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- Herausgeber: John Wiley & Sons
- Kategorie: Wissenschaft und neue Technologien
- Sprache: Englisch
Introduces readers to micro and local power markets and their use for local initiatives, grid integration, and future applications This book provides the basis for understanding micro power markets, emphasizing its application for local initiatives, the grid integration of renewable-based generation, and facilitating the decarbonization of the future electrical networks. It gives readers a comprehensive overview of the market operation, and highlights the basis of the design of local and micro markets. Micro and Local Power Markets starts by covering the economics and basic principle of power markets, including the fundamentals of the power trading (for both wholesale and local markets). Following a definition of both micro and local (technical and economic aspects) power markets, the book then looks at the organization of such markets. It describes the design of those power markets, isolated from the wholesale markets, and examines the methodologies of the interaction between these power markets and wholesale markets. The book also presents cognitive business models for micro and local power markets, as well as the regulatory issues concerning them. * Introduces the basic principle of power markets * Defines micro and local power markets * Outlines the design of micro and local power markets, including the principles, as well as the trading schemes, flexibility, and services * Discusses methodologies of the interaction between micro and local power markets and wholesale markets * Presents business models for micro and local power markets * Summarizes regulatory issues around micro and local power markets Micro and Local Power Markets is an ideal book for upper undergraduate students in engineering, as well as for early researchers in the energy sector. It is also recommended for any scientist and engineer being introduced to the field of power systems and their organization.
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Table of Contents
Cover
List of Contributors
Foreword
Preface
1 Power Market Fundamentals
1.1 Introduction
1.2 Basic Design of Power Markets
1.3 Mechanism for Auctions
1.4 Markets for Futures, Energy, and Balancing
1.5 Conclusions and Further Reading
References
2 Local and Micro Power Markets
2.1 Introduction
2.2 Why Local and Micro?
2.3 The Evolution of Power Systems
2.4 Introduction to Microgrids
2.5 Local and Micro Power Market Concepts
2.6 Local Market Design
2.7 Conclusions and Discussion
References
3 Micro Markets in Microgrids
3.1 Introduction
3.2 Basic Definitions of Micro Market Functions in Microgrids
3.3 Operational Characteristics of Microgrid‐based Micro Markets
3.4 Market Models
3.5 Conclusions
References
4 Coupled Local Power Markets
4.1 Introduction
4.2 Local and Wholesale Market Coupling
4.3 Local Market Clearing Mechanism in Coupled Markets
4.4 Conclusions and Discussion
References
5 Digital Business Models for Local and Micro Power Markets
5.1 What are Digital Business Models?
5.2 Local Power Markets and Digital Business Models
5.3 The EMPOWER Platform and Business Models
5.4 Social Acceptance of Local Power Markets
5.5 Conclusion
References
6 Regulation of Micro and Local Power Markets
6.1 Power Market Regulation
6.2 Common Power Market Regulation
6.3 Regulation of Micro and Local Power Markets
6.4 Trade Settings
6.5 Further Discussion
Acknowledgements
References
Index
End User License Agreement
List of Tables
Chapter 1
Table 1.1 Generation bids for electricity trading between 12 : 00 and 13 : 00.
Table 1.2 Demand offers for electricity between 12 : 00 and 13 : 00.
Table 1.3 Table of balances, incomes and expenses after market clearing.
Table 1.4 Intraday market structure of the Spanish market operator OMIE [18].
Chapter 2
Table 2.1 Main distributed generation technologies [22] .
Table 2.2 Local and micro power markets definition review.
Table 2.3 Local market characteristics and stakeholders.
Table 2.4 Local market services and approach review.
Chapter 3
Table 3.1 Different microgrid configurations.
Table 3.2 Major differences between competitive bargaining and cooperative negot...
Chapter 5
Table 5.1 Ideal business models based on the EMPOWER platform.
Table 5.2 Utility values from the energy cooperative study.
Table 5.3 Share of preferences of three simulated business models.
List of Illustrations
Chapter 1
Figure 1.1 Comparison of (a) monopolistic utility, (b) wholesale purchase agenc...
Figure 1.2 Comparison of one‐sided and double‐sided auctions.
Figure 1.3 Auction mechanisms for electricity products.
Figure 1.4 Stacked offers and bids.
Figure 1.5 One‐sided auction stacked supply curve.
Figure 1.6 Aggregated supply and demand curves of the Spanish market operator O...
Figure 1.7 Intraday market sessions timeline.
Chapter 2
Figure 2.1 Scheme of a microgrid [17] .
Figure 2.2 Microgrid components.
Figure 2.3 A microgrid as a single entity viewpoint. Interconnection with an ex...
Figure 2.4 Interconnection of two microgrids. Master–slave topology [17] .
Figure 2.5 Interconnection of two microgrids. Centralized topology [17] .
Figure 2.6 Isolated microgrid scheme.
Figure 2.7 Centralized approach vs P2P approach transactions.
Figure 2.8 Local energy market scheme and interaction.
Figure 2.9 Classification of DSM and DR activities.
Figure 2.10 Flexibility services and main stakeholders. Figure based on [64] ...
Figure 2.11 Flexibility services in a local flexibility market. Scheme and inte...
Figure 2.12 Wholesale and local market relation in the short term. Based on [13...
Chapter 3
Figure 3.1 A standard microgrid configuration showing points of common coupling...
Figure 3.2 Illustration of the Pareto front and distribution among micro market...
