Achieving generation dispatch efficiency through centralized optimization: Wisdom or heresy? The South American way

Abstract

The main objective of market efficiency in power systems operation is to meet the electricity load at least cost (optimizing the use of existing resources) with maximum possible reliability. In many countries this goal is pursued in a distributed fashion, by means of a bid-based scheme for system dispatch: generators and loads make offers (bids) to produce (consume) electricity in several markets (day-ahead, real time, etc) and these offers/bids are used to coordinate the supply of demand at least cost and max reliability, in the most efficient way and in each time interval. The main challenge of the bidding scheme for power systems operation is the tradeoff between a transparent, simple and solid mechanism for the economic dispatch and spot price formation and the natural complexity of power system operation. The system operator is risk averse and would like an operation that maximizes the security of electricity supply. However, the “risk” of system operation is implicitly given by the bids of the market participants, who incorporate their own risk profile (profit maximization), which can be different from the system operator risk profile. A natural tension then sometimes arises. This has become more evident with the increasing penetration of renewables and the “market response” has been the creation of more complex bidding schemes and new products that aim at allowing the market-based system operation to “mimic” the same risk profile desired by the system operator. These market mechanisms include the operation of additional intra-day and real-time markets with sub-hourly dispatch periods, the integration of hybrid plants, the dynamic pricing of consumers, bid cost recovery protocols and market rules that will ensure the availability of flexible energy products, capacity and ramping capability. An “upside down” and nonstandard approach to achieve market efficiency is to let the risk profile of the system operator prevail, and to centrally decide the physical operation by a very comprehensive stochastic optimization model with a detailed representation of system components (unit commitment, transmission network, individual generation units) but in a “market environment”, where wholesale competition applies, there is multiple generation ownership and where the short-run marginal costs from the model are used as proxies of market prices. This “heretic” approach is used in some hydro based countries in Latin America, such as Brazil, Chile, Peru and Central American Countries (Colombia being the only exception). The main challenges of this centralized and cost-based scheme are the opposite from the bidding scheme: maximum reliability in the power system operation is achieved, but the economic signals might be turned upside down due to the prevailing of the system operator's risk profile. This presentation discusses what happens when max reliability becomes the “dog” that wags the tail (min cost). We concentrate the presentation in the analysis of the Brazilian “unconventional” perspective, where for 12 years an electricity market has been functioning with a centralized scheme for system dispatch and prices based on marginal costs. We discuss the positive and negative aspects of this experience and its impact on market participants, system operator and in the power system operation itself.