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

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  • Wang, Yi
  • Yang, Zhifang
  • Yu, Juan
  • Fang, Xinxin

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.

Suggested Citation

  • Wang, Yi & Yang, Zhifang & Yu, Juan & Fang, Xinxin, 2020. "Revisit the electricity price formulation: A formal definition, proofs, and examples," Energy, Elsevier, vol. 200(C).
    • Handle: RePEc:eee:energy:v:200:y:2020:i:c:s0360544220306496
    DOI: 10.1016/j.energy.2020.117542
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    References listed on IDEAS

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    1. Wu, Felix & Varaiya, Pravin & Spiller, Pablo & Oren, Shmuel, 1996. "Folk Theorems on Transmission Access: Proofs and Counterexamples," Journal of Regulatory Economics, Springer, vol. 10(1), pages 5-23, July.
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    Cited by:

    1. Tomasz Rokicki & Piotr Bórawski & Barbara Gradziuk & Piotr Gradziuk & Aldona Mrówczyńska-Kamińska & Joanna Kozak & Danuta Jolanta Guzal-Dec & Kamil Wojtczuk, 2021. "Differentiation and Changes of Household Electricity Prices in EU Countries," Energies, MDPI, vol. 14(21), pages 1-21, October.
    2. Dranka, Géremi Gilson & Ferreira, Paula & Vaz, A. Ismael F., 2021. "A review of co-optimization approaches for operational and planning problems in the energy sector," Applied Energy, Elsevier, vol. 304(C).
    3. Karhinen, Santtu & Huuki, Hannu, 2020. "How are the long distances between renewable energy sources and load centres reflected in locational marginal prices?," Energy, Elsevier, vol. 210(C).
    4. Michelfelder, Richard A. & Pilotte, Eugene A., 2021. "The electricity production cost curve during extreme winter weather," Journal of Economics and Business, Elsevier, vol. 117(C).
    5. Wang, Yi & Yang, Zhifang & Yu, Juan & Liu, Junyong, 2023. "An optimization-based partial marginal pricing method to reduce excessive consumer payment in electricity markets," Applied Energy, Elsevier, vol. 352(C).
    6. Wang, Yi & Yang, Zhifang & Yu, Juan & Liu, Sixu, 2023. "Pricing in non-convex electricity markets with flexible trade-off of pricing properties," Energy, Elsevier, vol. 274(C).

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