Electricity Markets and Power System Economics.

• Author: Felder, Frank A.

Electricity Markets and Power System Economics, by DEQIANG GAN, DONGHAN FENG, and JUN XIE, (Boca Raton, Florida: CRC Press, 2014), 210 pages, ISBN-13: 978-1466501690

Perhaps more than any other markets, electricity markets are intertwined with engineering. Both in theory and in practice one cannot separate power system engineering from the microeconomics. Despite this necessity, there is a surprisingly wide range of models of wholesale electricity markets throughout countries and regions that have established them.

Deqiang Gan, Donghan Feng, and Jun Xie have written an excellent and concise textbook that integrates power system engineering with wholesale electricity markets. It covers a wide range of market design related issues such as dispatch, unit commitment, optimization of energy and ancillary reserve markets, and ex ante versus ex post pricing, always starting from the foundation of power systems. It is replete with numerical illustrations and examples from functioning electricity markets worldwide, such as ancillary services in Australia, market reform in California, bilateral trading in the United Kingdom, standard market design in the United States, and automatic generation control in New England. The focus is on the mathematics more than the intuition of power systems as applied to electricity markets.

Unusually for these types of books and this approach to power systems, this book has a chapter on common cost allocation, applying cooperative game theory to generation start-up costs, transmission costs, and peak generation costs (in addition to having a separate chapter on applying non-cooperative game theory to issues of market power). The authors note that the use of three-part bidding in U.S. RTO/ISO markets to recover generation units' start-up costs ensures start-up costs are recovered and removes the distortions of energy-only offers, but also note that the proportional allocation of such costs to electrical load does not always align with the causer-pays principle. Of course, with a regulator, there is no need for a core (if one exists): the regulator can impose an allocation. Nonetheless, the authors recommend the use of cooperative game theory to allocate common costs, instead of engineering principles.

Although the answers are beyond the remit of this book, it does set the table to ask what lessons we have learned from restructuring and liberalizing the power sector, particularly in the context of emerging smart grid...