Fifteenth National Power Systems Conference (NPSC), IIT Bombay, December 2008

Determination of Market Clearing Price in Pool

Markets with Elastic Demand
Bijuna Kunju K∗ and P S Nagendra Rao
Department of Electrical Engineering
Indian Institute of Science, Bangalore 560012
kbijuna@gmail.com, nagendra@ee.iisc.ernet.in
∗ Department of Electrical and Electronics Engg

T.K.M.College of Engineering, Kollam 691005

Abstract— Determination of Market Clearing Price is one of
the prime functions of a pool operator. In many of the existing
markets, market clearing is based on stepped bids received from
generators and consumers. However, quadratic bid functions
have more information and are more realistic. A simple closed
form solution scheme to compute the clearing price from such
supply and offer bids submitted to the operator is proposed in
this paper.
I. I NTRODUCTION
The most popular form of electricity market so far has
been the centralized auction, which has often mimicked the
procedures used for central dispatch in the past, reflecting
concerns over system security [1], [2], [3]. After the auction,
some pool-based electricity markets operate under a system-
wide market price [3] while others have elected the approach
of nodal (or locational) marginal prices [4]. The bids supplied
by the generators/generating companies indicate the quantity
of power they are ready to supply at a certain price in
terms of a price function [1], [2]. In many pool markets, the
consumers also submit offers in terms of quantity of power
required and a price function (at which they are prepared to
purchase) [5]. In the single-price auction, the market-clearing
price is determined by a merit order algorithm [6]: a well-
established technique where all participating generators bids
are ordered according to increasing levels while participating
consumers bids are ranked according to decreasing levels. The
market clearing price is then defined by the intersection of the
aggregate demand and supply curves. This method has the
advantage that it is very simple to implement.
With this process the total demand that can be met and the
individual generations accepted/ loads supplied can be decided
fairly easily. The stepped bids in use are approximations of the
true cost function of the generating units. A basic requirement
for the success of market dictated utility operation is that
the bids must reflect the true costs of operation. Hence, it
is easy to see that use of quadratic functions to represent the
cost of generation would provide a better representation of
the true cost of generation. It may also be noted that the use
of quadratic functions to represent the cost of generation has
been in use in power systems for a long time now. Hence,
continuing to use this form of cost functions (bid functions)
should be more acceptable to the industry rather than adopting
the step form of cost functions. A similar argument holds good
for the bids of loads also.
It must be pointed out that there has been a considerable
body of research which attempts to forecast the MCP [7], [8],
[9], [10]. Such forecasts are meant to be used by the bidders
in order to tune their bids to maximize their individual profits.
Techniques based on artificial intelligence and probability
theory have been proposed for this purpose. It is easy to see
that such techniques are obviously not intended to maximize
the societal benefit and hence, cannot be expected to achieve
the desired goals of restructured markets.
The aim of this paper is to develop a method for determining
the market clearing price in the case of pool markets under
the assumption of no congestion. In this development, it is
considered that generator bid functions and the load valuation
functions are quadratic functions of real power. The maximum
and minimum limits on both individual generations and loads
are also accounted in this process. The proposed method has
been developed by extending an earlier method [11], meant for
determining the generation schedules in vertically integrated
power systems. However the method in [11] does not consider
the bids of consumers and it also requires the total demand to
be specified.
In this approach, a formula is developed in Section II to
find the clearing price where the generator and load bids are
quadratic functions of real power. It is then shown how this
formula can be used in a systematic way to handle the limits
on loads and generators and arrive at the final schedule. A
detailed illustration of the algorithm is given in Section III
and the paper is concluded in the next Section. In Section III,
methods of handling generators bids and consumers offers-
with and without limits, fixed demands (block bids) and their
combinations are illustrated.
II. A F ORMULA FOR M ARKET C LEARING P RICE
Consider a system with N generators and M consumers. Let
the generator bid function for the ith generator be
Ci (P gi ) = ai P gi2 + bi P gi + ci
and the consumer benefit function for the j th load be
Bfj (P dj ) = αj P d2j + βj P dj + γj

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 Fifteenth National Power Systems Conference (NPSC), IIT Bombay, December 2008

The objective of the pool market operator is to maximise the where

social welfare function (2ak P gk + bk ) = λ

M 
N
Bfj (P dj ) − Ci (P gi ) Hence the value of λ is obtained as
j=1 i=1
2PR + B
subject to the power balance constraint, λ= (12)
A

