Market Architecture of Restructured

Power System
1,

1,

Akshay Sharma, 1, Nrusingha Prasad Tripathy, 1, Udayarun Deshpandey

Scholar M.E., Department of Electrical and Electronics Engineering, NITTTR, Bhopal, India.

Abstract: This paper deals with market

architecture which is a map of its components
"submarkets." This map includes the type of
each market and the linkages between them.'
The submarkets of a power market include the
wholesale spot market, wholesale forward
markets, and markets for ancillary services.
"Market type" classifies markets as, for
example, bilateral, private exchange, or pool.
Linkages between submarkets may be implicit
price relationships caused by arbitrage or
explicit rules linking rights purchased in one
market to activity in another. Architecture
should be specified before rules are written, but
it is often necessary to test the architecture
during the design process, and this requires a
rough specification of the rules. Architectural
design must also consider the market structure
in which it is embedded, which may inhibit the
proper function of some designs. Market design
should not be rigidly compartmentalized, yet it is
useful to consider the market's architecture
apart from the details of the rules and the
limitations of market structure.
Keywords : power exchange, market cleaning
price, Day-ahead market, Real time market,
Submarket, Market linkages, Spot Market,
Forward Market, Ancillary service, Bilateral
market.
I. INTRODUCTION
A process has been underway worldwide for
twenty years to privatize state enterprises and
liberalize markets for the services of the
infrastructure industries, including electricity, gas,
telecommunications, transport and water, among
others. This process is usually viewed in terms of
the shift from tight regulation of vertically

integrated monopolies to light regulation of

functionally separated firms. This shift has been
justified by changes in technology, such as
diminished economies of scale reflected in the
electricity industry by smaller efficient plant sizes.
In airlines and trucking, contestability was viewed
sufficient to limit market power, and in
telecommunications, it was enforced by requiring
incumbents to offer wholesale tariffs to resellers,
and occasionally, access by competing carriers.
Some countries have simply separated the public
good embodied in the infrastructure network, such
as electricity or gas transmission and rail lines,
from the associated commodity or services
industry. Another viewpoint emphasizes the role
of unbundling to expose cross-subsidies and to
improve efficiency via better pricing an incentive
for greater variety of products and services. A
third viewpoint, common in developing countries,
sees privatization and liberalization as necessary
to overcome organizational inertia with stronger
incentives, and to attract private investment to
serve rapidly growing demand arising from
economic expansion.
I. MARKET
The term market is used in many ways and has no
strict definition. Tirole (1997) explains that it
should not be so narrow as to encompass only a
specific product produced at a specific location,
nor should it be "the entire economy." He
concludes that there is no simple recipe. In
practice, the market designer must choose a
definition to suit the problem at hand by relying
on common sense rather than theory.
II.SUBMARKET
Just as for a market, there is also no strict
definition of a submarket. An entire market may

include many or few submarkets depending on its

degree of unbundling.
A market design analysis project concerns a
collection of submarkets, which are collectively
referred to as the entire market(both will often
referred to simply as market)
Unbundling
means, decentralization or deregulation of state
electricity boards on the basis of functions like
generation, transmission and disturbance.
III. POWER EXCHANGE
Even though short-term and long-term financial
energy transactions could be in bilateral forms in
the electricity industry where contracted parties
agree individually for certain terms such as price,
availability and quality of products, industry
restructuring proposals have concluded the
necessity of creating a new marketplace to trade
energy and other services in a competitive
manner. This marketplace is termed Power
Exchange (PX) or, as sometimes called, spot price
pool. This marketplace permits different
participants to sell and buy energy and other
services in a competitive way based on quantity
bids and prices.

supply at various prices, buyers bid a schedule of

demand at various prices, and MCPis determined
for each hour. Then, sellers specify the resources
for the sold power, and buyers specify the
delivery points for the purchased power. PX
schedules supply and demand with the ISO for
delivery. Supply and demand are adjusted to
account for congestion and ancillary services and
then PX finalizes the schedules. The hour-ahead
market is similar to day-ahead, except trades are
for 1 hour, and the available transfer capability
(ATC) is reduced to include day-ahead trades, and
bids are not iterative in this market. Once the
MCPis determined in the PX, market participants
submit additional data to the PX. The data would
include individual schedules by generating unit,
take out point for demand, adjustment bids for
congestion management ancillary service bids.
After this stage, the ISO and the PX know the
injection points of individual generating units to
the transmission system. A schedule may include
imports and/or exports. To account for
transmission losses, generators schedules are
adjusted where real losses are only known after all
metered data are processed.

