Electricity pricing theory based on continuous time commodity model

Abstract

The theory of spot pricing forms the basis of power market design in several countries. However, this theory has two major drawbacks. First, it is based on the traditional hourly scheduling/dispatch model, it ignores the critical influence of time continuity in the electric power production/consumption on cost and power system operation, and it fails to address intertemporal constraints. The second drawback is that it assumes that electric products are homogeneous in the same dispatch period and cannot distinguish among the base, intermediate, and peak load powers with different technical and economic characteristics. This study aims to present a continuous time commodity model of electricity, which comprise spot pricing and load duration pricing methods, to overcome the abovementioned shortcomings of the spot pricing theory. Market optimization models in traditional electricity market theories were then changed accordingly from a static optimization problem to a functional optimization problem. The feasibility of load duration pricing was validated by strict mathematical derivation. The proposed theory and methods will provide new concepts and theoretical foundation for the development of electric power markets globally and in China.