Convex Hull Pricing in Energy Markets Minimizing Uplift Payments Accounting for Power Transmission Limits

Abstract

The North American energy market is a deregulated market with generation companies (GenCos) bidding into a whole sale market which is regulated by federal regulators and managed by Independent System Operators (ISOs). GenCos are privately owned companies that sell energy to the ISOs under the objective to make a profit. ISO’s are setting market prices to meet the power demand under consideration of the generator bids. Economic market models are based on diminishing returns. That means that in an ideal market model, increasing generator output leads to increasing marginal energy costs. The cost curve is said to be convex. Due to the fact that generators have fixed costs like startup and shutdown cost and minimum MW output, when multiple generators are pooled together in a marketplace their aggregated energy costs are not convex. This imposes problems on determining a market clearing price and dispatch because a non-convex cost curve delivers the wrong market signal to profit oriented generators. To make up for the losses that are incurred due to non-convex energy costs, ISO’s settle with individual GenCos by paying them side payments. These side payments in the energy market are commonly called uplift payments. This thesis takes a closer look at the characteristics of aggregated energy cost curves and their non-convex behavior. Uplift payments are defined and discussed. The main focus of the thesis is, however calculating the marginal prices that produce the minimal uplift payments to the ISO. It has been observed that minimum uplift payments occur on the convex hull of the energy curve. An algorithm is presented which calculates the marginal prices for the convex hull at selected loading levels. Uplift payments resulting from the traditional pricing model and the convex hull pricing are compared. Finally transmission limits will be included into the calculation to allow for the comparison of locational marginal prices in the traditional and convex hull pricing model.