NODAL PRICING: OPF BASED CONGESTION MANAGEMENT

The general idea of nodal pricing is to model an electricity market with its various economical and
technical specifications, such as generators' cost functions, demand elasticity, generation limits, line
power flow limits and optimize the system for maximizing social welfare. This problem represents one of
the commonly employed formulations of Optimal Power Flow (OPF). The name OPF does not stand for
any specific optimization problem, rather a number of optimization problems falls into the OPF
category. The basic aim of an OPF analysis is to reach an optimum power transfer situation without
violating the network constraints. In other words, the congestion management problem is tackled by
solving an optimization problem, with a set of constraints representing network constraints.

One of the outcomes of this optimization problem is the price at each node known as nodal price. It
reflects the temporal and spatial variation of energy price relating to the demand on that node.Nodal
pricing can be interpreted as a fully coordinated implicit auction. The market participants do not
explicitly participate into auctions for transmission capacity. On the contrary, they submit bids for
energy injection and take-off and they are scheduled such that transmission capacity is implicitly
allocated to them based on their energy bids, without violating the network constraints.

The practical OPF uses a formulation wherein ac power flow equations are added to the economic
dispatch as equality constraints with inequality constraints involving the flow MW, MVA or current on a
transmission line and voltages at a substation bus. A version of OPF is developed that takes into account
various contingencies referred to as a security constrained OPF or SCOPF.

OPF problems are formulated with a number of objectives. A brief list is outlined here:

 Minimize the total cost of production

 Maximize total social welfare

 Minimize total system loss

 Minimize the re-dispatch cost

 Minimize the total adjustment

 Minimize load curtailment

In the text to follow, we will discuss the formulation of AC OPF as well as DC approximation of it - DC
OPF.

DC OPF

This section introduces the formulation of DCOPF. Conventional Economic Dispatch problem can be
represented as a minimization of total generation cost as follows:

................................................................................................(4.44)

...............................................................................................(4.45)

................................................................................................(4.46)

Where,

power output of generator i

generator i lower limit

Total system load

cost function of generator i

This problem can be converted into an OPF problem with inclusion of following:

 The constraints representing the DC power flow equations

 A set of inequality constraints representing line MW limits

The DC power equations as constraints are obtained by rearranging equation 4.3. This is given as:

..............................................................................................(4.47)

The line flow constraints are given as:

...................................................................................................(4.48)

This can be expressed in terms of phase angles. With addition of a slack variable, it can be given as:

................................................................................................(4.49)

The slack variable has a lower limit of zero and an upper limit of . Thus, the simplified DC OPF
formulation can be given by following set of equations:

.....................................................................................................(4.50)

Subject to

..................................................................................................(4.51)

................................................................................................(4.52)
 .................................................................................................(4.53)

The variables in this OPF are: bus phase angles , generator power outputs , m line flow limit
slack variables sij , where m is number of lines.

Inclusion of Load Elasticity in OPF

Elasticity of a load is represented by a benefit function . It represents the prices that the load

is willing to pay to purchase an amount of power and represents load's bid to the pool or ISO. The
objective function of the OPF problem will be modified as follows:

.............................................................................................(4.54)

The DC power flow equations of 4.31 are also modified to include the price elastic load as follows:

............................................................................................(4.55)

This formulation gives rise to additional set of variables, i.e., . Rest of the problem remains the same.

AC OPF

AC OPF gives a more realistic solution as losses are implicitly involved in the formulation itself. The AC
OPF formulation is given as follows:
 ..............................................................................................(4.56)

subject to, load balance equations as equality constraints

...........................................................(4.57)

........................................................(4.58)

And the inequality constraints

....................................................................................(4.59)

....................................................................................(4.60)

....................................................................................(4.61)

....................................................................................(4.62)

.....................................................................................(4.63)

......................................................................................(4.64)

Where,
Vi......voltage at ith bus

......real power flow on line km

.........tap position of the tap changing transformer in the line km

.........reactive power generation of ith generator

. phase angle of kth bus

. .......conductance of line km

........susceptance of line km

........real power generation of kth bus

........reactive power generation of kth bus;

........reactive power load at kth bus

The solution of this problem requires the creation of the Lagrangian as shown below:

................................................................................................(4.65)

Where,

objective function

equality constraints (eq. 4.57 and 4.58)

inequality constraints (eq. 4.59, 4.60, 4.61, 4.62, 4.63, 4.64)

and
 - -----vectors of Lagrange multipliers

x ----------state vector

Interpretation of Lagrange Multipliers

Any optimization problem will have a Lagrange multiplier associated with each equality constraint. In
the case of OPF, the Lagrange multiplier associated with each constraint represented by the power flow
equations is the derivative of the total cost with respect to the increase in the load at that bus. This
derivative can then be looked at as the instantaneous price of next small increment of load - or simply
the zone price in INR/MWh.

