Understanding the Complex Impact of Convergence Bids on Wholesale Electricity Markets: Current and Future Implications

University Of California-Riverside, Riverside CA

Investigators

Abstract

The objective of this project is to build an analytical foundation and new mathematical tools to investigate and explain the complex and sometimes counter-intuitive results of placing convergence bids (CBs), a.k.a., virtual bids (VBs), in wholesale electricity markets. Several Independent System Operators (ISOs) in the United States have adopted CBs with the general assumption that CBs would enhance market efficiency by lowering the gap between the prices in the day-ahead market (DAM) and prices in the real-time market (RTM). However, analysis of ISO market data over the past few years has led to a current state of uncertainty and debate about the true advantages or disadvantages of CBs in electricity markets and their impact on utility customers and generation firms. What is alarming is the reason behind having such debates: there is currently no clear scientific understanding of how CBs work (or don't work) in wholesale electricity markets. However, the PI's preliminary studies have shown that some of the concerns that are recently raised by ISOs about CBs are fundamental and have root causes that can be understood through mathematical analysis and illustrative examples. In brief, many of these issues are due to the physics of transmission lines, generators, and loads, which do not allow application of the generally accepted principles of market efficiency as observed in trading in other financial and commodity marketplaces. The intellectual merit in this proposal is to provide scientific fundamentals, in the form of mathematical analysis and illustrative examples and case studies, which can help to ultimately resolve the current state of uncertainty and debate on the subject of CBs in ISO markets. The intellectual advances in this project will be shaped and organized around three main research thrust themes: 1) characterizing the impact of CBs on price convergence; 2) characterizing the impact of CBs on overall market performance; and 3) explaining the current and future implications of the results and making recommendations to enhance the potential benefits of CBs while avoiding their potential detrimental impact in existing and emerging electricity markets.