Figure 3.3 Impact of grid tariffs, taxes, and commissions for buying and sellin...
Figure 3.4 Application of the cross‐subsidy concept within a micro market. The ...
Figure 3.5 Model 2 depicting a concept with central control and distributed dec...
Figure 3.6 Model 3 depicted with central market facilitating auctions and a tru...
Figure 3.7 A classic example where different bids and asks are made to find the...
Figure 3.8 Model 4 representing P2P transactions.
Figure 3.9 Model 5 pertains to markets where the interest of the community enco...
Chapter 4
Figure 4.1 Local flexibility market purposes.
Figure 4.2 Local energy community example connected to a DSO grid and to the LF...
Figure 4.3 The FDs of the LEC make flexibility offers for different energy volu...
Figure 4.4 Wholesale and local market interaction in short‐term operations.
Figure 4.5 Local flexibility market clearing sequence.
Figure 4.6 Interactions between different market participants in the proposed D...
Figure 4.7 Schematic diagram of the proposed ID scheduling process.
Chapter 5
Figure 5.1 A centrally organized electricity supply system.
Figure 5.2 A local power market in a decentralized energy supply system.
Figure 5.3 Priority reasons for participation.
Figure 5.4 Priority means of participation.
Figure 5.5 Priority services for participation.
Figure 5.6 Priority risks for participation.
Figure 5.7 Level of focus on the digitalization trend in utilities' strategy do...
Figure 5.8 Level of focus on the decentralization trend in utilities' strategy ...
Figure 5.9 Country differences in the focus on decentralization and digitalizat...
Figure 5.10 Relative importance of attributes to energy cooperative members.
Guide
Cover
Table of Contents
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E1
Micro and Local Power Markets
Edited by
Andreas Sumper
Universitat Politècnica de CatalunyaBarcelona, Spain
Copyright
This edition first published 2019
© 2019 John Wiley & Sons Ltd
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Library of Congress Cataloging‐in‐Publication Data
Names: Sumper, Andreas, editor.
Title: Micro and local power markets / edited by Andreas Sumper.
Description: First edition. | Hoboken, NJ : John Wiley & Sons, Inc., [2019] |
Includes bibliographical references and index. |
Identifiers: LCCN 2019003712 (print) | LCCN 2019004377 (ebook) | ISBN
9781119434566 (Adobe PDF) | ISBN 9781119434542 (ePub) | ISBN 9781119434504
(hardcover)
Subjects: LCSH: Electric power--Marketing. | Electric utilities. | Microgrids
(Smart power grids) | Energy policy. | Interconnected electric utility
systems.
Classification: LCC HD9685.A2 (ebook) | LCC HD9685.A2 M484 2019 (print) | DDC
333.793/20688--dc23
LC record available at https://lccn.loc.gov/2019003712
Cover Design: Wiley
Cover Images: Foreground: Courtesy of Mrs. Íngrid Munné, Background: © Pobytov/Getty Images
List of Contributors
Íngrid Munné‐Collado
CITCEA‐UPC
Universitat Politècnica de Catalunya
Barcelona
Spain
Pol Olivella‐Rosell
CITCEA‐UPC
Universitat Politècnica de Catalunya
Barcelona
Spain
Andreas Sumper
CITCEA‐UPC
Universitat Politècnica de Catalunya
Barcelona
Spain
Eduard Bullich‐Massagué
CITCEA‐UPC
Universitat Politècnica de Catalunya
Barcelona
Spain
Mònica Aragüés‐Peñalba
CITCEA‐UPC
Universitat Politècnica de Catalunya
Barcelona
Spain
Bernt Bremdal
University of Tromsø
Norway
and
Smart Innovation Norway
Halden
Norway
Iliana Ilieva
Smart Innovation Norway
Halden
Norway
Shahab Shariat Torbaghan
Unit Energy Technology
VITO NV/Energyville
Belgium
Madeleine Gibescu
Energy & Resources
Copernicus Institute of Sustainable Development
Utrecht University
The Netherlands
Moritz Loock
Institute for Economy and the Environment (IWOE‐HSG)
University of St. Gallen
Tigerbergstrasse
Switzerland
Emmanuelle Reuter
Enterprise Institute (IENE‐UniNe)
University of Neuchâtel
Switzerland
Julia Cousse
Institute for Economy and the Environment (IWOE‐HSG)
University of St. Gallen
Tigerbergstrasse
Switzerland
Dirk Kuiken
Groningen Centre of Energy Law
University of Groningen
The Netherlands
Foreword
Technological developments in recent years have had a huge impact on the electric power system. The increasing share of distributed renewable generation, falling costs and technology improvements in energy storage devices, and accelerating use of electric vehicles have revolutionized what was previously a centralized and conservative power sector. These developments are further enhanced by changing customer behaviour. As electricity end‐users become increasingly aware of environmental challenges and ways to use innovative technologies, they gradually transform from passive consumers to active prosumers who can generate and store power on their own, and who may be willing to change their consumption or production pattern in response to flexibility requests.
Whether motivated by economic profit, potential savings, environmental considerations or pure social status aspects, end‐users have radically reshaped their role as passive utility customers. Most importantly, end‐users have demonstrated their willingness and ambition to be ‘active’ in cooperation with other electricity users, members of the same community. Common interest in renewable energy initiatives, financial savings, and value‐added services exhibited by local citizens has created the grounds for the establishment of innovative market structures, namely the local and micro power markets that this book focuses on.