N 
M
(P gi ) = (P dj ) (1) Similarly, with the demand offers, it can be shown that
i=1 j=1
2PR + Bd
Hence, the augmented objective function for unconstrained λ= (13)
Ad
optimisation is
where,

N 
M 
N 
M
L= Ci (P gi ) − Bfj (P dj ) − λ( (P gi ) − (P dj )) M
1
Ad = ( ) (14)
i=1 j=1 i=1 j=1
i=1
αi
where λ is the Lagrangian multiplier. The conditions for
optimality of L are given by M
βi
dL dCi Bd = ( ) (15)
= =0 ∀ i (2) i=1
αi
dλ dP gi
and Solving (12) and (13), we have
dL dBfj
= =0 ∀ j (3) ABd − Ad B
dλ dP dj PR = (16)
2(Ad − A)
Equations (2)and (3) imply that for optimality, the incremental
cost functions of all the generation as well as the incremental
utility function of all loads must be equal to λ. The incremental (B − Bd )
cost for generators can also be written as λ = (17)
(A − Ad )
dCi
= λ = 2ai P gi + bi , i∈N (4) The schedules for each of the generators and the demand
dP gi
of each consumer that can be met is obtained as,
At the optimum, the incremental costs of all generators are
same and we have, λ − bi
P gi = ∀ i (18)
2ai
2ai P gi +bi = 2ak P gk +bk = λ ∀ i ∈ N, for a particular k ∈ N
(5)
2ak P gk + bk − bi λ − βi
P gi = , ∀i∈N (6) P di = ∀ i (19)
2ai 2αi
Let the total demand (total generation) given by (1) be equal
to PR . Therefore, A. Incorporating the Limits


N 
N
2ak P gk + bk − bi The formula in (17) for the market clearing price is valid
(P gi ) = = PR (7) only if the corresponding generators and loads given by (18)
2ai
i=1 i=1 and (19) are within their limits. However, this may not always
N N N happen. If at any stage of calculation of the system λ using
1 1 bi
2ak P gk ( ) + bk ( )− ( ) = 2PR . (8) (17), the corresponding schedule results in limit violations,
i=1
a i i=1
a i i=1
a i then the violating loads / generations must be constrained
Define two parameters A and B, at the limits that they are violating and the net difference
between such allocated loads and generations has to be first
N
1 optimally allocated among the non violating generators / loads.
A= ( ) (9)
ai For this step also, the formula derived above is made use
i=1
of. After this step, the cost functions of the non violating
and generators / loads are modified to reflect the partial allocation
N
bi
B= ( ). (10) of load / generation that has been done to the particular entity.
i=1
ai The process of finding the system market clearing price is
continued considering only the non violating generators / loads
and (8) can be written as
and the modified incremental cost functions of these generators
(2ak P gk + bk )A = 2PR + B (11) and loads.

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 Fifteenth National Power Systems Conference (NPSC), IIT Bombay, December 2008

