Paper accepted for presentation at 2003 IEEE Bologna Power Tech Conference, June 23th-26th, Bologna, Italy

Replicating Interruptible Supply Contracts for

Security Constrained Transmission Management
Sergio Bruno, Student Member, IEEE, Massimo La Scala, Senior Member, IEEE,
Roberto Sbrizzai, Member, IEEE, Giuliano Vimercati

AbstractIn this paper, the authors introduce an exotic

financial hedging tool in order to replicate interruptible load
supply contracts. This derivative tool should guarantee the ISO
the possibility of using interruptible resources when and
where it actually needs them. A methodology, based on nonlinear programming, is proposed in order to give the technical
tool necessary to exploit, on real-time operation, all control
resources ensured by energy markets and by the proposed
financial contracts. In the formulation, static and dynamic
security constraints are taken into account. Moreover, costs
related to control actions are minimized through the introduction
of a pure economical objective function. The procedure has been
implemented and tested on a representation of the Italian
national grid.
Index TermsTransmission Management, Power Markets,
Financial Hedging Tools, Financial Derivatives, Exotic Options,
Dynamic Preventive Control, Non-linear Programming.

I. INTRODUCTION

HE development of financial tools for hedging strategies

constitutes one of the ultimate goals in the re-regulation
process of electric industries. Both producers and consumer
need price risk management tools in order to mitigate risks
coming out by the energy price fluctuations.
Electric energy prices proved to be among the most volatile
of any traded commodity [1]. The failure of markets for
reserve in California, New England and New York saw price
spikes reaching $7000-$10000 per MWh. The main reasons of
the electricity price volatility can be found in:
the high variability of demand, strictly dependant on
various exogenous variables (the weather for example);
very limited demand elasticity;
large differences in production costs (fixed and variable
costs) due to different generating technologies;
availability of generation;
transmission congestions.
In the structure of many electric industry organization,
many financial hedging tools have been already introduced [23]. In the UK, the hedging policies developed in order to
manage price exposure are basically based on Contracts For
S. Bruno, M. La Scala and R. Sbrizzai are with the Dipartimento di
Elettrotecnica ed Elettronica (DEE) of the Politecnico di Bari, Bari, Italy (email: bruno@deemail.poliba.it, lascala@poliba.it, sbrizzai@poliba.it).
G. Vimercati is with CESI S.p.A., Milano, Italy (e-mail vimercati@cesi.it)

0-7803-7967-5/03/$17.00 2003 IEEE

Difference, CFDs (one-way and two-way) and on Electricity

Forward Agreements (EFAs). In Scandinavia, the Nord Pool
was the first, in 1993, to trade futures contracts in electricity.
Moreover, the Nordic market has got even an active OverThe-Counter (OTC) market. In the US, the PJM pool sets
auctions for the sale of Fixed Transmission Rights (FTR)[4].
Those instruments are float-for-float swaps which hedge the
costs of transmission congestions.
Hedging policies may involve not only producers and
customers. System operators, responsible for network security
and reliability, are called during the network operation to
assess and exploit real-time control resources. Electricity
Market Rules for Italian energy market [5], state that two
markets may guarantee control resources for transmission and
congestion management. The first one, the Congestion
Management Market is a day-ahead market, based basically
on Market Splitting, whereas the Balancing Market takes
place regularly every day in a number of sessions not
specified yet. In both, market participants may submit
supply/demand bids.
The C-Section of the Dispatching Rules (vers. 1, October
31st 2001) defines for the GRTN (Gestore della Rete di
Trasmissione Nazionale, the Italian system operator) the
activities and the control actions necessary to assess static and
dynamic security in real-time operation [6]. Every 15 minutes
the GRTN identifies control resources ensured by balancing
and reserve markets. This prevision is made for all quarters of
hour in a temporal framework of maximum four hours. Risks
due to price fluctuations in the purchase of such resources are
extremely high since reserve and balancing markets proved to
be bull markets characterized by a high price volatility.
In this paper, we would like to explore possibilities given
by the replication of interruptible supply contracts through the
use of appropriate financial derivative tools. The amount of
curtailment for each load with an interruptible supply contract
is evaluated through the solution of a dynamic optimization
problem, where static and dynamic security constraints are
integrated in the same formulation. Control variables are
loading level of interruptible loads, generation and load
variations purchasable in the Balancing Market. Operation
costs are minimized through the use of an economical
objective function.

