A Penalty Scheme for Reducing Electricity Price Volatility

The deregulation of electric power systems in many parts of the world has changed the mechanism of electricity pricing. Unlike the fixed price in conventional power systems, electricity price varies with time and location in the new deregulated environment. Electricity prices in a restructured power system can be highly volatile due to the random nature of system failures and demands. It is therefore very difficult for the independent system operator (ISO) to control the price and associated risk. The high prices beyond control have resulted in significant impacts on customers as well as on system operation. This paper proposes a penalty scheme for reducing electricity price volatility caused by failures in generation companies (Gencos) or transmission companies (Transcos). In this scheme, Gencos and Transcos will be penalized if their equipment failures result in unexpected price changes. The price decomposition technique is used to evaluate the price components caused by random failures. The penalty can be calculated based on the difference of electricity price components between the normal state and the contingency states. Moreover, a simplified schema which is based on profit analysis is also proposed in this paper. The proposed penalty scheme not only gives the Gencos and Transcos an incentive to improve their reliabilities but also provides a flexible tool for the ISO to control the system price risk. The possible shortcomings of the proposed schema are also specified in the paper. The IEEE RTS is analyzed to illustrate the technique.