Elimination of merchandise surplus due to spot pricing of electricity

The paper analyses problems associated with the merchandise surplus (i.e. the difference between payments and revenues that is inherent to the spot pricing for electricity). A novel method of pricing is proposed which does not alter the optimal prices faced by the generators but makes the price faced by the loads equal to the weighted average of the nodal optimal prices with the weights equal to power notionally supplied to a given load from individual generators. This averaging, which is based on a recently proposed electricity tracing method, eliminates the merchandise surplus and most of the problems associated with it. The paper also suggests a hedging mechanism which not only separates financial performance of the generators and the loads from the actual operation but also places a financial incentive for the independent system operator to operate the system in such a way as to minimise the cost of transmission. Application of the method has been illustrated using a sample 10-node CIGRE power network