The scarcity of transmission capacity is reflected by the Lagrange multipliers associated with equations
4.63 and 4.64. General theory of optimization suggests that the Lagrange multipliers indicate how the
optimal solution changes if the relevant constraint is changed marginally. Non-binding constraint implies
zero value of corresponding Lagrange multiplier. In case of binding constraint, corresponding Lagrange
multiplier indicates change in the optimal solution if the constraint was marginally eased. The Lagrange
multiplier associated with line flow limits thus sets a threshold on the price per unit, which one would be
willing to pay in order to increase an available capacity marginally. This threshold is termed as shadow
price. As the transmission resources go on becoming scarcer, the line shadow price gets reflected in the
nodal price as it is the sum of the price for generation and transmission.

Pricing system based on nodal prices is an essential feature of Standard Market Design (SMD) proposed
by Federal Electricity Regulatory Commission (FERC) in USA. The nodal price is popularly known as
Locational Marginal Price (LMP). If there are no lines that are congested, then the nodal LMP for all
buses will be equal if DC OPF is employed. In a full AC OPF, even the uncongested case will have
different bus prices. This is due to the effects of transmission losses. The difference between bus prices
equals the value of marginal losses between the nodes.

The physical meaning associated with LMP can be stated like this: It is the rate of increase of optimum
generating cost with respect to the increase of real power load at that bus. It is the marginal cost of
supplying next 1 MW increment at the corresponding node. Same can be established in mathematical
terms as:
..................................................................(4.66)

where, is the optimal operating cost with the variable load at bus k.

Illustrative Example

For illustration purpose, the Optimal Power Flow problem for a 3 bus system of Figure 4.2 is solved.
System data given in Tables 4.2 and 4.3 is used. The cost curves for generators at bus 1 and 2 are given
as:

In addition, following inequalities are imposed

AC OPF, as explained in section 4.6.3, is solved with the above mentioned constraints with the objective
of generation cost minimization. The results are shown in Table 4.4.

λ(INR
Bus
V δ PG PD /
No
MWh)

1 1.099 0 359.87 - 1731.5

 2 1.100 10.041 540.13 100 1731.5

3 1.099 -0.893 - 800 1731.5

Table 4.4: Results of OPF without line limits

It is observed that power flow between buses 1 and 2 is 210.85 MW. The λ value is same for every bus
as no line limits are hit and the system marginal price is same on all nodes. Now, in addition to the
above constraints, real power flow over line 1-2 is limited to 200 MW such that,

By placing a limit of 200 MW real power on line 1-2, a congestion is created, due to which the bus
incremental costs are different at different buses. The Lagrange multiplier associated with the line flow
constraint of line 1-2 comes out to be greater than zero in this case. The results are shown in Table 4.5.

Bus λ(INR /
V δ PG PD
No MWh)

1 1.100 0 382.11 - 1838.22

2 1.100 9.492 517.89 100 1660.35

-
3 1.099 0 800 1832.65
0.909

Table 4.5: Results of OPF with line limits

Implications of Nodal Pricing

As seen from the above example, the nodal prices come out to be different when at least one Lagrange
multiplier associated with line flow constraints is non-zero. The difference in nodal prices gives rise to
congestion charge or the network revenue (NR), which is given as follows
 ...............................................................................(4.67)

where, λ,k and are the nodal price, demand and generation at node k, respectively. For the above
example, during the uncongested case, NR is zero as all nodal prices are

equal. However, in the second case, i.e., when line 2-3 has hit its limit, NR is given as follows:

.....................................................(4.68)

This amount is collected by ISO as it buys power at some nodal price and sells it at buses having
relatively large nodal prices. The ISO may use this excess money for network reinforcements or
distribute it among the participants using the financial transmission rights (FTRs).

A thorough treatment to the topic of interpretation of Lagrange multipliers associated with OPF
problem, LMP calculation and FTRs is provided in the next chapter. The above discussion on this topic
was provided in its most simple form so as to make the reader aware of the concept of nodal pricing and
associated congestion management.