Currently, there are multiple examples of local energy communities established across Europe. Research related to the implementation of local and micro power markets takes the local community trend further. By exploring market designs, business models, algorithms, and IT instruments to facilitate the local trade, end‐users, local utilities, and service providers are given a vital insight into what energy‐sustainable and locally efficient market participation could look like. The Horizon 2020 project EMPOWER, funded by the European Commission, has contributed greatly in this respect, demonstrating in practice the benefits and possibilities related to local energy trade within a neighbourhood. The positive and extensive experience gained through the EMPOWER project has motivated the creation of this book. Local and micro power markets should be considered not only as an effective and efficient way to help mitigate grid challenges, but also as a powerful tool to empower end‐user awareness and support the transition to a more sustainable future.
Head of Research and Innovationat Smart Innovation Norway
Dieter Hirdes
Preface
More than five years ago, a small group of researchers from several European countries came together to prepare a European Horizon 2020 project. One key person in this process was Bernd Bremdal from Smart Innovation Norway; he had a very clear vision of a local electricity market for the exchange of local renewable sources in a neighbourhood. These initial ideas led to the project proposal of EMPOWER that was finally approved by the European Commission. The project was executed from 2015 until 2018. In the course of the project we identified the need to disseminate the insights and research done to promote the benefits of such a system. During the writing of this book, we identified contributers outside the project that could complement and enrich the content of the book. Consequently, the book contains also insights that did not result from the EMPOWER project.
The book is divided into six chapters. Chapter 1 is dedicated to the fundamentals of the power markets, introducing the reader to the basic concepts of power markets and auction types. Chapter 2 introduces the concepts of local markets and micro markets, complemented by a comprehensive literature review. Chapter 3 addresses a micro market as a local market accommodated within a microgrid. It proposes five basic models for market mechanisms for micro markets. Chapter 4 deals with the interaction between local and wholesale power markets for the case where a local energy community is connected to the main grid. In Chapter 5 digital business models of micro and local power markets are analyzed. It focuses on business model opportunities in such power markets and on the factors that predict the models' diffusion and acceptance by local citizens. Finally, Chapter 6 presents the common principles of the regulatory issues of micro and local power markets. It describes the basics of market regulation and how regulation is applied to local and micro power markets.
The objective of this book is to disseminate the research done in this field and to provide the basis for novel approaches to bring local power markets closer to consumers.
Universitat Politècnica
de Catalunya/BarcelonaTech
Andreas Sumper
1Power Market Fundamentals
Íngrid Munné‐Collado Pol Olivella‐Rosell and Andreas Sumper
CITCEA‐UPC, Universitat Politècnica de Catalunya, Barcelona, Spain
1.1 Introduction
The overall goal of the electricity market is to provide electricity efficiently and, at the same time, to meet the demand of the consumers. Nowadays, electricity markets are based on competition but also contain regulated agents. However, times are changing, and the traditional electricity grid is evolving from a very centralized and unidirectional flow to a bidirectional flow, thanks to distributed energy resources (DERs) that are being installed along the distribution grid. Furthermore, one should also take into account the current energy policies that are focused on the decarbonization of the power sector [1]. According to the International Energy Agency (IEA), European electricity consumption is projected to increase at an average annual rate of 1.4% up to 2030 and the share of renewables in Europe's electricity generation will double from 13% now to 26% in 2030. The European Energy roadmap 20501 aims to reduce greenhouse gases emissions and hence to reduce and mitigate climate change by integrating distributed and renewable energy resources.
This leads to new challenges that are currently being faced by the electricity sector. Technical challenges have arisen in the system operation, such as grid capacity, the intermittent behaviour of DERs, and grid congestion. Novel technologies such as smart meters and information and communication tools (ICTs) facilitate the transition towards smart grids. Furthermore, the costs of renewable energy technologies have declined steadily due to technological advances, an increase in the environmental concern of customers and legislators, and the regulation that has enabled different players to emerge in the electricity market, such as retailers and energy service providers. New business models are being discussed and developed to enhance the integration of DERs into distribution grids and provide services to smart grid stakeholders by empowering prosumers. As a result of this, local energy communities (LECs) are being defined to provide solutions for prosumer involvement in this new energy paradigm. These topics are defined and further discussed in Chapter 2.
It is well known that power systems are complex structures composed of an enormous number of different installations, economic actors, and, in smaller numbers, system operators. The traditional approach of power systems is based on large power generators that cover the demand. In this approach, for steadily increasing consumption, large power generation is installed, mainly nuclear, coal, natural, and hydro. To guarantee the reliability of such a system, a meshed transmission grid at high voltage is installed, where the generators feed in. Underlying this transmission system, the distribution grid has the function of conducting the power flow in lower voltage levels to consumers in medium and low voltage. The described power flow is mainly unidirectional from the generators to the consumers connected in medium and low voltage. Such a system is easy to control as most of the players (customers) are passive and only a few actors (generators, system operators) allow a central coordinated control of the system, having well‐defined interfaces. The traditional power system cannot cope with the increasing amount of DERs, and the traditional grid evolves to a smart one. It is worth noting that the transmission grid and the distribution grid are considered natural monopolies, due to their high infrastructural costs and impacts, and this is discussed further in Section 1.2.
