Price formation in the wholesale market

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Price formation in the wholesale market

grampajohn
Administrator
I am concerned that the "Liquidity Provider" method used in the market prototype is not going to be credible or even useful in our simulation, even for the alpha version. The original liquidity provider basically fed bids in to the wholesale market from a body of historical price data that was correlated with historical consumption data. But we are not using historical consumption data any more, we are using our own customer models. Brokers need to learn about the relationships among weather data, tariff terms, customer behavior, and market prices. If we use historical market prices there will be nothing to learn, and therefore no way for brokers to formulate competitive yet profitable tariffs, and then trade effectively in the wholesale market to serve their customers.

So what's the alternative? I suggest that the only reasonable way to solve this problem is to model the genco side of the market directly, to some level of abstraction. That would have the additional benefit of allowing us to pass energy-source information through the market from our models, which is not available in the historical data.

For the first version, we could model a single genco with a pre-defined cost curve and stochastic capacity. That would produce an easily-learnable relationship between market price and net consumption.

Does this make sense?

John
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Re: Price formation in the wholesale market

grampajohn
Administrator

I'm trying to write a simple genco as described in the previous post. Here are some thoughts:

  • A genco is only going to provide asks, not bids (I assume). It's pretty easy to imagine an abstract genco that computes a simple nonlinear function, perhaps something like
       ask-price = min-price * (1 + (demand/capacity)^n)
    where capacity is stochastic (perhaps a mean-reverting random walk), and n is picked from some range (like 1.5-3) and might also be stochastic.
  • We could borrow the capacity-prediction algorithm from the SCM supplier capacity-prediction spec. It's just the expected value of capacity given the parameters of the random walk.
  • We need a wholesale buyer in the market as well, or at least I think we do. I'm not quite sure how we should model that, or how it would interact with the brokers. This is assuming, of course, that the set of brokers will always represent a net load. Probably that's a bad assumption. A simple algorithm would be to always bid the minimum selling price of the genco.
  • To achieve balance, we would want some reasonable relationship between the mean net demand of the simulated customer base and the mean capacity of the simulated genco. Perhaps 1:1?
Does this make sense? Will it work well enough to get started? This is another reason we'll have to run our customer models in isolation long enough to get some statistics on their supply and demand.

Cheers -

John

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Re: Price formation in the wholesale market

grampajohn
Administrator
grampajohn wrote
We need a wholesale buyer in the market as well, or at least I think we do. I'm not quite sure how we should model that, or how it would interact with the brokers. This is assuming, of course, that the set of brokers will always represent a net load. Probably that's a bad assumption. A simple algorithm would be to always bid the minimum selling price of the genco.
Sorry, that was not quite clear. We could possibly get away _without_ a wholesale buyer if the brokers always represented a net load.

John
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RE: Price formation in the wholesale market

Wolf
Administrator
In reply to this post by grampajohn

Yes, I agree, we need to come up quickly with a genco for Power TAC, since this is really needed for the pilot.

I'm trying to write a simple genco as described in the previous post. Here are some thoughts:

  • A genco is only going to provide asks, not bids (I assume). It's pretty easy to imagine an abstract genco that computes a simple nonlinear function, perhaps something like
       ask-price = min-price * (1 + (demand/capacity)^n)
    where capacity is stochastic (perhaps a mean-reverting random walk), and n is picked from some range (like 1.5-3) and might also be stochastic.

This seems reasonable.

  • We could borrow the capacity-prediction algorithm from the SCM supplier capacity-prediction spec. It's just the expected value of capacity given the parameters of the random walk.

I was actually also thinking of the SCM supplier capacity function. Let’s use that for the initial version.

  • We need a wholesale buyer in the market as well, or at least I think we do. I'm not quite sure how we should model that, or how it would interact with the brokers. This is assuming, of course, that the set of brokers will always represent a net load. Probably that's a bad assumption. A simple algorithm would be to always bid the minimum selling price of the genco.

Not sure, if we definitely need a wholesale buyer (nice to have). If the (simple) brokers represent the net load, then won’t need one for the initial version.

  • To achieve balance, we would want some reasonable relationship between the mean net demand of the simulated customer base and the mean capacity of the simulated genco. Perhaps 1:1?

Good to start with.

Does this make sense? Will it work well enough to get started? This is another reason we'll have to run our customer models in isolation long enough to get some statistics on their supply and demand.

 

I think this will be with to start with, and it’s simple enough to get sometime done in time for our deadline mid April.

