Pricing of Fluctuations in Electricity Markets

IDSS PI: John Tsitsiklis
Co-PI: Yunjian Xu (Singapore University of Technology and Design)

In an electric power system, demand fluctuations may result in significant ancillary cost to suppliers. Furthermore, in the near future, deep penetration of volatile renewable electricity generation is expected to exacerbate the variability of demand on conventional thermal generating units. IDSS PI John Tsitsiklis and his collaborator Yunjian Xu (SUTD) address this issue by explicitly modeling the ancillary cost associated with demand variability. They argue that a time-varying price equal to the suppliers’ instantaneous marginal cost may not achieve social optimality, and that consumer demand fluctuations should be properly priced. They propose a dynamic pricing mechanism that explicitly encourages consumers to adapt their consumption so as to offset the variability of demand on conventional units. Through a dynamic game-theoretic formulation, Tsitsiklis and Xu show that (under suitable convexity assumptions) the proposed pricing mechanism achieves social optimality asymptotically, as the number of consumers increases to infinity. Numerical results demonstrate that compared with marginal cost pricing, the proposed mechanism creates a stronger incentive for consumers to shift their peak load, and therefore has the potential to reduce the need for long-term investment in peaking plants.

References and Related Content:

“Pricing of Fluctuations in Electricity Markets” – European Journal of Operational Research, April 2015