A smart grid is an electricity network that can intelligently integrate the actions of all users connected to it – generators, consumers, and prosumers – to efficiently deliver sustainable, economic, and secure electricity supplies. A smart grid uses sensing, embedded processing, and digital communications as ICT tools to enable the electricity grid to be observable, measured, and visualized, as well as controllable, automated (able to adapt and self‐heal), and fully integrated, which means that it is fully interoperable with existing systems and has the capacity to incorporate a diverse set of energy sources.
A prominent actor in modern power systems is the prosumer, a common consumer who becomes active to help personally improve or design the goods and services of the marketplace, transforming it and their role as consumers [2]. The strategic integration of prosumers into the electricity system is a challenge. Nowadays prosumers are acting outside the boundaries of traditional electricity companies because they supply energy to the grid. Hence, ordinary approaches to regulating their behaviour prove to be insufficient. The aggregated potential of flexibility makes the prosumer role important for energy systems with high and increasing shares of fluctuating renewable energy sources. To involve different prosumer segments, utilities and policy need to develop novel strategies. These new actors enable the emergence of new business models and smart grid key agents to integrate these new services provided by and to prosumers. Local electricity markets and micro electricity markets are the two main business models described along this book.
Electricity is a good that is traded in electricity markets, described as a very important zone in the smart grid plane. Markets are a way of organizing the distribution of commodities efficiently when conditions enhance perfect competition between actors. However, electricity is not a simple commodity. Nowadays large amounts of storage are not installed along the electricity grid. There is no possibility to store electricity on a large scale, and therefore it is necessary to use flexibility in the power system to keep the balance between production and consumption. Therefore, the technical differences of the commodity ‘electricity’ compared to other energy sources like natural gas and oil, have a profound effect on the organization and rules of electricity markets. Taking into account all these considerations, this good has to be produced when it has to be consumed, which leads to additional complexity in the market structure. To ensure reliable and continuous delivery of significant amounts of electricity, the system needs bulk generation plants, redundant transmission, distribution grids, and different control and monitoring functions to keep the system power flow technically feasible.
On top of this, the introduction of competition to the electricity supply has been accompanied by the privatization of utilities in most western countries. A market is a mechanism for matching the supply and demand for a commodity by finding an equilibrium price. Markets can be organized in different ways; each type is complementary to the others and therefore combined, and they are described in Section 1.4, considering spot markets, forward and future markets, and balancing markets.
For a secure and reliable operation of the power system, certain services, called ancillary services, have to be provided. These services maintain the quality of the supply in an acceptable range by regulating the frequency, providing spinning reserve or power to compensate imbalances. Typically, these tasks are performed by very flexible generation plants. Also, the transmission system operator (TSO) could ask to modify generator schedules for security reasons to handle overloading of power lines or transformers. All these commercial transactions have to be settled between all participants and market types as well as the ancillary services. This process is very complex for the electricity system and for that reason the settlement system for electricity markets is typically centralized.
Regulatory bodies define and implement all the principles or rules used to control any activity related to the power system. Regulation aims to prevent inefficient results being reached if people were allowed to interact freely [3]. Regulation has been a key agent in electricity markets and power systems. It seeks to protect consumers from the market power by preventing monopolies and oligopolies from setting high prices or providing low‐quality services. On the other hand, regulation also protects investors from the state by avoiding the settlement of supply tariffs that would increase the investment payback. To enable this transition towards smart grids and decentralized power systems and electricity markets, regulation is still a key factor in creating a well‐defined regulatory framework to develop these new business models. Regarding this, the regulatory framework must provide a safe environment for prosumers in the smart grid era.
In this chapter the reader will navigate through the basic concepts of power markets in Section 1.2 , starting with their evolution from monopolies to the current liberalization. Then the differences between bilateral and auctions are explained, and the basis of the trading procedure is defined, covering clearing and settlement stages. Going deeper into auction knowledge, which is used in electricity markets, Section 1.3 deals with the different mechanisms for auctions, combining not only theoretical aspects but also examples to help the reader's understanding. Section 1.4 details the current market schemes in electricity markets for energy trading. Lastly, some references are presented for those readers who wish to go learn more about auctions.
1.2 Basic Design of Power Markets
1.2.1 Organization
Traditionally, the utility model chosen by most developed countries was the regulated monopoly. After deregulation started in the 1980s, other utility models were created, reaching different degrees of liberalization. In this section, monopoly, purchasing agency, wholesale competition, and retail competition models are briefly introduced. These models are depicted in Figure 1.1 and more details about them can be found in [4].
Figure 1.1 Comparison of (a) monopolistic utility, (b) wholesale purchase agency, (c) wholesale market and (d) retail competition.
1.2.1.1 Monopoly
In this model, a single utility is vertically integrated and includes generation, transmission, and distribution of electricity, as shown in Figure 1.1 a. Within this monopoly model there is no room for competition because the integration of the different activities in one utility makes it appear like a single business. The price or tariff for electricity that consumers would pay is regulated by a governmental entity and is based on the overall results of the utility. Political decisions on electricity tariffs have a big impact on the financial results of those utilities.
1.2.1.2 Purchasing Agency
A development from the monopolistic model is the purchasing agency model, as depicted in Figure 1.1 b. In this model, the wholesale purchasing agency buys the best generator offers of multiple independent power producers (IPPs). It introduces competition between the IPPs to incentivise efficient generation technologies over inefficient ones. Distribution companies (discos) purchase the energy required to supply consumers. In this case, both the transmission system company and the disco are monopolistic companies. Discos are considered monopolies here due to the natural monopoly in the local supply area.
