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Coordination of power and natural gas markets via financial instruments

Abstract

Current electricity and natural gas markets operate with deterministic description of uncertain supply, and in a temporally and sectorally decoupled way. This practice in energy systems is being challenged by the increasing integration of stochastic renewable energy sources. There is a growing need for exchanging operational flexibility among energy sectors, which requires to improve the sectoral coordination between electricity and natural gas markets. In addition, the dispatch of flexible units in both sectors needs to be made in a more uncertainty-aware manner, requiring to strengthen the temporal coordination between day-ahead and real-time energy markets. We explore the use of existing financial instruments in the form of virtual bidding (VB) as a market-based solution to enhance both sectoral and temporal coordination in energy markets. It is established in the literature that VB by purely financial players is able to enhance the temporal coordination between deterministic day-ahead and real-time markets. By developing various stochastic equilibrium and optimization models, we show that VB by physical players, i.e., gas-fired power plants, at the interface of power and natural gas systems is of great potential to improve not only the temporal coordination between deterministic day-ahead and real-time markets, but also the sectoral coordination between deterministic electricity and natural gas markets. We exploit a fully stochastic co-optimization model as an ideal benchmark, and numerically illustrate the benefits of VB for increasing the overall market efficiency in terms of reduced expected operational cost of the entire energy system. We eventually show that flexible resources in both electricity and natural gas markets are dispatched more efficiently in the day-ahead stage when VB exists.

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Notes

  1. By operational flexibility, we refer to the capability of a power system to modify its output or state in response to a change in renewable power production (Zhao et al. 2016).

  2. Note that this definition of loose temporal coordination should not be confused with the issue that the timing of gas nomination cycles is not necessarily harmonized with the needs of the power industry. We do not address such a harmonization issue in this paper.

  3. To relax this assumption, we will use later an out-of-sample analysis in our numerical study, where the realized RT prices are different than those within the stochastic program of the virtual bidders. This analysis shows that imperfect virtual bidding can still improve the coordination but to a limited extent.

  4. The merit order refers to placing the power plants with an ascending order of marginal production costs.

  5. Although \(\varvec{\Delta }{} \mathbf{v} ^{\mathrm{E}}_{r}\) is a recourse variable, it is not indexed by \(\omega \). The reason for this is that throughout all scenarios, the RT position of the explicit virtual bidder should be identical. Mathematically speaking, this variable can take a scenario index to become \(\varvec{\Delta }{} \mathbf{v} ^{\mathrm{E}}_{r,\omega }\). However, constraint (1b) would enforce again all those recourse variables over scenarios to take an identical value.

  6. In the rest of the manuscript we use the terms implicit virtual bidder and self-scheduler interchangeably.

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Acknowledgements

We thank Benjamin F. Hobbs and Stefanos Delikaraoglou for thoughtful discussions about the initial model. We also thank Kenneth Bruninx and Anubhav Ratha for providing constructive feedback on previous drafts. We are very grateful to Uday V. Shanbhag, Maryam Kamgarpour and Jong Shi Pang for their fruitful inputs on generalized Nash equilibrium model. In addition, we thank Yves Smeers and Ibrahim Abada for their helpful comments at the 23rd International Symposium on Mathematical Programming (ISMP 2018). Finally, we thank the three anonymous reviewers for their constructive feedback. This research was supported by the Danish Energy Development Programme (EUDP) through the Coordinated Operation of Integrated Energy Systems (CORE) project (64017-0005).

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Schwele, A., Ordoudis, C., Pinson, P. et al. Coordination of power and natural gas markets via financial instruments. Comput Manag Sci 18, 505–538 (2021). https://doi.org/10.1007/s10287-021-00403-x

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Keywords

  • Electricity market
  • Generalized Nash equilibrium
  • Natural gas market
  • Sectoral and temporal coordination
  • Stochastic programming
  • Virtual bidding