The financial risk of lossless shift factor in the ISO energy market and its resolution

This paper presents the financial risk of Independent System Operators in using the DC-based shift factor in modeling transmission constraints in its market optimization model while transmission losses are accounted for in scheduling generation. The risk arises because DC-based shift factor is not able to account for the necessary marginal loss effect when the network becomes congested. Locational marginal price will under reflect the cost of energy at the load location. ISO energy revenue is under collected and could be below the congestion rent and thus could be inadequate for congestion revenue right settlement. In resolving the risk of energy inadequacy, this paper proposes the use of AC-based shift factor in the market optimization model. In conjunction, since the LMP congestion component under AC-based shift factor is not applicable for congestion revenue right settlement, this paper proposes the use of DC-based shift factor together with the shadow price from the AC-based shift factor optimization solution to determine a nodal based price for congestion revenue right settlement.