Active Participation of FACTS Devices in Wholesale Electricity Markets

Traditionally, electric system operators have dispatched generation to minimize total production costs, assuming a fixed transmission topology within the dispatch horizon. Implementation of smart-grid systems could allow operators to co-optimize transmission topology alongside generator dispatch; the technologies that would enable such co-optimization are still regulated as part of the monopoly transmission system. Recent work (Gribik et al., 2005; O’Neill, et al., 2008) has proposed mechanisms for compensating transmission owners based on flexible electrical characteristics and availability; and integrating transmission into “complete” real-time electricity markets. We study two different designs for the market-based operation of Flexible Alternating Current Transmission Systems (FACTS), which allows some control over the electrical topology of transmission lines. The first market design compensates FACTS devices based on differences in locational prices (effectively with Financial Transmission Rights), while the second allows FACTS devices to submit supply offers just as generators would, being paid a market-clearing price for additional transfer capacity provided to the system. The variable social costs of FACTS devices are modeled as the additional losses associated with changes in electrical characteristics of transmission lines. Our problem formulation for a simple two-node system suggests a number of regulatory implications for flexible transmission architecture. First, we find that the marginal cost functions for FACTS device dispatch are increasing, suggesting that flexible transmission technologies may not possess the same natural-monopoly characteristics as the wires themselves. Second, the additional transfer capacity offered by FACTS devices may effectively clear the real-time market in some circumstances (i.e., the additional transfer capacity displaces higher-cost generation), suggesting that FACTS devices have the power to set prices. Third, if FACTS devices are compensated based on locational price differentials, the owners of such devices will not have incentives to offer the socially optimal amount of transfer capacity to the system operator.