1.2.1.3 Wholesale Market
In a wholesale market structure (Figure 1.1 c) no central organization is responsible for the provision of electrical energy. Discos buy the electrical energy demanded by their consumers, which is offered by generation companies (gencos) in the wholesale market.
The wholesale market can be a pool market or based on bilateral transactions, also called over‐the‐counter transactions. Furthermore, larger consumers can also participate in the wholesale market and purchase the energy required for their activities. The responsibilities to operate and maintain the grid and their services are divided. While the operation of the transmission network and the operation of the market are managed in a centralized approach, the discos operate their distribution network in their service area. They are responsible for purchasing the energy for their consumers located in the supply area with no competition.
This model introduces even more competition at generation level through transparent market rules. The wholesale price is determined by matching the demand and supply. However, the retail remains regulated. In this case, consumers are not able to choose between different suppliers because the distribution network remains monopolized.
1.2.1.4 Retail Competition
In retail competition, shown in Figure 1.1 d, competition between retailers is introduced to the supply level. Small and medium‐sized consumers can purchase their electricity supply from different competing retailers, while large consumers are also allowed to purchase electricity directly from the wholesale market. Discos do not have a local monopoly for energy supply in their area, but they are still responsible for operating and maintaining the distribution network. They distribute electricity to connected consumers in the supply area as a natural monopoly separated from retailer activity. Consumers can change to a retailer that offers a better service and price.
This model has the advantage that retail prices are settled based on market competition, while transmission and distribution network costs are charged to the final users. Transmission and distribution networks are regulated by governmental entities because they remain natural monopolies.
1.2.2 Bilateral Contracts and Auctions
Bilateral trades are executed when a buyer reaches an agreement with a unique seller and sets up a contract for energy exchange. Bilateral trading involves only two parties: a buyer and a seller. There is no involvement of a third party, and so bilateral contracts are made when two agents reach an agreement, but there are not structured sessions where the contracts have to be defined, as there are in auctions (mediated trading).
In terms of bilateral trades and power markets, there are different forms of bilateral trading, according to Kirschen and Strbac [4] : customized long‐term contracts, trading ‘over the counter’, and electronic trading.
Customized long‐term contracts
are negotiated privately to fulfil the needs of the buyer and the objectives of the seller. In a customized long‐term contract, large amounts of energy are traded, usually, hundreds or thousands of megawatt hours, and contracts are for long periods of time, from several months to several years. In this type of bilateral trading, large transaction costs are also involved and so only big companies can afford to operate in this way.
Over‐the‐counter
trading involves the same agents but on a smaller scale. In this case, energy contracts are settled for periods of time up to days or weeks. This type of bilateral trading has much lower transactions costs.
Electronic trading
is another bilateral trading mechanism. Here, participants submit their bids to sell and offers to buy in a computerized marketplace. Each market participant can see the others' bids, but do not know who the bidder is. Once a bid is submitted, the software checks if there is any other agent willing to accept that trade. If the price is equal to or greater than the bid's price, the deal is automatically done. If not, the bid remains in a list until there is a matching offer. This form of trading is not properly a bilateral trade because the computerized marketplace clears the markets after collecting offers and bids, but it is not a defined agent.
Regardless of the type of bilateral trading that has been chosen, the key point here is that the settled price is set independently and is agreed upon by the involved agents.
It is a fact that electrical energy is centralized as it flows from generation plants to end‐users, so there is a trend to centralize also the way that energy is traded.
Mediated trades are those where the seller sells the product to an intermediary who sells it to the final buyer. Auctions, according to [5], are market institutions with an explicit set of rules determining resource allocation and prices by bids from the market participants.
According to [6], auctions are organized markets where goods are awarded to bidders based on rules that determine who wins and the price the winning bidder pays. They are called pools when the product exchanged is electricity. Auctions are also the means for other related electricity products, as ancillary services, to be exchanged. Creating a pool is the mechanism required to reach an equilibrium between generation and demand, and so between buyers and sellers.
Regarding power markets, a distinguishing factor between bilateral and pool‐based markets is that in bilateral or over‐the‐counter trading each transaction has a singular price, whereas pool‐based markets usually have a uniform price that all market agents (buyers and sellers) receive or pay. Most wholesale electricity markets operate as a combination between bilateral markets and power exchanges or pools. From the central operator perspective, electricity procurement is based on the fact that the central operator collects all the demand offers and optimizes the procurement cost while ensuring constraint satisfaction. On the other side, the story is completely different. Market participants are strategic decision‐makers. They aim to maximize their profit by choosing their bids. However, as will be detailed later, each participant's profit is a function of all participants' submitted bids.
Auctions are applied in power markets to achieve different objectives:
Objective 1
. To perform the energy generation dispatch procedure at its lowest‐cost level, which balances supply and demand and in some cases can also minimize transmission congestions and its costs.
Objective 2
. To develop a transparent and competitive market platform that encourages participation and increases market liquidity.
Objective 3
. To improve market efficiency by fulfilling objectives 1 and 2.
The most important issue in auction design for energy markets is the traditional concern of preventing collusive, predatory, and entry‐deterring behaviour [6] .
An auction has three main parts: bidding, clearing, and pricing. The bidding rules define how bids are structured and the precise moment when they can be submitted. The bidding phase sets up the rules for each market player. For instance, one bidder can submit just one bid or can submit multiple bids in response to the other market‐players' bids. Regarding each bid, the bidding rules state, for example, if just a price per bid can be submitted or if a set of prices can be submitted.
