Nonlinear time series analysis on the offer behaviors observed in an electricity market

a r t i c l e i n f o Keywords: Hurst exponent Nonlinear dynamics Chaos Offer behavior Locational marginal price (LMP) In electricity markets where supply and demand drives the price for the purchase and sale of electricity, generating firms change capacity for various reasons including load level, policy, and varying market conditions. These types of fluctuating production patterns can result in the reduction of market efficiency. In an inefficient market, where the price for electricity exceeds marginal cost, the locational marginal price (LMP) is often used to measure market efficiency. Stochastically driven changes in the market are captured by this approach, however, these random changes (frequently observed in efficient markets as well) do not affect market efficiency in the long run. Conversely, a slow, consistent change is not captured by the snapshot approach and affects the efficiency significantly. Therefore, it is necessary to construct an algorithm that captures only consistent changes that truly affect market efficiency. Fractal analysis can characterize a price behavior in the electricity markets because the price exhibits a self-similarity. 1 Once a system undergoes a change, the fractal dimension of the system reflects the change. In this paper, an approach using nonlinear time series analysis is proposed and tested on actual offer behavior observed in the electricity markets in the United States. Independent system operators (ISOs) monitor the electricity market using locational marginal pricing (LMP) in a snapshot approach to provide them with a quick look at the market to determine market efficiency [1,5,11,13,16,20,21]. Only when anomalous market behavior is observed do ISOs take further investigative action. Such an action may include examining the offers from the generators under investigation directly [2,8,12,17,26]. But, according to the Federal Energy Regulatory Commission (FERC) [25], an efficient market review " …should include an evaluation of market prices of ISO/RTO-administered products (e.g. real-time and day-ahead markets , locational marginal prices, and ancillary services) and specifically determine the extent to which the prices reflect competitive outcomes… " This means that, in addition to LMP information, ISOs must also factor in correct and up-to-date information (i.e., fuel costs and current economic situations) in order to properly determine market efficiency. If these factors are not considered in the decision to take further investigative action, market participants could claim that the information used by ISOs to assess the market was incorrect and thereby flawed. Another problem associated with the snapshot approach …