Forward markets for transmission that clear at LMP: a hybrid proposal

Abstract

Progress on restructuring of the US power system has been slowed, in part, by the debate over market design and, more specifically, over the design of the congestion management system. The paper proposes a hybrid model that combines the most critical elements of the flow-based and locational marginal price approaches. Specifically, the accounting interface between the simplified network representation of the forward market of the flow-based approach and the more detailed network representation of locational pricing for real time settlements are elements of the hybrid model. This solution minimizes the amount of real time congestion cost that is not included in the final cost of the transaction. The California and PJM markets are examples of each of the isolated approaches, respectively. The paper uses them to illustrate the flaws in each of these market structures and to identify how each market would improve if operated under the proposed hybrid model.