The impact of startup costs and the grid operator on the power price equilibrium

TL;DR

This paper introduces a quadratic programming model for electricity price modeling that explicitly incorporates startup costs and grid operator actions, demonstrating their impact on price spikes and grid reliability.

Contribution

It presents a mathematically rigorous method for including startup costs in electricity price models and extends the model to account for grid operator decisions.

Findings

Startup costs cause significant price spikes.

Including grid operator actions reduces price volatility.

The model accurately reflects real-world power system dynamics.

Abstract

In this paper we propose a quadratic programming model that can be used for calculating the term structure of electricity prices while explicitly modeling startup costs of power plants. In contrast to other approaches presented in the literature, we incorporate the startup costs in a mathematically rigorous manner without relying on ad hoc heuristics. Moreover, we propose a tractable approach for estimating the startup costs of power plants based on their historical production. Through numerical simulations applied to the entire UK power grid, we demonstrate that the inclusion of startup costs is necessary for the modeling of electricity prices in realistic power systems. Numerical results show that startup costs make electricity prices very spiky. In the second part of the paper, we extend the initial model by including the grid operator who is responsible for managing the grid. Numerical simulations demonstrate that robust decision making of the grid operator can significantly decrease the number and severity of spikes in the electricity price and improve the reliability of the power grid.