Modeling the Effect of Generator Reliabilities on Electricity Market Prices

When electricity becomes deregulated the price of electricity is not determined by a regulatory authority but by market demand and supply conditions. Electricity cannot be stored and needs to be produced at the same rate at which it is produced. Thus, if any of the cheaper generating units fails a more expensive unit needs to be brought into operation in order to meet the demand. This increased cost will be reflected in the market price of electricity. The paper provides a formulation for evaluating how the reliability of generating units affects market prices. The forces of demand and supply drive any competitive market. In the electricity market, the demand is determined by the load. A power generation system, which consists of the generators participating in the market, determines the supply. The load is a random quantity because it depends on the electricity consumption based on human activities. The supply is also a random variable because generating units have the potential to fail. The stochastic models that we have used to represent demand and supply are as follows: