Electricity Markets (cont)
Several researchers have noted that a variety of factors, including energy price caps set well below the putative scarcity value of energy, the impact of "out-of-merit" dispatch, the use of techniques such as voltage reductions during scarcity periods with no corresponding scarcity price signal, etc. results in a "missing money" problem. The consequence is that prices paid to suppliers in the "market" are substantially below the levels required to stimulate new entry. The markets have therefore been useful in bringing efficiencies to short-term system operations and dispatch but have been a failure in what was advertised as a principal benefit: stimulating suitable new investment where it is needed, when it is needed.
The system price in the day-ahead market is, in principle, determined by matching offers from generators to bids from consumers at each node to develop a classic supply and demand equilibrium price, usually on an hourly interval, and is calculated separately for sub-regions in which the system operator's load flow model indicates that constraints will bind transmission imports. In practice, the LMP algorithm described above is run, incorporating a security-constrained, least-cost dispatch calculation (see below) with supply based on the generators that submitted offers in the day-ahead market and demand based on bids from load-serving entities draining supplies at the nodes in question. In most systems the algorithm used is a "DC" model rather than an "AC" model, so constraints and re-dispatch resulting from thermal limits are identified/predicted, but constraints and re-dispatch resulting from reactive power deficiencies are not. Some systems take marginal losses into account. The prices in the real-time market are determined by the LMP algorithm described above, balancing supply from available units. This process is carried out for each 5-minute, half-hour or hour (depending on the market) interval at each node on the transmission grid. The hypothetical re-dispatch calculation that determines LMP must respect security constraints and the re-dispatch calculation must leave sufficient margin to maintain system stability in the event of an unplanned outage anywhere on the system. This results in a spot market with "bid-based, security-constrained, economic dispatch with nodal prices."
