Testing the Effects of Inter-Regional Transfers of Real Energy on the Performance of Electricity Markets

Since deregulation of the electric utility industry began in the USA, there has been a substantial increase in the quantity of power transferred over long distances. Both thermal and voltage constraints on transmission have been experienced in regions that previously were rarely congested. One solution to this type of problem is to expand the capacity of transmission networks, but it is likely that market forces will still cause congestion (in new locations) on an expanded network. The objectives of this paper are 1) to test how power transfers through a network affect congestion and market performance and 2) to explain the complications and limitations of treating an AC network like a pipeline as a way to compensate transmission owners.

The tests use graduate students to represent suppliers on an AC network in an electricity market. The nodal prices and optimum dispatch are determined by PowerWeb (a computer platform or testing different types of electricity auction). The results of the tests demonstrate that the students can respond effectively to changing conditions on the network and earn excess profits when they have market power. In particular, the tests show 1) power transfers can cause additional congestion in different parts of the network, 2) this congestion increases the market power of some suppliers, 3)these suppliers are able to identify and exploit the auction when they have market power,4) average market prices are substantially higher when congestion occurs,5)in most cases, the effects of power transfers are localized and the effects on different suppliers are highly varied, and 6)some power transfers can reduce congestion and lower prices.

The results of tests demonstrate that monitoring the physical effects of transfers on a network is complicated because additional congestion can occur in surprising locations. In addition, the amount and location of congestion change as local load patterns change even if the quantity of real energy transferred remains constant. Consequently, it is generally impractical to try to treat a network like a pipeline and pay transmission owners in proportion to the flows on their lines. The most important complication is that a transmission network plays an essential role in maintaining the reliability of supply as well as transferring power. Since reliability is a public good, the owners of the AC network should continue to be regulated. Market incentives to reduce congestion can bve implemented, but transmission enhancements should be based on joint decision by all transmission owners and subject to meeting reliability standards set by regulators. A formal planning process is needed because there is no guarantee that decentralized decisions by individual owners will make the network operate efficiently and meet reliability standards effectively.