Following the bidding rules there are the clearing mechanisms and rules. They state how bids are compared to determine the winner or winners and the allocation of the energy product. The pricing phase then defines the price at which energy will be traded.
1.2.3 Clearing
When the market is set up as a one‐sided auction or a single‐sided auction exchange pool, it means that only the supply side submits bids to sell their energy generation, whereas the load is served without taking into account the price. In this situation, the estimated demand (ED) value is considered to clear the market and then obtain the market clearing volume (MCV) and the market clearing price (MCP).
When a double‐sided auction is defined, both supply and demand sides submit bids to sell and buy energy, respectively. The MCV and MCP are then obtained at the crossing point of the two aggregated curves (Figure 1.2).
Figure 1.2 Comparison of one‐sided and double‐sided auctions.
This mechanism is followed for every period. Each market player submits their bids according to their forecasts on pricing, consumption scenarios, and weather.
1.2.4 Settlement or Pricing
There are several types of settlement systems or pricing in energy markets, the best‐known being pay‐as‐cleared and pay‐as‐bid.
Pay‐as‐cleared, or uniform pricing or non‐discriminatory pricing, is based on the fact that the auctioneer buys power from the bidders that submit the lowest bid. However, in this pricing mechanism all successful bidders receive the market‐clearing price.
Pay‐as‐bid pricing is also known as discriminatory pricing. In this case, the buyers acquire the power from the seller who submits the lowest bid and pays to each generator its specific bid.
An example is detailed below to show the differences between pay‐as‐cleared and pay‐as‐bid.
1.2.5 Example
Consider that a retailer company needs 25 MWh for the time slot between 10:00 and 11:00. In the wholesale market, there is power to cover this demand. Two generation companies submit the following bids:
Generation Company A: €
10
MWh
−1
.
Total amount =
15
MWh
Generation Company B: €
15
MWh
−1
.
Total amount =
15
MWh
Under a lowest‐cost objective, the best way to cover this demand is to buy 15 MWh from Generation Company A and 10 MWh from Generation Company B. However, regarding the settlement, the total amount paid will vary depending on the settlement mechanism.
In a pay‐as‐cleared scenario, the clearing price will be €15 MWh−1so each bidder will receive €15 MWh−1:
Generation Company A income:
15
MWh × €
15
MWh
−1
= €225
Generation Company B income:
10
MWh × €
15
MWh
−1
= €150
In a pay‐as‐bid scenario, each bidder will receive payment according to the previously submitted bid, hence:
Generation Company A income:
15
MWh × €
10
MWh
−1
= €150
Generation Company B income:
10
MWh × €
15
MWh
−1
= €150
Under the first scenario, it makes sense to submit low bids to ensure winning and selling the product, and so receive a payment that is higher than expected. However, this logic cannot be applied under a pay‐as‐bid scenario. If each generation company knows what the others are going to submit and also the energy that will be required, then Generation Company A would not submit a bid clearly below the highest price. In other words, Generation Company A would have submitted its bid for €14.99 to ensure it would sell the energy and sell it for a higher price.
Some insights arise from the uniform price mechanism. This type of auction provides some incentives to raise the price per unit. Each generation company bears in mind that their submitted bids could be the marginal unit, in the same way that they might set the uniform price for all generating units. As an example, consider a generation company that owns several generation sets, which participate in the same auction mechanism under a uniform price mechanism. The company can increase the price of the probable marginal unit to set the market‐clearing price. As a result, the higher market‐clearing price is going to be earned by all the generator sets. The generator sets that submit lower bids but receive market clearing price incomes are called inframarginal sets.
The market‐clearing price is an indicator of the level of demand, since at higher demand, the more expensive plants have to be turned on. This type of settlement mechanism tends to drive up prices because generation companies will increase their bidding price based on plants that are the latest to enter the market and so clear it at the highest price. The need for companies to guess the market‐clearing price before submitting their bids can lead to market inefficiencies as plants with high marginal costs are run before plants with low marginal costs. In this case, all market participants are bidding in a price close to the market‐clearing one, and this develops a marketplace that runs in a more arbitrary way and is not based on generation plant costs. There is a specific situation that may happen: none of the very cheap plants owned by the same company are run due to very optimistic bids.
The pay‐as‐bid settlement mechanism is not exempt from inflation. In a pay‐as‐bid mechanism there is the possibility of paying more for a product or receiving less for it than the real market value, what is also called the winner's curse phenomenon. Pay‐as‐bid mechanisms increase the participation costs for small generation plants, and this forces them to cluster as a bigger market participant to play in the market [6] .
It is still not clear if one settlement mechanism is better than the other. What is already known is that both of them have drawbacks that might affect the market operation and the way that participants act in power markets. Only time will reveal if inframarginal capacity on MCP or the winner's curse phenomenon has a greater effect on power market operation.
1.3 Mechanism for Auctions
1.3.1 Why Auctions in Energy Markets?
Market models often assume that buyers and sellers do not influence prices, but this only happens if the number of buyers and sellers is big enough. After the deregulation of the electricity market, there was a need to establish rules for energy purchase and exchange. Auction theory provides one explicit model of price making. The process is transparent since it is based on a set of rules that are determined by the market operator and known by the bidders before the auction takes place.
