Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1211: Simulation and Evaluation of Zonal Electricity Market Designs

Mohammad Reza Hesamzadeh (), Pär Holmberg () and Mahir Sarfati ()
Additional contact information
Mohammad Reza Hesamzadeh: Royal Institute of Technology (KTH)
Pär Holmberg: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
Mahir Sarfati: Research Institute of Industrial Economics (IFN), Postal: and Royal Institute of Technology (KTH)

Abstract: Zonal pricing with countertrading (a market-based redispatch) gives arbitrage opportunities to the power producers located in the export-constrained nodes. They can increase their profit by increasing the output in the dayahead market and decrease it in the real-time market (the inc-dec game). We show that this leads to large inefficiencies in a standard zonal market. We also show how the inefficiencies can be significantly mitigated by changing the design of the real-time market. We consider a two-stage game with oligopoly producers, wind-power shocks and real-time shocks. The game is formulated as a two-stage stochastic equilibrium problem with equilibrium constraints (EPEC), which we recast into a two-stage stochastic Mixed-Integer Bilinear Program (MIBLP). We present numerical results for a six-node and the IEEE 24-node system.

Keywords: Two-stage game; Zonal pricing; Wholesale electricity market; Bilinear programming

JEL-codes: C61; C63; C72; D43; D47; L13; L94

39 pages, May 3, 2018

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