2004 IEEE Intemational Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DFWT2004) April 2004 Hong
Kong
Three Electricity Market Principles and Electricity Value Equivalent (EVE)
Pricing Methodology
Yan Mao-song
Shanghai University, Shanghai 200072,China
1. The first electricity market principle
Like the general commodity market the
electricity market efficiency should be held at
first. The market efficiency means the
maximization of social welfare or
minimization of operation cost when demand
is invariable. Namely, the investment cost
should be excluded from the economic
dispatch objective function. This can be
realized only by short run marginal cost
(SRMC) methods, for example the uniform
cleaning pricing methods using merit loading
order by operation cost bidding in the
generation market.
Total Cost Short Run
A Marpinal Cost
Inital
capital
Yield
0 capital repayment. However the new market
Fig.1 Short run marginal cost is less than
average cost under the condition of economics
of scale comparing between their slope rates
Under the condition of economics of scale,
especially in power system it is always the
case that the short run marginal cost is less
than the average cost (AVC), namely
SRMC<AVC,See Fig. 1. However the profit of
a utility (GenCo andor GridCo) depends on
AVC, rather than SRMC. There must be a way
for all capacity investments to be returned
from transaction market. Return deficiency in
transaction market will result in capacity
shortage, which may damage the system
0-7803-8237-4/04/$17.0002004IEEE
13
security and even results in power crisis. This
is a difficult market problem in the world.
So the EVE theory claims the first
electricity market principle : Both Ademate
Capacity Return and Market Efficiency
Should Be Held at Same Time under The
Economies of Scale. It means that : a. There
must be a way for all capacity investments to
be returned from the transaction market only,
b. Even if the adequate capacity investments
are returned, the market efficiency should also
be held under the economies of scale, c.
Simple supplement and government
interposition would damage the market
efficiency, d. A new pricing method for
automatic implementation of 1St market
principle is needed; it is just Electricity Value
Equivalent (EVE) pricing methods.
2. The second electricity market principle
The capacity cost competition must be
equal for every participant regardless of the
participant has heavy capital repayment, while
the old one does not. It is not fair in economy.
This is an investment bulwark, especially for
power industry under the economies of scale.
So the EVE theory claims the second
electricity market principle : Firstly The
Market Efficiencv Must Be Held, Then The
Economics Fairness Should Also Be
Concerned under The Economies of Scale.
3. The third electricity market principle
Investment return inadequacy will
generally result in shortage of the available
capacity in the market, and then price
skyrockets. The shorter the available capacity,
the higher the market price. It is also including
2004 IEEE lntemational Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong
power supplier bad actions, high bidding and
capacity withholding using their market power,
until government intervening or the market
being closed. At this time people could not be
encouraged to invest because of market risk.
The price cap is efficient for price peak
restraint, but it is not reasonable and will
damage market efficiency.
So the EVE theory claims the third
electricity market principle :
Market Should Be Efficient Not only When
The Power SuDulv Being In Richness But
Also In Deficiency. Under the electricity
capacity relative shortage the market price
skyrocket should be restrained and the market
may not be closed and at this time should
provide correct market signal. A new pricing
method for automatic implementation of 31d
market principle is needed; it is just Electricity
Value Equivalent (EVE) pricing methods.
4. Brief introduction to EVE pricing
methods for generation, transmission and
ancillary markets
According to the three market principles
mentioned above, we have developed a series
of EVE pricing methods [‘-‘I, namely we have
solved the three great difficult market
problems in the world and a new pricing
methodology for electricity market has been
developed, for example the generation EVE
pricing methods[‘”], the hydro-thermal
coordination and hydro-unit EVE pricing
methodsr3],the operation reserve EVE pricing
methodsK4],the AGC EVE pricing methodsr5],
the transmission EVE pricing methodsr6],the
transmission congestion EVE management
methodsL7],and the wheeling EVE pricing
methods[‘] etc.
We have also researched the market
character of EVE pricing methods using
analysis method[’] and the intelligent
agent-based method[’’] ,taking into account
the bidding action (Bertrand game) and the
14
withholding capacity action (Coumot game)
of participants and comparing with the
uniform cleaning pricing(UCP) and pay as bid
(PAB) pricing. Besides the market efficiency
and the capacity adequate return, the results
show that the EVE pricing method can induce
the power suppliers bidding according to their
true operation cost and without capacity
withholding. This is an invaluable market
character. We call it market ‘inductivity’
which is different from reliability, stability and
robustness etc. As we know that there are no
such properties for any other pricing methods.
Acknowledgment
The work reported in this paper was
supported by National Natural Science
Foundation of China (NSFC) under grant
59937150.
References
[ 11 Yan Maosong. Electricity Value Equivalent
(EVE) Pricing System and Relevant
Systems Design: Part One
Electricity Markets and Electricity Value
Equivalent (EVE) Pricing: Theorv.
Automation of Electric Power Systems,
2003,27(7): 1-6
[2] Yan Maosong. Electricity Value Equivalent
(EVE) Pricing System and Relevant
Systems Design: Part Two A Practical
Electricity Value Equivalent (u-EVE)
Pricing Method for Pool Purchase and Its
Market Characters. Automation of
Electric Power Systems, 2003,27(8): 1-9
[3] Yan Maosong. Electricity Value Equivalent
(EVE) Pricing System and Relevant
Systems Design: Part Three Electricitv
Value Equivalent (EVE) Pricing Method
for Hydro-units in Electricity Market.
Automation of Electric Power Systems,
2003,27(11): 1-4
2004 IEEE International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong

[4] Yan Maosong. Electricity Value Equivalent Transmission Congestion Management

(EVE) Pricing System and Relevant
Systems Design: Part Four - A Automation of Electric Power Systems,
Probabilistic Practical Electricitv Value
Equivalent (pp-EVE) Pricing Method for
ODerating Reserve. Automation of
Electric Power Systems, 2003,27( 12): 1-6
[5]Yan Maosong. Electricity Value Equivalent
(EVE) Pricing System and Relevant
Systems Design: Part Five -
A EVE Methods. Automation of Electric
Probabilistic EVE Pricing and Assessment
Method for AGC Units. Automation of
Electric Power Systems, 2003,27(13): 1-4
[6] Yan Maosong. Electricity Value Equivalent
(EVE) Pricing System and Relevant
Systems Design: Part Six Transmission
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Pricing Methodology. Automation of
Electric Power Systems, 2003,27(14): 1-8
[7] Yan Maosong. Electricity Value Equivalent
(EVE) Pricing System and Relevant
Systems Design: Part Seven
Methods Based on EVE Pricing.
2003,27(16): 1-5
[8] Yan Maosong. Electricity Value Equivalent
(EVE) Pricing System and Relevant
Systems Design: Part Eight Wheeling
Pricing with Oueration Reserve Ancillary
Service for Bilateral Transactions Using
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[9] Yan Maosong. Electricity Value Equivalent
(EVE) Pricing System and Relevant
Systems Design: Part Nine Could ODen
Electricitv Market with CaDacitv
Inadequacy? Automation of Electric
Power Systems, 2003,27( 10): 1-7
[IO] Zou Bin, Yan maosong, Xie Xianya.
Comparison Between Pricing Methods for
Pool-Based Electricity Market using
Agent-Based Simulation. Automation of
Electric Power Systems, to be submitted