III. I LLUSTRATION OF THE METHOD B. Case 2: Maximum Limit on Generator Output

Consider a system consisting of three generators and two In addition to the conditions in case 1, suppose that genera-
consumers with variable demands. The generator cost func- tor 1 has a maximum limit of 400 MW. Hence, the generation
tions of the three units as given in [11] are, of this unit must be constrained to 400 MW, instead of 446.5
MW calculated above. In addition, this generation has to be
C1 = 0.003P g12 + 2P g1 + 80 Rs/h, allocated optimally among the customers. P gx1 = 400M W .
The corresponding λint is computed (13) using the values of
C2 = 0.015P g22 + 1.45P g2 + 100 Rs/h, Ad and Bd obtained earlier
C3 = 0.01P g32 + 0.95P g3 + 120 Rs/h. 2 × 400 − 8500
λint = = 5.1333 Rs/M W
−1500
The offer functions of the two consumers are, The allocation of 400 MW among the loads would be
Bf1 = −0.002P d21 + 5P d1 + 150 Rs/h, corresponding to this λint of 5.1333. This value turn out to
be
5.133 − 5
Bf2 = −0.001P d22 + 6P d2 + 200 Rs/h. P d1 = = −33.3 M W
2 × −0.002
A. Case 1: No Limit Constraints 5.133 − 6
P d2 = = 433.3 M W
For this system the values of A, B, Ad and Bd are calculated 2 × −0.001
using (9), (10), (14) and (15)as The negative value implies the violation of minimum limit
for P d1 . So, the full 400 MW is allocated to P d2 . Now, the
1 1 1
A= + + = 500 remaining generators (No. 2 and No. 3) and demand bids are
0.003 0.015 0.01 to be used in the next stage. However, the incremental cost
2 1.45 0.95 function of P d2 is to be changed to 2α2 P d2 + β2 to account
B= + + = 858.33
0.003 0.015 0.01 for the allocation of 400 MW and the modified value of β is
obtained as
1 1
Ad = + = −1500 β2 = 2 × α2 × P d2 + β2
−0.002 −0.001
β2 = 2 × −0.001 × 400 + 6 = 5.2
5 6
Bd = + = −8500
−0.002 −0.001 With this procedure for accounting of the allocated component
Now, the total demand that can be supplied is obtained using of this demand, the slope of the incremental cost function of
(16) as P d2 does not change, only the constant value changes. So,
for further scheduling, only the value of Bd will change to
(500 × −8500) − (−1500 × 858.33) Bd (Ad will remain the same).
PR = = 740.63M W.
2(−1500 − 500)
5 5.2
Bd = + = −7700
The Market Clearing Price is obtained using (12) or (13) as −0.002 −0.001
2 × 740.63 + 858.33 Since, the set of available generators has changed, the values
λ= = 4.6792 Rs/M W of A and B (9,10) are to be recalculated and the new values
500
are
Or 1 1
2 × 740.63 − 8500 A = + = 166.67
λ= = 4.6792 Rs/M W 0.015 0.01
−1500
1.45 0.95
The schedules are then found using (18) and (19)as B = + = 191.67
0.015 0.01
4.679 − 2 From the new set, the demand that can be supplied is found
P g1 = = 446.5M W
2 × 0.003 out as
4.679 − 1.45 (166.67 × −7700) − (−1500 × 191.67)
P g2 = = 107.64M W PRn = = 298.7501M W
2 × 0.015 2(−1500 − 166.67)

4.679 − 0.95 The new system λ being

P g3 = = 186.46M W 2 × 298.7501 + 191.67
2 × 0.01 λ= = 4.7350 Rs/M W
166.67
4.679 − 5
P d1 = = 80.2M W The individual shares of the loads and generations are calcu-
2 × −0.002
lated using (18,19) and the schedules are
4.679 − 6 4.7350 − 1.45
P d2 = = 660.4M W P g2 = = 109.5 M W
2 × −0.001 2 × 0.015

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 Fifteenth National Power Systems Conference (NPSC), IIT Bombay, December 2008

