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(cid:2) TrimSize:6inx9in Tesfatsion670124 f01.tex V2-11/20/2020 10:48P.M. Pagei A NEW SWING-CONTRACT DESIGN FOR WHOLESALE POWER MARKETS (cid:2) (cid:2) (cid:2) (cid:2) TrimSize:6inx9in Tesfatsion670124 f01.tex V2-11/20/2020 10:48P.M. Pageii IEEEPress 445HoesLane Piscataway,NJ08854 IEEEPressEditorialBoard (cid:2) (cid:2) EkramHossain,EditorinChief JónAtliBenediktsson DavidAlanGrier ElyaB.Joffe XiaoouLi PeterLian AndreasMolisch SaeidNahavandi JeffreyReed DiomidisSpinellis SarahSpurgeon AhmetMuratTekalp (cid:2) (cid:2) TrimSize:6inx9in Tesfatsion670124 f01.tex V2-11/20/2020 10:48P.M. Pageiii A NEW SWING-CONTRACT DESIGN FOR WHOLESALE POWER MARKETS Leigh Tesfatsion (cid:2) (cid:2) (cid:2) (cid:2) TrimSize:6inx9in Tesfatsion670124 f01.tex V2-11/20/2020 10:48P.M. Pageiv Copyright©2021byTheInstituteofElectricalandElectronicsEngineers,Inc.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. 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Identifiers:LCCN2020027003(print)|LCCN2020027004(ebook)|ISBN 9781119670124(hardback)|ISBN9781119670131(adobepdf)|ISBN 9781119670148(epub) Subjects:LCSH:Electricutilities.|Electricutilities–Costs.|Options (Finance) Classification:LCCHD9685.A2T4662021(print)|LCCHD9685.A2(ebook)| DDC333.793/23–dc23 LCrecordavailableathttps://lccn.loc.gov/2020027003 LCebookrecordavailableathttps://lccn.loc.gov/2020027004 CoverdesignbyWiley Coverimages:(Topimage)©SamRobinson/Gettyimages,(Centerimage)©dowell/GettyImages Setin10/12ptTimesLTStdbySPiGlobal,Chennai,India 10 9 8 7 6 5 4 3 2 1 (cid:2) (cid:2) TrimSize:6inx9in Tesfatsion670124 f01.tex V2-11/20/2020 10:48P.M. Pagev ThisbookisdedicatedtoHermanC.Quirmbachforhissteadfast supportofthischallenging bookprojectandforhisinsistence, bywordandexampleovermanyyears,thatreasoningbeboth preciseandclear. (cid:2) (cid:2) (cid:2) (cid:2) TrimSize:6inx9in Tesfatsion670124 f01.tex V2-12/12/2020 5:35P.M. Pagevii CONTENTS PREFACE xiii AUTHORBIOGRAPHY xiv ACKNOWLEDGMENTS xv CHAPTER 1 INTRODUCTION 1 CHAPTER 2 USRTO/ISO-MANAGEDWHOLESALEPOWERMARKETS:OVERVIEW 9 2.1 ChapterPreview 9 2.2 GeneralGoalsforWholesalePowerMarketDesign 9 2.3 USRTO/ISO-ManagedMarketOperations 10 2.4 StressesFacedbyCurrentUSRTO/ISO-ManagedMarkets 14 (cid:2) (cid:2) CHAPTER 3 MOTIVATIONFORCURRENTSTUDY 17 3.1 ChapterPreview 17 3.2 ProblematicDesignAspectsofUSRTO/ISO-ManagedWholesalePowerMarkets 17 3.2.1 ArtificialDistinctionBetweenEnergyandReserve 17 3.2.2 ProblematicuseofHedonicPricing 18 3.2.3 RevenueInsufficiencyandIncentiveProblems 19 3.2.4 ComputationalFragilityofLMPDerivations 20 3.2.5 PerformancePaymentinAdvanceofPerformanceDelivery 22 3.2.6 MinimalDirectRepresentationofRetailCustomerInterests 23 3.2.7 RelianceonOverlySimplisticCostConceptions 24 3.2.8 UseofSpot-MarketPricingforForwardMarkets 26 3.3 RelationofCurrentStudytoPreviousSwing-ContractWork 26 CHAPTER 4 SWINGCONTRACTSFORISO-MANAGEDWHOLESALEPOWER MARKETS 29 4.1 SwingContractOverview 29 4.2 SwingContracts:GeneralFormulation 29 4.3 SwingContractsinFirmorOptionForm 31 CHAPTER 5 ILLUSTRATIVESWING-CONTRACTRESERVEOFFERS 35 5.1 ChapterPreview 35 5.2 