II. EXOTIC OPTIONS FOR INTERRUPTIBLE LOAD ASSESSMENT

In [7] a market for interruptible, or callable, forward
contract for electric power has been proposed. Callable
forwards are essentially a bundle of two contracts. The first
one is a forward contract, owned by the consumer, which
guarantees that the utility will deliver a certain amount of
power at a delivery date. The second contract is a call option
which confers to the owner the right, but not the obligation, to
purchase a quantity of power (notional volume) at a given
price (strike price). The notional volume is the quantity of
power purchased by the consumer through the forward
contract; the strike price has been fixed when the option was
sold. This kind of financial tool would guarantee the
possibility to repurchase energy during scarcity period and sell
it back to those customers which are characterized by the
greatest value of willingness-to-pay.
An analogous more proper tool has been proposed in [8-9].
In this work, a new contract which bundles a single forward
contract with an exotic option with two exercise points and
two strike prices has been proposed.
The contract that we are introducing is essentially based on
the one reported in [9]. The main difference is related to the
specific application of the proposed contract. In [9],
interruptible forward contracts are introduced in a demandside management environment, in order to reduce the
inelasticity of demand.
In this paper, we suppose that, in order to allocate some
resources for real-time control and replicate interruptible load
supply contracts, the ISO may buy some compound contracts
on forward supply contracts. A compound is an exotic option
that is a bundle of two option contracts. Main advantages of
this kind of contract are a lower price on respect of a single
option contract and the presence of two exercise points (one
for each option contract).
With a special discount on wheeling charge the ISO may
buy seasonally those kind of compound contracts from those
loads which present a strategic location and low interruption
costs. At the beginning of the day, when the system operating
point and market conditions are roughly known, the ISO may
decide to exercise the first option contract. If dangerous
contingencies and high spike prices are forecasted, the ISO
may pay the first strike price in order to activate the second
option contract.
Then, during the real-time management, in the control
resource assessment phase, the ISO may decide to exercise the
second option contract purchasing energy by selected nodes in
order to guarantee operational reliability.
This idea springs out, basically, from the actual
implementation, in the Italian Electricity Market, of contracts
for interruptible loads. Because of the heritage of some prederegulation ENEL agreements, the system operator (GRTN)
buys energy from Independent Producers. A certain quantity
of this power is sold with discounts to some customers which
have with the GRTN an interruptible supply contract. This
amount of energy is sold at two different prices (43/MWh for

interruption with notification, 45/MWh for interruption

without notification) to those customers which were selected
by auctions. Those kind of contracts are long-term agreements
and do not allow flexibility with regard to actual operating
conditions. Thus, our approach consists in introducing some
new financial derivative tools in order to guarantee to the
GRTN the possibility to buy interruptible resources when
and where it actually needs them.
III. THE PROPOSED APPROACH
A. Basic assumptions
In our study, we refer to the extended real-time temporal
framework, in which the GRTN should operate its activities
for real-time control. Thus, in our analysis, we just aim to give
a technical tool for the actual calculation of all the necessary
control actions. During calculations, the compounded forward
contracts are listed among all the other available resources for
real-time control.
This work should be the first step for the development of a
more complex tool, based on a probabilistic approach, for the
optimal assessment of the financial objects introduced in this
paper. Considerations related to the cost of the proposed
compound contracts are out of scope of this work; neither we
are trying to propose a method for the long-term assessment of
these financial tools.
Our methodology is aimed to evaluate the optimal choice in
the exploitation of real-time control resources when
congestion problems due to static violations (low voltages,
line overloads) or dynamic limitations (loss of synchronism,
transient voltage instability) are detected. These control
actions are considered as applied during the real-time
management and control.
Basically, the optimal assessment of control resources is
performed through the formulation and the solution of a
dynamic optimization problem for non-linear systems, where
static and dynamic inequality constraints are taken into
account through the introduction of some penalty functions. In
order to solve it, the problem is reformulated in terms of static
optimization (non-linear programming) and solved by
applying the Lagrangian multipliers method [10].
B. Control variables
The control variables are chosen among all exploitable
resources for real-time operation. In our study, those resources
are ensured by all the units which are participating in the
Balancing Market (upward and downward regulation) and by
interruptible load supply contracts. Hence, in order to perform
preventive control, the ISO may reduce some loads (buying
energy), increase or decrease some generation (buying or
selling energy), curtail interruptible loads.
On the basis of previous considerations, control variables
are load active power (decreasing), generation active power
(increasing and decreasing), interruptible load active power
(decreasing). Load reactive power is taken into account
considering, for each load, the power factor as a constant