4.7350 − 0.95
P g3 = = 189.25 M W The additional demand that can be met is
2 × 0.01
(500 × −2500) − (−500 × 2058.35)
4.7350 − 5 PR = = 110.4125 M W
P d1 = = 66.25 M W 2(−500 − 500)
2 × −0.002
This turns out to be the demand of consumer 1 P d1 =
4.7350 − 5.2 110.4125 MW. The new clearing price is obtained using (16)
P d2 = = 232.5 M W
2 × −0.001 as
The final schedules for the three generators are 400.0, 109.5 2 × 110.4125 + 2058.35
λ= = 4.5584 Rs/M W
and 189.25 MW respectively. The values for the two final 500
demands are 66.25 and 632.5 MW (i.e.400M W +232.5M W ) Or
respectively. The Market Clearing Price is 4.735 Rs/MW. 2 × 110.4125 − 2500
Since the generator with a lower cost has been constrained λ= = 4.5584 Rs/M W
−500
at its maximum limit, the total demand supplied reduces from
a possible 740.63 MW level to 698.75 MW while the clearing The contribution of the three generators towards this additional
price shows a rise from 4.6792 to 4.735 Rs/MW. load are
It is not difficult to see that the solution obtained by this P g1 = 73.61M W
method satisfies the Kuhn Tucker conditions also. The optimal
P g2 = 14.72M W
incremental cost for the total system is 4.735 Rs/MW where
as the incremental cost of the generator constrained at its P g3 = 22.08M W
maximum limit is
Hence, the final schedules for the three generators are 426.377
λ1 = 2 × 0.003 × 400 + 2 = 4.4 Rs/M W (352.76 + 73.61), 103.3867 (88.6667+14.72) and 180.4133
(158.333 + 22.08) MW respectively. The two demands are
C. Case 3: Maximum Limit on Load
110.4125 and 600.0 MW. The Market Clearing Price is 4.5584
Consider that the schedule is as in case 1, and suppose that, Rs/MW. Here since the demand with a higher valuation is
in addition, there is a maximum limit on the load at node constrained at the maximum limit, the total demand met gets
2 (specified) of 600MW. This implies a constraint violation.
Hence, first this load (600MW) is to be optimally allocated reduced from 740.63 MW to 710.4125 MW while the clearing
between generators. An intermediate value of λ for allocating price decreases from 4.735 to 4.5584 Rs/MW.
this 600MW among the generators is found using (12) as
D. Case 4: Maximum Limits on Both Generators and Con-
2 × P rn + A 2 × 600 + 858.3333
λint = = = 4.1167 Rs/M W sumer Loads
B 500
Here, we consider both the constraints to be operative
and the corresponding allocation are
simultaneously. The generation 1 has a maximum limit of 400
4.1167 − 2 MW and the maximum demand of consumer 2 is 600 MW.
P g1 = = 352.76M W
2 × 0.003 From the optimal schedule of case 1 it is seen that both limits
are violated. So P g1 is fixed at 400 MW and P d2 is fixed at
4.1167 − 1.45
P g2 = = 88.6667M W 600 MW. The difference of these two values is 200 MW of
2 × 0.015 demand. This demand is optimally distributed among the two
4.1167 − 0.95 generators not set at their limits as follows. The intermediate
P g3 = = 158.3333M W value of λ is obtained using values of A and B  already
2 × 0.01
calculated in (Case 2) as 166.67 and 191.67 respectively.
Now, the incremental cost functions of the generators have to
be modified to reflect this allocation. The slope ai of all the 2 × P r + B  2 × 200 + 191.67
λint = = = 3.55Rs/M W
generators remain unchanged, and it is easy to see that bi of A 166.67
all the generators must be now taken as 4.1167. Now for the and the corresponding allocation to the two generators are
next stage of optimisation, the value of B need to be calculated
again and is denoted as B  . 3.55 − 1.45
P g2 = = 70M W
2 × 0.015
4.1167 4.1167 4.1167
B = + + = 2058.35 3.55 − 0.95
0.003 0.015 0.01 P g3 = = 130M W
2 × 0.01
Now, the demand has to be met is of consumer 1. The new
values of Ad and Bd corresponding to this situation are The incremental cost function of the two generators now have
to be modified such that they have the same value of bi equal to
1 3.55 with their ai values remaining unchanged. So, the value
Ad = = −500
−0.002 of B is calculated again as
5 3.55 3.55
Bd = = −2500 B = + = 591.67
−0.002 0.015 0.01

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 Fifteenth National Power Systems Conference (NPSC), IIT Bombay, December 2008

Now, the demand that is to be met is only that of consumer The values of A and B are then recalculated with three
1. Hence, the new value of Ad and Bd are generators only. The new values are A = 123.1429 and B  =
216.
Ad = −500
2 × P r + A 2 × 75.4 + 216
Bd = −2500 λint = = = 2.9787Rs/M W
B 123.1429
Hence, the additional load that can be met is This value of λint is still lesser than the bi of the generators
(166.67 × −2500) − (−500 × 591.67) at 13, 23 and 27 and their output has been correctly allocated
PR = = 90.625 M W to be zero. Using this λint we get,
2(−500 − 166.67)
Therefore, the demand of consumer 1 is also 90.625 MW. P g1 = 24.4675M W
P d1 = 90.625 MW. The new clearing price is
P g2 = 35.1057M W
2 × 90.625 + 591.67
λ= = 4.6375 Rs/M W 
166.67 P g22 = 15.8296M W
Or
The incremental cost function of these three generators now
2 × 90.625 − 2500 have to be modified such that they have the same value of bi
λ= = 4.6375 Rs/M W
−500 as 2.9787 with their ai values remaining unchanged. So, the
value of B is calculated again as
The contribution of the two generators towards this load is
2.9787 2.9787 2.9787 3.25 3 3
4.6375 − 3.55 B = + + + + + = 998.3719
P g2 = = 36.25 M W 0.02 0.0175 0.0625 0.0083 0.025 0.025
2 × 0.015
The total demand of the nodes with price dependent loads is
4.6375 − 3.55 then determined by (16)
P g3 = = 54.375 M W
2 × 0.01
(323.624 × −1410) − (−300 × 998.3719)
The final schedules are generations 400.0, 106.25 and 184.375 PR = = 125.72M W.
2(−300 − 323.624)
MW respectively. The final demands are 90.625 and 600.0
MW. The Market Clearing Price is 4.6375 Rs/MW. The new clearing price is found by (17)