IV. MARKET CLEANING PRICE (MCP)

VI. REAL TIME MARKET

PX accepts supply and demand bids to determine

a MCP for each of the 24 periods in the trading
day. Computers aggregate all valid (approved)
supply bids and demand bids into an energy
supply curve and an energy demand curve. MCiPs
determined the intersection of the two curves and
all trades are executed at the MCPi, n other words,
the MCPis the balance price at the market
equilibrium for the aggregated supply and demand
graphs. Generators are encouraged to bid
according to their operating costs because bidding
lower would lead to financial losses if MCPis
lower than the operating cost and bidding higher
could cause units to run less frequently or not run
at all.

Unlike a day-ahead exchange, a real-time

exchange cannot use bids. The real-time (RT)
market consists of trades that are not under
contractpower that just shows up, or is taken, in
real time and accepts the spot price. An RT
exchange works like a classical Walrasian
auction. A price is announced and suppliers and
customers respond. If the market does not clear, a
new price is announced. The difference is that in a
power market trade takes place all the time; there
is no waiting to trade until the right price is
discovered. Like a Walrasian auction and unlike a
day-ahead (DA) exchange, an RT exchange may
find there is no price that balances supply and
demand. Consequently, if an exchange is used, it
must be supplemented with another exchange or
perhaps an operating-reserve market in the form
of a pool. There are many possibilities, and little
is known about their relative merits.

V. DAY-AHEAD MARKET & HOURAHEAD MARKET

The day-ahead market and for each hour of the
24-hour scheduling day, sellers bid a schedule of

VII. LISTING THE SUBMARKETS

The term market is used in many ways and has no
strict definition. Tirole (1997) explains that it
should not be so narrow as to encompass only a
specific product produced at a specific location,
nor should it be "the entire economy." He
concludes that there is no simple recipe. In
practice, the market designer must choose a
definition to suit the problem at hand by relying
on common sense rather than theory. At least two
categories of market are needed. First the designer
must define the scope of the design problem
which will be termed the entire market. "Power
market" in the present book refers to such a
market. Depending on context this could include
only the wholesale market or the retail market as
well. This choice demonstrates the need for a
second market concept. An entire market typically
includes components that are themselves markets.
These will all be called submarkets. The
distinction between an entire market and a
submarket is relative, not absolute. In a different
context it could be useful to view the ancillary
services market as an entire market with
submarkets instead of as a submarket of the entire
power market. An entire market may comprise
many or few submarkets depending on its degree
of vertical integration or unbundling. In other
words, the intermediate products used to produce
the final products of the entire market can be
produced internally by the producer that uses
them or can be purchased in a submarket. The first
step in mapping an entire market's architecture is
to decide on the list of submarkets. This is a key
step in the design, requiring careful consideration,
and it can be highly contentious. Currently, there
is no consensus, even within the most informed
circles, as to the best collection of submarkets
from which to construct a power market. Just as
for a market, there is no simple recipe for the
definition of a submarket. If a day-ahead energy
market contains two zones, then different
suppliers will sell into each zone and there will be
two prices. Clearly there are two products: energy
delivered to zone 1 and energy delivered to zone
2. Should these be considered different
submarkets? That may prove convenient, but
when there are 500 locations with different prices
it will be necessary to count it as a single
multiproduct submarket. Submarkets that play a
significant role in an entire market should be
included in the list of markets even if not designed

as part of the current project because they are a

vital part of the market's architecture. Linkages
between designed and naturally occurring or preexisting submarkets are crucial to the health of the
entire market.
VII. REASONS FOR INCLUDING A
SUBMARKET
An entire market typically consists of a set of
closely related end-product markets and the
intermediate-product markets that feed into them.
For a power market, the end product markets
might be only a single wholesale electricity
market in a particular region. Wholesale markets
include all forward, hours, and options markets.
The difficult task is to decide which public
markets should be created. While there are no
clear-cut rules, several possible motivations
should be considered:
1. Nondiscriminatory access.
2. Completeness (trading of a product not
otherwise traded).
3. Reduced trading costs.
4. A publically known price.
5. Transparent operation.
Nondiscriminatory access may be guaranteed by
the governance structure of a public market and is
usually of most importance to small consumers
and producer. Completeness is most relevant in
the case of public goods such as reliability
services. It may also apply to natural-monopoly
goods and services such as the unit commitment
service. A public centralized market, such as an
exchange, will typically have much lower trading
costs than a private decentralized market but not
necessarily lower than a private exchange. A
publically known price serves two different
purposes. First, it is a required assumption of the
Efficient-Competition Result and is quite helpful
to traders in making efficient trades.3 Second it
can be used as a benchmark for other transactions,
both regulated and private, such as settling
financial futures. Transparent operation is
essential when market power is a potential
problem and needs to be monitored. There are
also drawbacks to public markets, all of which
seem related to the lack of proper incentives for
regulators. A public market may offer products

that are not well designed or are too limited, or

transactions costs may be higher than necessary.
VIII. MARKET TYPES
There are two basic ways to arrange trades
between buyers and sellers. They can trade
directly, one buyer and one seller making a
"bilateral" trade, or suppliers can sell their product
to an intermediary who sells it to end-use
customers. Both bilateral and mediated markets
come in several types with bilateral markets
usually less organized but with some overlap in
this regard.