during real-time operations.

Under these assumptions, the control variable vector can be
formulated as:

u = PGB T , PLB T , PLI T

(1)

where PGB (PLB) represents the active power vector related to

generators (loads) participating in the Balancing Market, PLI
represents the active power vector related to interruptible
loads.

C. Equality constraints
The methodology proposed in this paper is based on a reformulation of dynamic optimization problems for nonlinear
systems in terms of static optimization. For power systems, a
time domain simulation on a transient time-scale can be
obtained by solving the following set of non-linear
Differential and Algebraic Equations (DAEs):
x& (t ) = f (x(t ), V (t ), u )
(2)

x(t ) = g (x(t ), V (t ), u )

(3)

where x is the state variables vector and V is the vector of

nodal voltages.
By the application of an integration rule the system model
is discretized and the set of DAEs is composed in a unique set
of algebraic equations:
(y , u ) = 0
H
(4)
where

y i = x iT

ViT

(5)

y = y T0

y T0+

y1T L y iT L y TnT

= H T
H
0

H T0+

H1T L H iT L H TnT

(6)

(7)

y represents the composition of all vectors of state variables

and voltages evaluated at the generic ith time step (i.e. it
represents the discretization of the whole trajectory of the
system), H i is the discretization of the DAEs set at the
generic ith time step and nT is the total number of time steps
relative to the integration interval [0,T]. The index 0- refers to
the pre-fault steady state conditions of the system.
Equation (4) represents the set of equality constraints in the
formulation of the optimization problem.
D. Voltage-related inequality constraints
Static and dynamic inequality constraints have been
considered in order to ensure transient stability, avoid
dangerous voltage conditions, avoid overloads and guarantee
control resources availability.
In the proposed approach, transient voltages trajectories are
constrained in a practical time varying domain, in order to
ensure stability or a suitable transient behavior. Examples of
this approach, known as practical stability are reported in
[10-12]. In particular, we force voltages at a generic jth bus
and ith time step to satisfy the following conditions:

Vi,jm Vi,j Vi,jM

(8)

where Vi,jm and Vi,jM are time-varying thresholds fixed to

ensure a desirable voltage transient and acceptable steadystate voltage levels.
To take into account transient voltage-related inequalities,
we defined the following penalty function:
Vi,j Vlim

i,j
j =1
nT n

nT

C V ( y ) = V

where

Vlim

i =0

Vi ,Mj

= Vi m
,j
V
i, j

if

Vi , j > Vi ,Mj

if

Vi , j < Vi m
,j

(9)

otherwise

In our developments, we assume a weighting factor i,j

evaluated as follows:
V
if Vi , j < Vi m
,j
i,j = i , j
1 otherwise
This weight factor is adopted to avoid dangerous low
voltage conditions such as the ones associated to transient
voltage instability.
E. Current-related inequality constraints
In order to avoid transmission line overloads a currentrelated penalty function has been considered. If b denotes the
number of branches, for the generic ith branch we require
I i ( y ) I imax
i = 1, ..., b
(10)
where Ii represents the steady state value of current flowing on
the ith branch.
From equations (10), we define the penalty function CBR,
defined as follows:

C BR ( y ) = BR i I i I imax

(11)

i =1

where

1 if

I i > I imax

0 if

I i I imax

i =

F. Control variables inequality constraints

Limits on upward and downward regulating bids and limits
on notional volume of interruptible contracts introduce some
more inequality constraints on control variables:
min
max
PLB
i PLBi PLBi
min
max
PGB
j PGB j PGB j
min
PLI
k

PLI k

(12)

max
PLI
k

G. Objective functions
In order to minimize the overall cost related to control
actions, we introduced some pure economical objective
functions, where control efforts are weighted by some
constants (expressed in /MWh) which are represented by
bids for buying/selling energy, for all units participating in the
Balancing Market (according to Italian regulation, the

Balancing Market is a pay as bid market).

C1EC (u ) =

LBi PLBi 2 + GB j PGB j 2

i

(13)

0
0
where PLBi = PLBi PLB
i , PGB j = PGB j PGB j and the

index 0 refers to power levels before applying control.

Since for generators both upward and downward regulation
bids are considered, the index GB j in eqn. (13) changes its
value (and its sign) depending on the sign of the term PGB j.
Through the introduction of a proper objective function,
even curtailments of interruptible loads are minimized. In
addition, weights related to interruptible loads should have
small values, since interruption costs are reduced (customers
have been advised in advance) and are supposed to be
recovered in the long-term through the payment of the exotic
option fees. Moreover, bids in the Balancing Market may be
very high due to some speculative strategies of its participants.
C 2EC (u ) = LI k PLI k 2

the inertia coefficient of the jth machine.

The scope of the objective function (17) is to reduce
machine velocity deviations from COI velocity at each time
step of the discretized trajectory. The rationale for this
strategy is based on the assumption that the system tends to be
stable when all machines have similar velocities. Theoretical
developments and test results for this approach are reported in
[13-14].
H. The overall optimization problem
On the basis of previous assumptions the overall
optimization problem can be formulated as:
min (C EC (u) + C KTE ( y ) + C V ( y ) + C BR ( y ) )
(19)
u

subject to:

(y , u ) = 0
H
min
PLB
i
min
PGB
j
min
PLO
k

(14)

where PLI k =

0
PLI k PLI
k

Another aim of our methodology is to minimize net power

imbalance for the overall system. In our model, power
imbalance is distributed among some load-following
generators. Costs related to imbalances were considered as
ancillary services and included in the formulation of the
objective function. Thus we introduce a third function:
2

(u ) = IMB PLBi PGB j + PLO k (15)

j
k
i

where IMB is the cost of regulation for load-following units.

Hence, the overall economical objective function is the sum
of the three terms introduced right above:

C 3EC

C EC (u ) = C1EC (u ) + C 2EC (u ) + C 3EC (u )

(16)

To improve the dynamic behavior of the system, we

introduce a second objective function aimed to the
minimization of the transient kinetic energy VKTE whose
excess is typically associated to transient instability
phenomena. The following cost function reduces kinetic
energy VKTE across the whole trajectory:
nT

i
C KTE (y ) = KTE VKTE

(17)

i =0

where KTE is a coefficient which takes into account the

relative weight of this objective function with respect to other
cost functions.
i
At the generic ith time step VKTE
is formulated as follows:

i
VKTE

1 m
= M j ij iCOI
2 j =1

max
PLBi PLB
i
max
PGB j PGB
j

(20)

max
PLO k PLO
k

In eqn.(17) the problem has been reformulated in terms of

static optimization. The further step is to solve it by applying
the Lagrangian multipliers method [10-12]. Hence, the
Lagrangian function to be minimized is formulated as:
L = C ( u) + C
( y ) + C ( y ) + C ( y ) + T H ( y , u) (21)
EC

KTE

BR

For the solution the Gradient method has been used.

