizations,
 Ancillary services: reserves and regulation,
 based on Steven Stoft, Power System Economics: Designing
Markets for Electricity, IEEE Press and Wiley Interscience and John
Wiley and Sons, Inc., Piscataway, NJ, 2002, and Daniel S. Kirschen and Goran Strbac, Fundamentals of
Power System Economics, Wiley, Chichester, England, 2004.
 Locational marginal pricing,
 Optimal power flow,
 DC optimal power flow,
 Offerbased optimal power flow,
 Examples,
 Properties of locational marginal prices,
 Congestion rent (merchandising surplus) and congestion cost,
 Contingency (or security) constraints,
 Reactive power and losses,
 Decomposition and linearization.
 Unit commitment
 Temporal issues,
 Formulation,
 Lagrangian relaxation,
 Duality gaps,
 Mixed integer programming,
 Dispatch supporting
prices and makewhole
payments,
 Role of prices,
 Implications for investment decisions,
 Transmission constraints.
 Introduction to hedging of energy and transmission price risk,
 Volatility of energy prices,
 Forward markets,
 Dayahead and realtime markets,
 Contracts for differences,
 Relationship to capital formation,
 Transmission prices,
 Financial transmission rights,
 Revenue adequacy.
To summarize, the course will integrate a number of concepts from economics, electric power,
and optimization theory. The emphasis will be rigorous and we will present
various theorems and results formally.
Expectations
Please come to office hours with
prepared questions.
I may have to cancel one or two
classes during the semester in order to attend conferences. We may need to
schedule makeup classes for these cancelled classes since the semester will be full of material to cover.
I do not take attendance and you are
free to attend or not attend class as you choose. However, if you come to
class, please be prompt. Please be seated in class by the
time the startofclass bell rings. If a homework is due, please put it on
the desk in the classroom prior to the start of class.
Textbook
The course will cover topics from a number of fields
including power systems, optimization theory, and economics.
Consequently, there is no single textbook for this class. However, the
slides are available online and I will plan to distribute copies of relevant
papers if necessary. Two useful references
for the power systems economics material is:
 Steven Stoft, Power System Economics: Designing
Markets for Electricity, IEEE Press and Wiley Interscience and John
Wiley and Sons, Inc., Piscataway, NJ, 2002.
 Daniel S. Kirschen and Goran Strbac, Fundamentals of
Power System Economics, Wiley, Chichester, England, 2004.
For a more general reference on microeconomics, see:
 Hal R. Varian, Intermediate Microeconomics,
Norton, 2006.
For material on power systems, see:
 Arthur Bergen and Vijay Vital, Power Systems Analysis, PrenticeHall, 2000,
 William D. Stevenson, Elements of Power Systems Analysis,
 Duncan Glover, Mulukutla Sarma, and Thomas Overbye, Power System Analysis and Design, Thomson, Fourth Edition
 Allen J. Wood and Bruce F. Wollenberg, Power Generation, Operation, and Control, Wiley, Second Edition, 1996.
For material on optimization, see:
 Ross Baldick, Applied Optimization: Formulation and Algorithms for Engineering Systems, Cambridge University Press 2006.
Prerequisites:
The class will build on a background of undergraduate
economics, undergraduate electric power or circuit theory, and continuous and
mixedinteger optimization theory. I do not expect every student to have a strong
background in all three areas. However, if you do not have a background in
at least two of these areas, you may struggle in the class. I encourage
you to take the course as credit/no credit if you are concerned
about the background material. (If
you are looking for a nontechnical introduction to locational marginal pricing,
I also teach a oneday shortcourse that might suit you instead. See www.baldick.com
for details.)
For people from industry:
I strongly encourage people from industry to
attend. There are two basic options for attendance by
nonstudents:
 Auditing: Use this option if you do not need
credit for the course..
 Nondegree: Use this option if you want
credit for the course or your employer requires that you take the course for
credit. Apply through the Texas Common Application website, https://www.applytexas.org/adappc/commonapp.WBX,
for graduate admission to The University of Texas at Austin. You
should create a new admission application to The University of Texas at
Austin. Select "Graduate, U.S." admission or "Graduate,
International," as appropriate, and choose Fall 2006 admission.
Select admission to the "ECEEnergy Systems" major. Enter
the biographical information on "Page 1" and the other required
information on the successive pages. On "Page 2" be sure to
check the "Nondegree Graduate Student" box on question 13.
The application fee is $50 and the online application must be completed and
submitted. As well as submitting the online
application, you will need to submit transcripts of your degrees. Once
admitted, the tuition and fees will be between $1500 and $2000 for instate
residents and approximately $3500 to $4000 for outofstate.
Homework policy:
There will be occasional homeworks in this class.
Exam policy:
There will be three inclass midterms: Tuesday, September 25; Thursday, November 1; and, Thursday, December 6. There will be no final.
Grading policy:
A final score will be calculated based on:
 Homeworks 40%
 Midterms each 20%
Other information:
Allegations of Scholastic Dishonesty will be dealt with
according to the procedures outlined in Appendix C, Chapter 11, of the General
Information Bulletin, http://www.utexas.edu/student/registrar/catalogs/.
The University of Texas at Austin provides, upon request,
appropriate academic adjustments for qualified students with disabilities. For
more information, contact the Office of the Dean of Students at 4716259,
4714241 TDD, or the College of Engineering Director of Students with
Disabilities, 4714321.
Classroom
evacuation for students:
All occupants of university
buildings are required to evacuate a building when a fire alarm and/or an
official announcement is made indicating a potentially dangerous situation
within the building. Familiarize yourself with all exit doors of each classroom
and building you may occupy. Remember that the nearest exit door may not be the
one you used when entering the building. If you require assistance in
evacuation, inform your instructor in writing during the first week of class.
For evacuation in your classroom or building:
1. Follow the instructions of
faculty and teaching staff.
2. Exit in an orderly fashion
and assemble outside.
3. Do not reenter a building
unless given instructions by emergency personnel.