Since 1990, the use of long‐term contract auctions to cover the demand has increased [7]. Despite this, the liberalization of power markets has led to a more challenging market model, with a higher number of market players. As a result, competition is the best way to ensure the lowest price for energy dispatch. At the moment that competition is feasible and desirable, and auctions have proven to be a very effective mechanism for achieving the previous objective and attracting even more market players [7] .
Auction theory has been used to facilitate the design of auction markets for a wide range of goods, services, and financial assets, such as carbon emission permits in Germany, 3G mobiles phone licenses in the UK, and US Treasury Bills [8].
An auction has three main parts: bidding, clearing, and pricing. Based on the aim of market efficiency and so least‐cost dispatch, central authorities such as the market operator and the TSO require to know each generator's marginal cost curve and also the characteristics of the transmission network and the forecast demand.
1.3.2 Auction Basics
Auctions take place in a marketplace, which is considered to be a public context in which the trading (selling and buying) of a good or service takes place. An auction market is therefore a marketplace which is run and operated by the auctioneer, also known as a central clearing house. This market agent enables trades between sellers and buyers. The revenue equivalence theorem (RET) is the basic principle that holds for the auction theory. The RET is discussed in the next section and then the standard auction mechanisms and those applied to electricity products are detailed.
1.3.2.1 The Revenue Equivalence Theorem
The RET was the first important theorem of auction theory, proved by Vickrey in 1961 [9]. Later, in 1981, Myerson generalized this theorem [10], and Riley and Samuelson achieved the same theorem independently [11]. This theorem states that the outcomes of any of the four basic auction mechanisms are equivalent under particular assumptions, which are defined in Section 1.3.3. In particular, the theorem details that all types of auctions provide the same revenues if they are under certain conditions, so award the buyer with the highest private bid and give no surplus to the others, with each bidder making the same expected payment as a function of their private valuation. In other words, the seller can expect equal profits on average from all the standard types of auction, and buyers are indifferent to them.
Two key statements are important here. First, it does not matter which auction mechanism is chosen, the total cost that society will pay for the energy will be the same. Second, the costs are independent of the auction mechanism because buyers and sellers will adapt their bidding strategies according to the auction rules.
In all the four auction methods that are explained below there is one winning price. This is because usually a single product is set to an auction process. However, this is not the case for electricity, where the auctions involve the sale of multiple products as forecast generation for a specific hourly timeframe and forecast demand for a specific hourly timeframe.
The RET ensures that the same revenue is provided under certain conditions and standard auctions, such as ascending‐bid, descending‐bid, first‐price sealed‐bid and second‐price sealed‐bid. Even so, this theorem, when it is applied in restructured electricity markets, suffers from several drawbacks because real‐world power markets tend to involve large deviations from the RET assumptions [8] . The current power market is considered as an open‐ended dynamic game among traders, the market operator, and regulatory agencies. They submit multi‐unit supply offers and bids. Furthermore, the addition of regulatory frameworks to auction mechanisms leads to opportunities for market agents to game the system to their specific benefits from strategic mechanisms, e.g. collusion and exaggeration of costs. Additionally, these rules and regulatory frameworks should avoid collusion and gaming. The result is that there is still much more research and development to be done regarding auction theory in restructured power markets.
1.3.3 Types of Auctions
There are many types of auctions, which are used to trade goods or products. Auctions can be for short‐, mid‐ or long‐term trade purposes. Each auction mechanism has advantages and shortcomings, and so no auction fits all purposes. However, historically there are four main types of auctions, and all of them have been studied and detailed: the English or ascending‐bid auction, the Dutch or descending‐bid auction, the first‐price sealed‐bid auction, and the second‐price sealed‐bid or Vickrey auction.
1.3.3.1 The English or Ascending‐Bid Auction
This is the best‐known kind of auction and it is widely used for selling goods such as antiques and artwork. In this auction the price is increased successively, based in rounds, until one bidder remains. This bidder is the one who wins the object at that price, which is the highest. In an ascending‐bid auction, bids are openly revealed. This type of auction is the most vulnerable to collusion and entry‐deterring behaviour [12].
1.3.3.2 The Dutch or Descending‐Bid Auction
The Dutch auction or descending‐bid auction works contrary to the English auction, so the seller starts with a very high price for the item and lowers it successively. When one bidder accepts the seller's price, the item is sold at that price. This is a quite uncommon auction mechanism, but it is used for selling cut flowers in the Netherlands, fish in Israel, and tobacco in Canada.
1.3.3.3 The First‐Price Sealed‐Bid Auction
In a first‐price sealed‐bid auction each buyer submits a single bid, but without seeing the other bids submitted. Furthermore, they can only submit one bid. The product is sold at the highest bid submitted, also called the first‐price bid. This auction mechanism is commonly used for selling mineral rights to US government‐owned land and artwork.
1.3.3.4 The Second‐Price Sealed‐Bid Auction
The second‐price sealed‐bid auction or Vickrey auction has a similar process to the first‐price sealed‐bid auction. Each bidder submits a single bid independently, with no information about the other submitted bids. In this case, the product is sold to the bidder with the highest bid, but the price that is paid is according to the second‐highest bid submitted. Nevertheless, this auction method is considered vulnerable to collusion. A modification of this type of auction is used by eBay, and the Google and Yahoo! online advertisement programs.