I. Convergence strategy
The structure of the algorithm implemented for the solution
is based on the one proposed in [12]. As in [12], the
convergence behavior of the process is enhanced by splitting
the optimization problem into two phases.
The function to be minimized is the sum of four terms (19)
which are in general non-homogeneous. The solution of this
kind of optimization problems depends on values of the
weighting factors used in the formulation of objective and
penalty functions. The use of weighting factors can give rise
to doubts among the actors of the market on the nondiscriminatory policy adopted by the ISO. For this purpose,
we split the optimization problem in two parts which reflect a
acceptable viewpoint.
The main objective of the approach is to guarantee security.
Secondarily, we try to reduce as much as possible, costs for
control actions. Consequently, in the first phase of the
optimization problem we aim to remove dynamic and static
security limitations without taking into account economical
considerations.
Thus we obtain the definition of Phase-1:
min (C KTE + C V + C BR )
u

(18)

where ij is the angular velocity of the jth machine, iCOI is

the angular velocity of the Centre Of Inertia (COI) and M j is

subject to constraints (20).

Phase-1 stops as soon as the system enters the secure region
where the system results stable and no inequality constraints
are violated. Curtailments calculated according to Phase-1
strategy derive by pure physical considerations.

After that security requirements have been satisfied, it is

possible to apply an optimal strategy based on economical
considerations.
Thus, we define Phase-2 as:
min (C EC + C V + C BR )
u

subject to constraints (20).

Note that CV and CBR vanishe during the iterations of
Phase-2, since we start the optimization in the secure region.
Only when the control effort, quantified by CEC, tends to be
reduced, new security violations appear. This situation can be
detected by values of CV and CBR, no longer negligible.
Phase-1 and Phase-2 can be iterated until convergence is
reached. Step size control of the gradient and a tradeoff
between security (CV and CBR) and economical (CEC) cost
functions ensure convergence. In Fig. 1, the two phases of the
method are pictorially shown for a bi-dimensional case.

Test result for three cases (namely case A, B and C) are

reported. For each case we considered a different selection of
interruptible load buses. For all cases the strike price for the
proposed option on interruption of supply was fixed to
20/MWh.
The cost for balancing regulation at load following buses
was fixed to 50 /MWh.
Case A refers to a configuration in which there are no
interruptible supply contracts. All selected loading buses are
participating in the Balancing Market. Figure 2 reports, for
loading buses, the control actions which were evaluated
through our methodology. As shown in Fig. 2, the greatest
curtailments was operated on bus #692 which showed to be
the most sensitive bus. The cost for operation is about
12970/h.
300
260

MW

220

u2 max

180

secure region
CEC

phase 2
100

phase 1

u1

421 429 751 683 511 692 713 30 346 723 571 953
BUS #

Figure 2. Case A: load active power at controlled buses.

u1 max

Figure 1. Pictorial representation of the method convergence strategy.

IV. TEST RESULTS

The algorithm was tested on a detailed representation of the
current Italian power grid. The system is characterized by 598
buses, 586 lines, 234 transformers and 162 generators. The
base operating condition refers to an actual configuration of
the grid during a working day at its daily peak.
In order to build our test case, some assumptions were
made. A uniformly distributed overload (+6%) was assumed
on the overall system. For tests, the most severe contingency
was selected, and some conservative hypothesis were made
(three-phase fault cleared after 0.2s through the tripping of a
line). Transient simulations were operated in a 5s window,
with 0.02 time steps.
Other assumptions are related to generating units and loads
participating in Balancing Market for upward and downward
regulation. Although this market has got a pay as bid
structure, for the sake of clarity we fixed one price for upward
and one for downward regulation.
Energy price for regulating loads (generators) with
downward (upward) regulation was fixed to 200/MWh.
Energy price for regulating loads (generators) with upward
(downward) regulation was fixed to 10/MWh.

In Fig. 3 we reported control actions on loading buses for

case B. For this case we supposed to be able to call our option
for interruption on buses #421, #429, #713, #571. Major
curtailments were evaluated on those buses. For all loading
buses participating with downward regulation bids,
curtailments are negligible and almost not discernible in the
figure. The overall cost for operation was reduced to 4820/h.
300
260
220
MW

u2

base
case
after
control

140

180
base
case

140
100

after
control
421 429 751 683 511 692 713 30 346 723 571 953
BUS #

Figure 3: Case B: load active power at controlled buses.

