Zonal Pricing in a Deregulated Electricity Market

Abstract

In the deregulated Norwegian electricity market a zonal transmission pricing system is used to cope with network capacity problems. In this paper we will illustrate some of the problems that the zonal pricing system, as implemented in Norway, has. With the use of small network examples we illustrate the difficulties involved in defining the zones, the redistribution effects of the surplus that a zonal pricing system has, as well as the conflicting interests concerning zone boundaries that are present among the various market participant. We also show that a zone allocation mechanism based on nodal prices does not necessarily lead to a zone system with maximal social surplus. Finally, we formulate an optimization model that when solved yields the zone system that maximizes social surplus given a pre-specification of the number of zones to be used.,QWURGXFWLRQA zonal approach to managing congestion has been adopted in the Norwegian scheduled power market. The trading process works approximately as follows:1) Based on the supply and demand schedule bids given by the market participants, the market is cleared while ignoring any grid limitations. This produces a system price S of energy.2) If the resulting flows induce capacity problems, the nodes of the grid are partitioned into zones.3) Considering the case with two zones defined, the zone with net supply is defined as the low-price area, whereas the net demand zone is determined the high-price area. 4) Net transmission over the zone-boundary is fixed when curtailed to meet the violated capacity limit.

From nodal to zonal pricing: A bottom-up approach to the second-best

“…Walton and Tabors (1996) therefore combine statistical tests for price uniformity with information from practical experience to identify zones, but do not formalize a method to test the results' adequacy. In Bjørndal and Jørnsten (2001), the authors show that absolute differences in nodal prices do not yet provide an adequate basis for the definition of zones since similar price differences may lead to variations in the optimal zonal configurations in different scenarios. Thus, cluster analysis is suggested as one possible methodological refinement.…”

“…A stronger focus on quantitative measures is put in Stoft (1997), Walton and Tabors (1996) and Bjørndal and Jørnsten (2001). Stoft (1997) states that the definition of zones should be based on nodal price differences which comprise all relevant information on network related costs.…”

Simulation of Congestion Management and Security Constraints in the Nordic Electricity Market

“…In the whole Nordic system there is a practice of moving a transmission constraint within a price area to an area boundary by reducing the capacity between price areas. Previous work [1] and [2] has shown that this is a practice that can be costly and greatly affects the levels of area prices in different regions. Incentives for this practice are also influenced by the network regulation models and the fact that the two congestion management methods described above normally differ in how they affect grid revenues and system operation costs.…”

“…Optimal zonal prices have been studied by [1]. They are second best compared to optimal nodal prices.…”

“…In the following analyses we relax the infeasible cut constraints (in our case particularly in the Bergen area): two cut constraints are removed from the disaggregated optimization problems of the OptFlow model. The relaxation will change the optimal nodal and zonal prices, while the simplified zonal prices will be unaffected, since the cut constraints are not directly included in this price calculation anyway 1 . Summary data of the new prices is given in Table IV and shows that all prices are now below 141 Euros/MWh.…”