 

Thanks,

 

Wolf

Cheers -

John

 


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RE: Price formation in the wholesale market

grampajohn
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I am still concerned that there needs to be a buyer on the wholesale side just to support prices - that was the original idea behind the liquidity provider, I think. What I'm not sure about is whether the bids submitted by this buyer might need to be conditioned by the actual bids in the market, or whether they can be pre-computed.

Does this make sense?

John
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RE: Price formation in the wholesale market

chris.flath
grampajohn wrote
The original liquidity provider basically fed bids in to the wholesale market from a body of historical price data that was correlated with historical consumption data. [...] If we use historical market prices there will be nothing to learn, and therefore no way for brokers to formulate competitive yet profitable tariffs, and then trade effectively in the wholesale market to serve their customers.
Very true and I like your GenCo approach which fits nicely into the regional market setting that Power TAC is trying to describe. Such a regional market is typically chracterized by a local DU operating some generation capacity (roughly matching the mean market demand) as well as maintaining the distribution grid.

Circiling back to the discussion around the default broker / tariff this is again the same entity and it also takes care of the balancing actions. If we do implement the GenCo providing asks and the default distribution branch providing bids we need to look at these two at the same time. Moreover, we need to align them with the balancing mechanism. The balancing was based on the DU balancing cost curve - couldn't we just couple this with a DU generation cost curve? Clearly, the DU's asks will always exceed its marginal cost (which probably are increasing in quantity) and similarly they will be much less than the cost of balancing. Potentially the two are linked, i.e. depending on the level of generation balancing is more/less expensive.

grampajohn wrote
I am still concerned that there needs to be a buyer on the wholesale side just to support prices -  that was the original idea behind the liquidity provider, I think.
I think it is one side to it - from what I understood Carsten was furthermore envisioning some kind of market maker that allows wholesale trading at any time. I am not sure if we really need any of these aspects - prices in the wholesale market can only be below the GenCo's marginal cost if somebody else is selling excess energy (from other sources - decentralized generation or earlier wholesale purchases in an EEX-style multi-clearing market). I do not see a problem with this as it is exactly what we are expecting?
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RE: Price formation in the wholesale market

grampajohn
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I have written a wiki page on wholesale power providers or GenCos that attempts to lay out the beginnings of a concrete proposal. At this point, the way it would interact with the market is still a bit murky.

John
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Re: Price formation in the wholesale market

jrichstein
Hello,

this is the first time I contribute something to the discussion. I'm a master student at KIT doing my thesis on strategies for an electric vehicle broker. But to come back to the liquidity provider discussion:
The reasoning behind the liquidity provider, at least how I understood the concept of it, is based on two separate arguments:

- Price stability and anchoring of prices to realistic (past) values (this can be achieved by a genco and maybe a wholesale trader)

- Linking the regional energy market to the national/international electricity markets: If in reality a regional market is established, there will always be trading for arbitrage with the national market, even if the the regional energy market is very liquid. At least within transmission limits of the point of common coupling (PCC) where the regional energy grid is connected to the national transmission grid. The role of the liquidity provider is thus to be an arbitrage agent, which adds a premium on the national market prices depending on the transmission limit of the PCC.

So from the point of view of agent learning the liquidity provider is maybe not so important, or even counter-productive (using past prices instead of a customer/producer model), but I think it could offer interesting research opportunity on how the the variation of PCC transmission capacity effects a regional energy market (e.g. to study the effect of high-performance transmission networks necessary for off-shore windparks or the desertec project). It essentially distinguishes the concept of a regional energy market embedded in a (inter-)national market from the simulation of an autonomous island energy economy.

So do you think it might be a good idea to keep the liquidity provider in mind for later instances of PowerTAC?

Jörn



On 22.03.2011, at 18:14, grampajohn [via Power TAC Developers] wrote:

> I have written a wiki page on wholesale power providers or GenCos that attempts to lay out the beginnings of a concrete proposal. At this point, the way it would interact with the market is still a bit murky.
>
> John
>
>
> If you reply to this email, your message will be added to the discussion below:
> http://power-tac-developers.975333.n3.nabble.com/Price-formation-in-the-wholesale-market-tp2702521p2715886.html
> To start a new topic under Power TAC Developers, email [hidden email]
> To unsubscribe from Power TAC Developers, click here.

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Re: Price formation in the wholesale market

grampajohn
Administrator
jrichstein wrote
The reasoning behind the liquidity provider, at least how I understood the concept of it, is based on two separate arguments ...
I agree that more sophisticated behaviors for a LP could be useful in the future, but I'm not sure how we would model it given that we are not able to use historical prices. Perhaps sometime we could run a competition with multiple parallel games, having capacity-limited links and arbitrage agents running between them. It's a pretty interesting idea.

John