For case C, the most sensitive bus (#692) was selected

among buses with interruptible supply contract. Other
interruptible loads are located at buses #421, #429, #713. In
Figg. 4-5 control actions evaluated for this case are reported.
As we could expect (see Fig. 4) for this case the most of
curtailments are operated on bus #692. Hence, a further
reduction of the cost of operation was obtained. The total cost
is about 2230/h.

In Fig.5 we also reported the rescheduling operated on

generators participating in Balancing Market with both
upward and downward regulation bids. Cases A and B
exhibits a similar distribution of generators output changes.
For this case the total power associated to load-following
units was reduced to 3.58MW.
300
260

MW

220
180
base
case
after
control

140
100

421 429 751 683 511 692 713 30 346 723 571 953
BUS #

V. CONCLUSIONS
The approach presented in this paper is aimed to the
definition of a technical tool, necessary for the minimization
of cost associated to control resources exploited during realtime control. In this work, we assumed as control resources
generator and load bids for both upward and downward
regulation.
Moreover, the presence of some low costing control
resources related to interruptible supply contracts has been
considered. Those contracts are basically long term
agreements whose exotic structure has been defined. The
presence in their structure of two exercise points should
guarantee the assessment of interruptible resources when
and where there is an actual need of them.
Test results have been presented for a realistic-sized power
system.
VI. REFERENCES

Figure 4: Case C: load active power at controlled buses.

[1]
350

[2]

MW

300

[3]

250

[4]
[5]

200
base
case
after
control

150
100

[6]
[7]

26 113 115 116 642 474 475 774 810 811 812 813
BUS #

[8]

Figure 5: Case C: generated active power at controlled buses.

Figure 6 shows the preventive control cost across the

iterative process. Note that the behavior at iterations 1-8 is
given by the tradeoff of economical and security cost
functions. Moreover, the minimization of the function related
3
) plays a major role during the
to power imbalance ( C EC
iterative process up to iteration 8. After this iteration the
minimization of control costs exhibits a monotonous behavior.

[9]
[10]
[11]
[12]

35
30

[13]

k/h

25
20

[14]

15
10
5
0
0

10

15

20

25

iteration

Figure 6: Cost of control vs. number of iteration

CPU timings evaluated for cases A, B and C, are 427s, 580s

and 366s, respectively.

Enron Corp., Managing Energy Price Risk, G. S. Masson, Competitive

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VII. BIOGRAPHIES
Sergio Bruno was born in Bari, Italy, in
1975. He received the degree in Electrical
Engineering from Politecnico di Bari (Italy) in
2000. In the same year he started working on
his Ph.D. course in Electrical Engineering at
Politecnico di Bari. He is currently Student
Member of IEEE PES.
His recent studies deal with Power System
Dynamics and Control, FACTS technologies
and Energy Markets.
Massimo La Scala was born in Bari, Italy, in
1959. He received the degree in Electrical
Engineering from University of Bari (Italy) in
1984. In 1989, he received his Ph.D. in
Electrical Engineering from the University of
Bari. He is currently Professor of Electrical
Energy Systems at the Politecnico di Bari
(Italy). His research activity deals with Power
System Control and Energy Markets. He is
Senior Member of the IEEE PES and A.E.I.
Roberto Sbrizzai received the degree in
Electrical Engineering from University of Bari
(Italy) in 1986. In 1992, he received his Ph.D.
in Electrical Engineering (Power System
Analysis) from University of Bari. He is
currently Associate Professor at the Department
of Electrical Engineering of the Politecnico di
Bari. His research interests are in the areas of
Power System Analysis and Control and
Electric Energy Markets.
Giuliano Vimercati is graduate in Nuclear Physics and has been employed
with CISE S.p.A. (a Research Center of the Italian National Electricity
Board) since July 1973. He held positions of increasing responsibilities in
the field of the nuclear reactor core analysis. From January 2000 he joined
CESI S.p.A. where he is involved in Grid Operation and Planning
Management.