Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2014/27: Nodal Pricing in a Coupled Electricity Market

Endre Bjørndal (), Mette Bjørndal () and Hong Cai ()
Additional contact information
Endre Bjørndal: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Mette Bjørndal: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Hong Cai: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway

Abstract: This paper investigates a pricing model for an electricity market with a hybrid congestion management method, i.e. part of the system applies a nodal pricing scheme and the rest applies a zonal pricing scheme. The model clears the zonal and nodal pricing areas simultaneously. The nodal pricing area is affected by the changes in the zonal pricing area since it is directly connected to the zonal pricing area by commercial trading. The model is tested on a 13-node power system. Within the area that is applying nodal pricing, prices and surpluses given by the hybrid pricing model match well with those given by the full nodal pricing model. Part of the network is better utilized compared to the solutions given by the full zonal pricing model. However, the prices given by the hybrid system may send wrong economic signals which triggers unnecessary generation from existing capacities, exacerbates grid congestion, and induces higher re-dispatching costs.

Keywords: Congestion Management; Nodal Pricing; Zonal Pricing; Electricity Market

JEL-codes: Q00

6 pages, June 26, 2014

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