Welfare Impacts of Optimal Virtual Bidding in a Multi-settlement Electricity Market with Transmission Line Congestion

Hyungkwan Kim, Purdue University

Abstract

With a goal of improving the performance of wholesale electricity markets, virtual financial products have been introduced. Virtual bids are purely financial instruments that may be used to speculate on the differences between prices in the forward and spot markets in a two-settlement electricity market. While there is evidence that price convergence across these markets can be induced by virtual bidding, other research has shown that the impacts on the welfare of market participants are less clear. The problem is that, while virtual bidding may narrow the price gap, if it does so by inflating the prices, then electricity consumers may not be better off. Although some work has been done on the impacts of virtual transactions on welfare for the electricity market participants, that work provides an incomplete assessment because it ignores some important aspects of the electricity market system. In particular, the prior work due to Giraldo (2017) essentially ignores the electricity transmission network as well as the physical laws governing electricity flows. The objective of this research is to understand the effect of virtual transactions on electricity market efficiency (i.e. social welfare) using a model that explicitly includes the network as well as relationships that reflect the physical properties of electricity flows through a network (i.e. loop flow). The core research question is; what impact does network congestion have on the welfare shifts caused by the participation of financial virtual traders? This study employs models with multiple buses to analyze the welfare changes of electricity market participants in a network constrained multi-settlement electricity market. Integrating the network in the model enables a comparison of welfare changes between the simpler network-free models and a network-based model with the possibilities of line congestion and an explicit treatment of loop flow. Using stylized two- and three-bus models, we estimated and compared the differences in welfare impact due to the introduction of virtual transactions between uncongested and congested networks as well as its heterogeneous impact on the different buses due to their location within the network. At the network level, congested lines amplify the welfare change due to introducing virtual transactions. We also found that the results from the simple models are broadly consistent in the complex network using the aggregate model of ISO-NE test case. Results suggest that price convergence occurs with optimal virtual bidding in most cases, which is consistent with existing literature. The prices throughout the network in both forward and spot markets are changed, and there are welfare transfers among producers, consumers, and virtual traders relative to the market equilibrium without virtual bidding. Furthermore, the welfare impacts on market participants are not homogenous throughout the network. These implications should be considered in the design of regulations governing virtual transactions in the electricity market.

Degree

Ph.D.

Advisors

Preckel, Purdue University.

Subject Area

Economics|Energy

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