More on efficient trade between power markets

Michael Giberson

A paper by Giorgia Oggioni and Yves Smeers, “Degree of coordination in market-coupling and counter-trading,” examines the value of improving coordination between separate-but-interconnected power markets. (A post here last week cited a recent Windpower Monthly article that provides a good non-technical discussion of the issue. If you are not familiar with market coupling, I recommend you first read the Windpower Monthly article linked to in the earlier post. The Oggioni and Smeers paper provides a more technical discussion.)

In brief, Oggioni and Smeers compare market coupling regimes to both an ideal market* on the one hand and separate market-to-market coordination agreements** on the other hand. Not surprisingly, they find the ideal market design is most efficient and independent market-to-market coordination is least efficient in their numerical analysis. An encompassing market coupling system (a single market coupling system able to redispatch all available energy supply resources) also achieves a high degree of efficiency. Somewhat surprising to me was that multiple independent but overlapping market coupling systems achieved similarly high degrees of efficiency so long as each supply resource is available to at least one market coupling system and each supply resource is available on the same terms (i.e. at the same price) to each market coupling system that can access it.

The paper is written to address circumstances in the European market, but has implications for trade between power systems in the United States and elsewhere as well. To put this in a U.S. context, the article suggests that if trade between the New York ISO and ISO-New England was well integrated, and if trade between the New York ISO and PJM was well integrated, then the three systems would attain a high degree of efficiency even without resorting to a single integrated dispatch across the three regional power markets.

In principle, adding efficient trade between PJM and MISO, and efficient trade between MISO and SPP, and suddenly one can obtain efficient power system arbitrage subject to the limits of the transmission system stretching from the tip of Maine down to the eastern edge of New Mexico.

In practice a few issues intrude.  Market coupling in Europe is, I think, still limited to day-ahead coordination between power systems, leaving the transmission system operators to address independently the changes in local supply and demand that arise after the day-ahead result is published.  Moving toward real-time market coupling would create additional economic value, but at the cost of a significant increase in data sharing requirements and a higher computational burden on the system operators. In considering priorities for further power market development, then, the issue is whether the benefits of moving closer to real-time market coupling are worth the costs, and this ratio then compared to the benefit-cost ratio of other identified potential market improvements.

*Ideal market = a single security-constrained economic dispatch covering the entire region, using a fully developed transmission model and accurate depictions of generation characteristics.

**Market-to-market coordination agreements = bilateral agreements between markets that govern access to the transmission capacity between the systems and setting rules to resolve congestion on the interconnecting transmission lines.