NODAL PRICING: OPF BASED CONGESTION MANAGEMENT

Though the nodal pricing method is supposed to be economically most efficient (ability to maximize
social welfare), it suffers from the limitation of complexity that is associated with it. Zonal aggregation
has been proposed and adopted in some systems as a realistic alternative to nodal prices. The basic idea
is to divide the grid into few congestion zones. When congestion is present, the zonal markets are
decoupled and the zonal market clearing prices reflect the supply and demand condition in each zone as
well as inter zonal transmission capability.

In some systems, there exist only a few lines where frequent congestion occurs. The rest of the lines are
less likely to be congested. This practicality has given birth to the concept of inter-zonal and intra-zonal
congestion management. The main objective is to reduce the complexity of readjustment process with a
large power network, and to avoid price deviation within a portion of the system where congestion is
less frequent. In this concept, the entire network is divided into multiple physical zones across the
potentially congested lines. These lines are considered to be economically significant.
At the first stage, an economically significant readjustment and pricing mechanism is utilized in order to
remove congestion on the potentially congested inter-zonal line. This stage is called inter-zonal
congestion management. In order to facilitate the readjustment, the participants submit the adjustment
bids. The adjustment bid submitted by a participant reflects its willingness to allow adjustment over its
preferred schedule. The adjustment bid consists of offer price, maximum decrement limit and maximum
increment limit. If a participant does not submit the adjustment bids, the ISO will use adjustment bids of
other participants for congestion management and the participant who did not submit the adjustment
bid would be automatically forced to pay congestion charges calculated according to other bids.

The next stage is intra-zonal congestion management. During intra-zonal congestion management stage,
the flows on the inter-zonal channels are set fixed to the values which are the outcomes of the inter-
zonal congestion management stage. The main goal is to minimize the absolute MW of re-dispatch by
taking into account the net cost of re-dispatch, determined by the adjustment bids of the participants.
Inter-zonal and intra-zonal congestion management scheme is employed in ERCOT market.

Generic Formulation

In the ERCOT Zonal Congestion Management Market, Qualified Schedule Entities (QSEs) , (a term used
for Scheduling Coordinators in ERCOT) submit balanced energy schedules that include physical
schedules, bilateral transactions, and Balancing Energy bids. QSEs balance their schedules through
bilateral transactions. After conducting an evaluation of congestion conditions using generation
schedules submitted by QSEs and short-term load forecast by ERCOT, ERCOT purchases Balancing
Energy up bids and Balancing Energy down bids from different zones to resolve zonal congestions while
maintaining the balance between generation and load. To minimize system cost and maximum system
welfare, the following objective function is used to calculate zonal Market Clearing Price, Shadow Price
of Zonal Congestion, and Balancing Energy bid deployment.

QSE is an entity that coordinates with ISO on behalf of generators, customers and retailers. It supplies
balanced schedules of power injection and take-offs on hourly basis.

............................................................(4.69)

...............................................................(4.70)
..............................................................(4.71)

..................................................................(4.72)

.....................................................................(4.73)

Where,

set of QSEs

set of zones

KC .set of zonal congestions

NP total number of QSEs

NZ total number of zones

NC total number of zonal congestions

BEUBP zonal balancing energy up bid price curve

zonal balancing energy down bid price

BEDBP
curve

INSU deployed balancing energy up bids

INSD deployed balancing energy down bids

P QSE’s total zonal generation schedules

LF short-term load forecast in zone

SF zonal average shift factor

TTC total transfer capacity

maximum amount of balancing energy up

MAXBEU
bids

maximum amount of balancing energy

MAXBED
down bids
Objective function of equation 4.69 indicates maximization of social welfare. Equation 4.70 indicates
overall power balance. Inequality of 4.71 indicates the limit on total transfer capability of a congestion
corridor. A feasible solution for this optimization function consists of three parts: the amount of cleared
Balancing Energy bids, the Shadow Price of Zonal Congestion, and the Shadow Price of Power Balance.
The Marginal Price, i.e., the Market Clearing Price (MCPE), for each zone is calculated as follows:

..............................................................(4.74)

Where,

........Zonal market clearing price

....Shadow price of power balance

SP ...............Shadow price of zonal congestion

The deployed Balancing Energy up bids will be paid at zonal MCPE while the deployed Balancing Energy
Down bids will pay ERCOT at the zonal MCPE. Those QSEs whose schedules aggravate a Zonal
Congestion will be charged at the SP of that Zonal Congestion in proportion to their scheduled flow on
that Zonal Congestion. Those QSEs whose schedules contribute to resolving a Zonal Congestion will be
paid in proportion to their scheduled counter flow.