Fig 1 Market type

Entire markets often use a mixture of types. For
example, the used car market is a mixture of direct
search, bulletin board, and dealer markets. The
term "pool" has a special meaning with regard to
power markets. For years, utilities in some regions
have organized their production in power pools,
some of which used a centralized dispatch. In a
deregulated market, a pool is an exchange in
which the supply bids are complex, and the
system operator carries out a complex calculation
to select and pay the winners. Some markets work
better as one type and some as another. In the heat
of debate, those favoring bilateral markets often
imply that exchanges are in some way like central
planning, socialism, or even communism, but
these analogies contribute little. Often the right
answer is for an entire market to utilize both
approaches side by side. The long-term energy
market utilizes a bilateral forward market that
trades individualized forward contracts and
centralized futures exchanges that trade
standardized futures contracts. The transaction
cost of trading in the forward market is greater but
provides flexibility while trading in the futures
market provides no flexibility in contract form but
is inexpensive. Bilateral markets can be either
direct search markets or brokered markets and can
be more or less centralized. If the market is
brokered, as is the housing market, the brokers do

not actually buy or sell in the market but are paid

a commission for arranging a trade. Some forward
energy markets, thanks to the Internet, are now
organized as bulletin-board markets which are just
a partially centralized variety of a direct-search
market. With the exception of the bulletin-board
approach, bilateral markets need little design.
They require an enforcement mechanism for
complex contracts, but this is provided by the preexisting legal framework.
A dealer market is the most rudimentary type of
mediated market. Unlike a broker, a dealer trades
for his own account, and usually maintains an
inventory. He buys the product and holds it before
reselling. There is no brokerage fee, but at any
point in time the dealer buys for a price that is
lower than the price he sells for. This difference is
called the spread. An exchange provides security
for traders by acting as the counter party to all
trades, eliminating traders' concerns over
creditworthiness. Exchanges utilize auctions and
are sometimes called auction markets. An
advantage of auction markets over dealer markets
is that one need not search to find the best price
for a good." Because an exchange interposes itself
between buyers and sellers, the two halves of the
market can operate independently, although they
are linked by what is called a double auction. An
exchange can have a number of advantages over a
bilateral market. It can reduce trading costs,
increase competition, and produce a publically
observable price. Depending on design and
circumstances, it can also facilitate collusion and
generally provides less flexibility than a bilateral
market. Power marketers often favor bilateral
markets because without an exchange there is
more room to earn commissions as brokers and to
appropriate the spread when they act as dealers.
IX. MARKET LINKAGES
Implicit linkages are most often produced by
arbitrage, the most important example being the
arbitrage-induced between a forward price for
delivery at time T and the expected spot price at
that time. The selection and arrangement of
submarkets can take advantage of implicit links as
when ancillary-service markets are sequenced so
that excess supply in one spills into the next.
Alternatively, multiproduct markets can be
designed with explicit linkages, sometimes
increasing efficiency but also adding complexity.

X. ARCHITECURAL CONTROVERSIES
Three architectural controversies have plagued the
design of power markets. All three surfaced early
and remain in dispute. Each has a decentralized
side (listed first) and a centralized side. These are:
a. Bilateral markets vs. centralized exchanges and
pools.
b. Exchanges vs. pools.
c. Zonal pricing vs. nodal pricing.
XI. CONCLUSION
The conclusion today, seventeen years later, is
essentially the same. Industries differ one from the
other, and the optimal mix of institutional
arrangements for any one of them cannot be
decided on the basis of ideology alone. The
central institutional issue of public utility
regulation remains. Power market becomes
competitive and efficient.

XII. REFERENCES
[1]Wilson Robert, Architecture of power
market, research paper no.1708, September
2001
[2] Shaidepour
Mohammad,AlmoshMuwaffaq,Restructured
electrical power system:operation,tradingand
volatility,Marcel Dekker Pub,2001
[3] Stoft Steven,Power system economics:
designing markets for electricity, john Wiley
and sons,2002
[4] William W. Hogan, Electricity market
restructuring: markets, market design and
RTOsAvailable:
http://ksghome.harvard.edu/~.whogan.cbg.ks
g/

[5] Federal Energy Regulatory Commission,

Working
Paper Standardized Transmission Service and
Wholesale Market Design Available:
http://www.ferc.gov/