ASimpleEnergy-BlockSwingContractinFirmForm 37 vii (cid:2) (cid:2) TrimSize:6inx9in Tesfatsion670124 f01.tex V2-11/20/2020 10:49P.M. Pageviii viii CONTENTS 5.3 AnEnergy-BlockSwingContractinOptionForm 40 5.4 Swing-ContractImplementationofStandardSupplyOffers 41 5.5 ASwingContractOfferingContinuousSwing(Flexibility)inPowerandRamp 47 5.6 ASwingContractOfferingBatteryServices 49 5.7 Swing-ContractFacilitationofPrivateBilateralContracting 52 CHAPTER 6 SWING-CONTRACTMARKETDESIGN 55 6.1 ChapterPreview 55 6.2 GeneralSwing-ContractMarketFormulation 55 6.3 FinancialandPhysicalFeasibilityofSwing-ContractOffers 58 6.4 ReserveBids 58 6.5 HandlingofFixedReserveBidsandNon-DispatchedPower 60 6.6 PerformancePenaltiesandIncentives 60 6.7 ISOCostAllocation 61 CHAPTER 7 SWING-CONTRACTMARKETOPTIMIZATION:BASE-CASEMILP FORMULATION 67 7.1 ChapterPreview 67 7.2 GeneralAssumptionsandNotation 68 7.3 DiscretizationoftheISO’sOptimizationProblem 69 7.4 ISOObjectiveFunction 73 (cid:2) 7.5 CompleteAnalyticalMILPFormulation 74 (cid:2) 7.6 AdditionalDiscussionofOptimizationAspects 76 7.7 Five-BusTestCase 78 7.8 ThirtyBusTestCasewithAdaptiveReserveZones 81 CHAPTER 8 INCLUSIONOFRESERVEOFFERSWITHPRICESWING 85 8.1 ChapterPreview 85 8.2 CostFunctionPreliminaries 86 8.3 MILPTractableformofReserveOfferswithPriceSwing 87 CHAPTER 9 INCLUSIONOFPRICE-SENSITIVERESERVEBIDS 93 9.1 ChapterPreview 93 9.2 IncorporationofBenefits 94 9.3 ModelingofPrice-SensitiveReserveBids 96 9.3.1 StandardDemandFunctionFormulation 96 9.3.2 ReserveBidswithTime-of-UsePricing 97 9.3.3 ReserveBidswithPriceSwing 97 9.3.4 ReserveBidsDirectlyExpressedasBenefitFunctions 99 9.4 MILPTractableApproximationofBenefitFunctions 100 (cid:2) (cid:2) TrimSize:6inx9in Tesfatsion670124 f01.tex V2-11/20/2020 10:49P.M. Pageix CONTENTS ix CHAPTER10 THELINKEDSWING-CONTRACTMARKETDESIGN 105 10.1 ChapterPreview 105 10.2 MultistageOptimizationandTimeInconsistency 107 10.3 SettlementTime-ConsistencyofSwing-ContractMarkets 109 10.4 Swing-ContractLong-TermForwardMarkets 111 10.5 Swing-ContractShort-TermForwardMarkets 112 10.6 Swing-ContractVeryShort-TermForwardMarkets 113 10.7 Swing-ContractDeploymentinReal-TimeOperations 114 CHAPTER11 ILLUSTRATION:LINKEDDAY-AHEADANDHOUR-AHEAD SWING-CONTRACTMARKETS 117 11.1 ChapterPreview 117 11.2 Hour-AheadMarketwithReserveOffersConsistingofSwing-ContractPortfolios 117 11.3 SCEDSolutionforHour-AheadSwing-ContractMarket 122 11.3.1 Overview 122 11.3.2 PowerBalance 122 11.3.3 CoverageoftheISO’sUncertaintySet 123 11.3.4 ConstrainedMinimizationofExpectedCost 125 11.4 LinkedDay-AheadandHour-AheadMarkets 126 CHAPTER12 STANDARDMODELINGOFACOMPETITIVEMARKET 131 (cid:2) 12.1 ChapterPreview 131 (cid:2) 12.2 KeyDefinitions 131 12.3 StandardCompetitiveMarketAssumptions 132 12.4 LawofOnePriceforCommodities 132 12.5 CompetitiveMarket:BasicFormulation 133 12.6 NetSurplusExtraction 136 12.7 MarketEfficiencyMetric 137 12.8 MarketEfficiencyandPricingRules 139 12.9 StrategicTradeBehaviorandTraderMarketPower 140 CHAPTER13 USRTO/ISO-MANAGEDMARKETS:EFFICIENCYANDMARKET POWER 143 13.1 ChapterPreview 143 13.2 DailyMarketOperations 144 13.3 IllustrativeAnalyticalDAMFormulation 146 13.4 