Market Engineering for the Smart Grid

In January 2001, California experienced rolling blackouts in their energy systems and an average price of electricity of $250 per MWh. This price was nearly ten times the average price of the previous January in the year 2000 (Woo et al. 2003). What had happened? California had liberalized its electricity market with a zonal setup and with it, had introduced various new market components that were intended to reduce grid congestion, market power and risks for consumers and at the same time to drive down wholesale electricity prices. There was little experience with designing electricity markets at that time and some market design choices created strategic incentives for individuals to optimize themselves against the market (see Alaywan et al. (2004) for more details on California’s design flaws). California was not the last trial and error of power market design. There are constant reports on small power market failures all over the world. This is not surprising as the market design for power markets is complex and it needs to integrate various interests. The peculiarities of the power market have been introduced to you in chapter “Smart Grid Economics”. The worldwide transition to more intermittent renewable generation challenges traditional market designs. It leads to generation spikes that can cause congestion (Staudt 2019), reversed power flows on the distribution level (Walling et al. 2008) or even negative electricity spot prices (Kyritsis et al. 2017). The market design needs to be adapted to these changes. At the same time, the Smart Grid introduces new possibilities to measure and control actions at the low voltage level that can help to balance the local infeed of renewable generation. This allows new actors to enter the market, it creates active and price-sensitive consumers and it provides more detailed market information. It is important to note that when we talk about the power market (in this chapter we will use power, electricity or energy market synonymously), we are really talking about a multitude of market stages (i.e., sub-markets) such as the wholesale spot and intraday markets or the market for balancing power, for example. Others might be added in the course of the energy transition, such as redispatch markets (Hirth and Glismann 2018). The Smart Grid potentially impacts all of these sub-markets and it might enable the creation of new sub-markets, for example, in the form of peer-to-peer trading in the distribution grid (Mengelkamp et al. 2018). Such markets as well as changes in the existing markets need to be carefully engineered to avoid market failures as in California and to achieve the intended objectives. In this chapter, we, therefore, introduce the market engineering framework as a way to systematically describe and engineer existing and new markets. We then describe the impact of the Smart Grid on energy markets and discuss how these changes can be classified.