Restructuring has been both a nationwide and a worldwide trend in the electric power industry in the last 10 years. With years of experience accumulated, both successful and frustrating, markets have developed with common main bodies based on economic theory, empirical knowledge, and intuition. Moreover, power market designs are tending towards greater uniformity with the Federal Energy Regulatory Commission's (FERC) carrying out a "Standard Market Design" (SMD) for electricity markets in North America. However, details still differ from market to market. The reason for these differences lies in the fact that there is no existing widely accepted method and tool to perform power market analysis and to provide convincing quantitative results. Theoretical properties of power markets remain relatively unclear, particularly in the presence of important engineering issues such as generation and transmission capacity constraints, operation issues such as price caps and non-decreasing supply functions, and sub-market interactions such as the interactions between the day-ahead market, real-time market, and bilateral contracts market. These issues have significant effects on the economic outcome, but are not well covered in classic economics, and not clearly understood by market participants and researchers.
This project proposes to investigate the characteristics of typical power markets, focusing on the difficulties mentioned above, and develop an original method to perform quantitative power market analysis. We will consider the common design elements of the major power markets in the US, referring to them as a "typical market" compatible with FERC's SMD. By doing this, we can concentrate on the most important common features of power markets and develop results that are directly applicable or applicable with minor modifications to most power markets in United States. In this project, we will adopt the supply function equilibrium (SFE) approach as our research platform. SFE involves the closest modeling to power market reality among all the existing power market modeling methods, as compared for example to a Cournot model. All our research work will be embedded in the SFE model setting with asymmetric market participants and an extended time horizon. We will use the SFE platform to investigate the effects of transmission and generation capacity constraints, real-time market interaction, bilateral contracts, and price caps. To the best of the PI's knowledge, no previous work has addressed these topics together in a sophisticated SFE setting with asymmetric market participants and an extended time horizon.
This project will involve theoretical work, development work, and application work. Theoretically, we hope to investigate the effects of the power market constraints, and provide valuable insights for the operation of power market. Specifically, we hope to bring forward and fulfill the novel idea of a "universal constraints handling framework" for SFE, which is capable of handling all kinds of constraints, and investigate market interaction issues with modeling of arbitrage. This part of the work is of great intellectual merit in both engineering science and economics, and will contribute to both of them. Another goal of this project is to devise a more sophisticated algorithm and software for power market analysis. This part of the work will serve as a good starting point for dispelling the ambiguities about the characteristics of power markets, facilitating a desirable power market standard design, and will assist market participants, researchers and regulators to obtain new insights. Lastly, we hope to apply the theoretical results and software to the Electric Reliability Council of Texas (ERCOT) market. This application is not only to test the effectiveness of our proposed method and software, but also to demonstrate how to apply our research results about a typical market to an actual large-scale market with its peculiarities. The proposed SFE analysis is valuable for ERCOT's ongoing market redesign process. By 2006, the current ERCOT market will change to a nodal day-ahead market. The insights from this study will be critical for the development of the new market design in ERCOT, and the results will consist of both analysis of the current ERCOT market and forecasts of the future ERCOT market. This work is not only of great value to the ERCOT market, but also of broad impact in the design and analysis of other markets.
This research will involve significant interaction between the Principal Investigator and graduate students and prepare these students for careers that integrate ideas from several disciplines, including electric power engineering, economics, and finance. The project involves a mix of theoretical and numerical analysis and software development, and is expected to result in several publications, both in the electrical engineering and the regulatory economics literature. The results will be reported at conferences such as IEEE Power Engineering Society meetings. In addition, the PI intends to incorporate some of the basic ideas and results about the SFE into power system engineering courses, and bring the students to the latest theoretical developments in the electric power industry.