NetSurplusExtractionintheIllustrativeDAM 147 13.5 MarketPowerintheIllustrativeDAM:Type-IError 152 13.6 MarketPowerintheIllustrativeDAM:Type-IIError 156 13.7 MarketInefficiencyintheIllustrativeDAM 160 (cid:2) (cid:2) TrimSize:6inx9in Tesfatsion670124 f01.tex V2-11/20/2020 10:49P.M. Pagex x CONTENTS 13.8 DAMPerformance:GeneralAssessment 163 13.9 SchedulingofBilateralContracts 165 CHAPTER14 COMPARISONSWITHSWING-CONTRACTMARKETS 167 14.1 ChapterPreview 167 14.2 ProductDefinitioninUSRTO/ISO-ManagedMarkets 168 14.3 WholesalePowerandtheLawofOnePrice(Not) 170 14.4 Differentialvs.UniformPricing 171 14.5 ComparisonofSCandCurrentUSDAMDesigns 172 CHAPTER15 ADVANTAGESOFTHELINKEDSWING-CONTRACTMARKETDESIGN175 15.1 ChapterPreview 175 15.2 SCMarketsarePhysically-CoveredInsuranceMarkets 176 15.3 Longer-TermSCMarketsSupportNewInvestment 177 15.3.1 Energy-OnlyMarket 179 15.3.2 CentrallyManagedCapacityMarket 181 15.3.3 LSEBilateralContractObligations 182 15.4 SCMarketsEnsureRevenueSufficiency 183 15.5 SCMarketsAmeliorateMerit-OrderConcerns 184 15.6 SCMarketsareRobust-ControlMechanisms 185 15.7 SCMarketsReduceRuleComplexity 186 (cid:2) 15.8 SCMarketsReduceGamingOpportunities 187 (cid:2) 15.9 SCMarketshaveSmaller-SizedOptimizations 189 15.10 AdditionalAdvantagesofSCMarkets 190 15.10.1 EnsureaLevelPlayingFieldforResourceParticipation 190 15.10.2 PermitCo-OptimizationofDiverseReserve 191 15.10.3 AppropriatelyRemunerateDiversityandFlexibility 191 15.10.4 EncourageAccurateForecastingandDispatchFollowing 191 15.10.5 EnsureSettlementTime-Consistency 191 CHAPTER16 GRADUALTRANSITIONTOLINKEDSWING-CONTRACTMARKETS 193 16.1 ChapterPreview 193 16.2 ADAMFormulationPermittingGradualTransition 195 16.3 CostFunctionPreliminariesfortheTransitionalDAM 197 16.4 MILPSCUC/SCEDOptimizationfortheTransitionalDAM 201 CHAPTER17 SWING-CONTRACTSUPPORTFORINTEGRATEDTRANSMISSION ANDDISTRIBUTIONSYSTEMS 209 17.1 ChapterPreview 209 17.2 TransactiveEnergySystemDesignforITDSystems 211 17.3 RoleofDistributionUtilities 215 17.4 AnIDSO-ManagedBid-BasedTESDesignforHouseholds 216 17.5 IDSOsasGrid-EdgeResourceAggregators 219 17.6 Swing-ContractSupportforIDSOParticipationinWholesalePowerMarkets 220 (cid:2) (cid:2) TrimSize:6inx9in Tesfatsion670124 f01.tex V2-11/20/2020 10:49P.M. Pagexi CONTENTS xi CHAPTER18 DESIGNEVALUATIONVIATHEITDTESPLATFORM 221 18.1 ChapterPreview 221 18.2 DesignReadinessLevels 222 18.3 AnITDTESPlatformPermittingTESDesignEvaluation 223 18.4 IllustrativeTestCases:Overview 226 18.5 IllustrativeTestCases:Report 229 18.5.1 IDSOPeak-LoadReductionCapabilities 229 18.5.2 IDSOLoad-MatchingCapabilities 229 18.5.3 HouseholdITDTestCases:Discussion 233 CHAPTER19 POTENTIALFUTURERESEARCHDIRECTIONS 235 19.1 EffectiveuseofOptionSwingContracts 235 19.2 RepresentationofReserveBids 236 19.3 CompensationforStorageServices 236 19.4 CompensationforReliabilityServices 236 19.5 RepresentationofPower-Paths 237 19.6 ImplementationofContract-ClearingOptimizationsforSwing-ContractMarkets 237 19.7 GradualTransitiontoaSwing-ContractMarket 238 CHAPTER20 CONCLUSION:THEDOTSKEEPCONNECTING 239 (cid:2) (cid:2) APPENDIXA APPENDICES 241 REFERENCES 249 INDEX 259 (cid:2)