Course description of "Restructured Electricity Markets: Locational Marginal Pricing"

This course focuses on the "locational marginal pricing" (or "nodal") model of "organized" or "centralized" day-ahead and real-time 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 offer-based 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 users.ece.utexas.edu/~baldick/classes/394V/EE394V.html, and the links are highlighted below and summarized in an overview.

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 non-linear 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 economic-decision 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.
  1. Solution of non-linear simultaneous equations:
  • Formulation,
  • Linear equations,
  • Non-linear equations,
  • Examples,
  • Newton-Raphson algorithm,
  • Discussion of Newton-Raphon update,
  • based on parts of Chapter 7 of Applied Optimization: Formulation and Algorithms for Engineering Systems, Cambridge University Press 2006.
  2. 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.
  3. Optimization:
  • Basic definitions,
  • Duality,
  • Continuous unconstrained problems,
  • Continuous equality-constrained problems,
  • Continuous linear inequality-constrained problems,
  • Continuous non-linear inequality-constrained problems,
  • Integer problems,
  • Mixed-integer 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.
  4. 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.
  5. 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.
  6. Economic decision-making in both short- and long-term:
• Construction and operation,
• Central planning versus markets,
• Goals of decision-making,
• 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.
• Offer-based 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,
  • Offer-based 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 make-whole 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,
  • Day-ahead and real-time 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 make-up 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 start-of-class bell rings.  If a homework is due, please put it on the desk in the classroom prior to the start of class.

Textbook

• 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, Prentice-Hall, 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. 

Pre-requisites:

The class will build on a background of undergraduate economics, undergraduate electric power or circuit theory, and continuous and mixed-integer 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 non-technical introduction to locational marginal pricing, I also teach a one-day short-course 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 non-students:

• Auditing: Use this option if you do not need credit for the course.. 
• Non-degree:  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 "ECE-Energy 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 in-state residents and approximately $3500 to $4000 for out-of-state.

Homework policy:

There will be occasional homeworks in this class.

Exam policy:

There will be three in-class mid-terms: 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%
• Mid-terms 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 471-6259, 471-4241 TDD, or the College of Engineering Director of Students with Disabilities, 471-4321.

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 re-enter a building unless given instructions by emergency personnel.