E. Case 5: Mixed Load - (No Limit violation) λ = 3.862Rs/M W

This example is provided to illustrate the method when the The individual share of generations and loads are then found
system has both fixed loads and price sensitive loads. The 30 from the clearing price by substituting in (18,19)
bus system is used for this illustration. The bids and offers
details of the 30 bus system used here is given Tab. I. There TABLE II
are loads which do not submit offer function implying that T HE SCHEDULES OBTAINED FOR 30 BUS SYSTEM
they are ready to accept power at any cost. In this system the
total fixed demand by those consumers is 75.4 MW.
Gen No. P gi P gi P gif inal Dem No. P di
1 24.47 22.11 46.58 2 53.45
TABLE I
2 35.10 25.27 60.37 7 13.45
T HE BIDS OF 30 BUS SYSTEM 22 15.83 7.10 22.93 8 23.45
Gen No. ai bi Dem No. αi βi 27 0.0000 36.74 36.74 12 8.45
1 0.02 2.00 2 -0.02 6.0 23 0.0000 17.25 17.25 21 23.46
2 0.0175 1.75 7 -0.02 4.4  13 0.0000 17.25 17.25  30 3.46
22 0.0625 1.00 8 -0.02 4.8 Gen. 75.4 125.72 201.12 V ar.Dem. 125.72
27 0.0083 3.25 12 -0.02 4.2
23 0.025 3.00 21 -0.02 4.8
13 0.025 3.00 30 -0.02 4.0
F. Case 6: Mixed Load with Limit Violation

The value of A for the set of supply bids is 323.6248 and Consider the system as in case 5, and suppose that in
addition there is a maximum limit of 50 MW on the demand
B is 847.5662. The corresponding values for demand bids are
Ad is −300 and Bd is −1410. of consumer 2, P dmax2 = 50M W . The steps of Case 5 are
In the first step, the fixed demand is allocated to the repeated until its last stage, where it is seen that the load
generators. Considering all the six available generators share assigned to consumer 2 is greater than its maximum value.
the demand, the value of λint is first calculated Hence the demand of consumer 1 is fixed to 50 MW, P d2 =
50M W . After the fixed demand allocation, this demand is
2 × P r + A 2 × 75.4 + 323.6248
λint = = = 2.928Rs/M W allocated. So the values of A and B are taken considering
B 847.5663 all six generators (323.6248 and 998.3719 respectively). Now,
It is clear that for three generators, 13, 23 and 27 their bi value this demand is distributed optimally among the generators as
is greater than this λint and hence their output is set to zero. demonstrated earlier. The intermediate λ considering all six

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 Fifteenth National Power Systems Conference (NPSC), IIT Bombay, December 2008

generators, for this load of 50 MW turned out to be 3.3940 R EFERENCES

Rs/MW. [1] S. Stoft, Power System Economics: Designing Markets For Electricity.
2 × P r + A 2 × 50 + 323.6248 IEEE Press:John Wiley and Sons, 2002.
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B 998.3718 ing and Economics. Dordrecht: Kluwer, 1998.
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tricity market,” University California Energy Institute,Berkeley,POWER
P g1 = 10.3825M W, P g2 = 11.8657M W Reports, Tech. Rep. PWP-047, April 1997.
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  manuals/pdf/m11v21.pdf, January 31, 2004.
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auctions,” The Electricity Journal, Elsevier Science Inc., pp. 72–81,
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Operation and Management, APSCOM 2003, Hong Kong, November
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P d8 = 23.7525M W, P d12 = 8.7525M W

P d21 = 23.7525M W, P d30 = 3.7525M W.
The demand with high valuation is limited in quantity and
hence the system incremental price reduces as compared with
the previous case.
In this case, the fixed demand can be considered as a block
bid with infinite offer. The offer can have a format of specified
quantity of power at a specified price also. However, in such a
case, the fixed demand will be supplied only when the system
incremental cost is same as the offer price of the demand (not
the first demand to be supplied as done in this case).
IV. C ONCLUDING R EMARKS
A method of determining the Market Clearing Price and
the schedules based on the bids submitted by the consumers
and generators has been proposed in this paper. The bids
are assumed to be quadratic functions of real power instead
of the stepped bids currently in use. A close form solution
(formula) for determining the system λ based on bids has
been developed. It is shown that this formula can be used
in a systematic way when limits on the generation/loads have
to be accounted. The algorithm is simple and give the global
optimal solution for this problem. The method can be used
to find the market schedules when network constraints need
not be considered; such results are also useful in assessing the
impact of network constraints on the market schedules and
prices.

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