A comprehensive fair nodal pricing scheme, considering participants’ efficiencies and their rational shares of total cost of transmission losses

Abstract

The pricing framework in any economic environment indeed has a special situation, since it directs the incentives of all different participants. Locational Marginal Pricing as one of the power market clearing mechanisms has several drawbacks, which causes it to be sometimes irrational and discriminatory. This paper presents a new nodal pricing mechanism to resolve the previous drawbacks and to establish a fair and comprehensive pricing framework, such that it can respect participants’ efficiencies and their extents of transmission use, as well as their rational shares of total cost of transmission losses. The new mechanism not only perfectly recovers all costs of generations, load curtailments, transmission investments, and transmission losses, but also it produces positive economic signals for all participants that encourage them for better performance. The rational profit shares for all participants are calculated in accordance with their own efficiency and profitability measures. The corresponding measure for Transco is defined according to a new definition of the Reference Transmission Network. Validity of the proposed mechanism is verified via numerical analysis and its comparison with previous pricing methods. This pricing mechanism indeed has capability to be used as a comprehensive fair nodal pricing framework.