1.3.4 Auction Mechanisms Applied to Electricity Products
Historical auction mechanisms can be applied to trade electricity products, but evolved auctions are currently applied in energy markets. Currently, regarding energy markets and ancillary services markets, the most commonly used auction mechanisms are those shown in Figure 1.3. The auctions mechanisms highlighted in grey are those most commonly applied in energy markets.
Figure 1.3 Auction mechanisms for electricity products.
1.3.4.1 Sealed‐Bid Auctions
First‐price sealed‐bid auctions and second‐price sealed‐bid auctions are applied to energy markets. However, there are two additional auction types considered under sealed‐bid auctions that are currently implemented in the energy market: pay‐as‐bid or discriminatory pricing and uniform price‐sealed bid.
The pay‐as‐bid or discriminatory auction mechanism is used when there are multiple units of the same product to be sold, resulting in different prices [7] . It is mainly used in long‐term contracts, procuring different volumes at different prices. The market collects all the bids and clears the market, but the pricing mechanism will be applied as in a pay‐as‐bid scenario, detailed in Section 1.2.4.
Uniform pricing or pay‐as‐cleared is a similar auction mechanism to pay‐as‐bid. In this case, bidders submit their bids and then the market operator gathers all of them and clears the market. The main difference is in the way each bidder is paid. As has been detailed in Section 1.2.5, all the winners or bidders with a winning bid will receive the same price, the MCP. This last auction mechanism is considered a fair‐trade mechanism because all winning bidders receive the same amount of money.
Both discriminatory and uniform pricing sealed‐bid auction mechanisms are used for multiple units of the same product that is being traded. This can lead to some misunderstandings because sellers with highly different structures and running costs receive the same payment. However, uniform pricing sealed‐bid auctions allow smaller participants to join the auction mechanism, leading to a strong competition mechanism.
According to [7] , the main disadvantage of sealed‐bid auctions is that all the uncertainty related to the price of a product must be translated into a single bid, which cannot be adjusted when more information is revealed. In addition to that, there is a wider problem within auction mechanisms, the lack of strong competition because of collusion regarding bidding, which increases the final price of the auction.
1.3.4.2 Descending Clock Auction
Descending clock auction mechanisms are a specific type of dynamic auction. Dynamic auctions have several rounds before clearing the market, according to market rules detailed before the auction starts. In this auction mechanism, the price is determined by several rounds, so‐called multi‐round bids. The procedure that runs this mechanism starts with the auctioneer calling a high price and asking bidders to state the quantities they wish to sell at such a price. Then the auctioneer collects the bids and if the quantity offered is greater than the quantity that has to be covered, a second auction round takes place. In this case, the auctioneer asks for bids based on a lower price. Again, the auctioneer collects the bids and checks if the offered quantity is greater than the ED. The procedure continues with multiple rounds until the quantity offered is equal to the ED or the excess of supply can be considered negligible. The bidders that offer in the final round are considered the winners and the final price is considered the MCP. The winning bidders receive the payment based on a pay‐as‐cleared scenario; the MCP multiplied by the offered bid. According to this scenario bidders do not reveal the lowest price they are able to pay for the product because the bidding procedure stops when supply is equal to the ED.
One of the advantages of descending clock auction mechanisms is that they permit price discovery in each bidding round. Bidders can adjust their bids based on early rounds behaviour. By this mechanism, they can guess the lowest price on which bidders would submit their bids, which leads to an improvement in the auction mechanism. In addition, real constraints such as budgets restrictions or costs variations can be taken into account between rounds, allowing the bidders to submit or not according to the considered price. Descending clock auction mechanisms are considered less vulnerable to collusion due to the transparency of the procedure.
1.3.4.3 Hybrid Auctions
There is ongoing debate on the choice between sealed‐bid auctions and descending clock auctions, according to [7] . The uncertainty faced by bidders might discourage them from participating in auctions or facilitate corruption between agents. On the other hand, descending clock auctions are open auction mechanisms where the bidder has full knowledge of the value of all the other bids. However, knowing the price is not always required. Hybrid auctions try to combine the advantages of both designs [13]. There are two possibilities for hybrid auction mechanisms that are currently applied: a first‐price sealed‐bid auction followed by an iterative descending auction or a descending clock auction followed by a pay‐as‐bid auction. This last mechanism is considered the standard hybrid auction mechanism and was first defined by Dutra and Menezes in 2002 [14] and later in 2005 [15].
As an example, Brazil adopted a hybrid auction based on the descending clock mechanism followed by a pay‐as‐bid auction for long‐term contract procurement. This auction mechanism was also chosen in Brazil for new generation capacity procurement.
1.3.4.4 Combinatorial Auctions
In all previously described auction mechanisms bidders submit bids on the object that is being sold, which is considered a unit. In combinatorial auctions, the simultaneous sale of more than one item is performed, resulting in a more complicated auction. Bidders can submit bids on an all‐or‐nothing basis or package, instead of single units. Applying this principle to energy‐related products, combinatorial auctions allow bidders to place bids for different types of contracts for electricity provides. Hence, one contract might be for different packages that bidders are interested in and there may be many bids for one specific contract or package. Then, the market operator or the auctioneer is responsible for determining the winning bids to minimize the total cost of providing electricity, taking into account the fact that each contract can be chosen as a winner only once. This type of auction finds a solution for bidders, allowing them to bid on combinations, the so‐called packages, of the product that is being auctioned. Nevertheless, it is not widespread due to the complexity in finding the winning bidders.
