1

KEY ENERGY MANAGEMENT ISSUES OF SETTING MARKET CLEARING PRICE

(MCP) IN MICRO-GRID SCENARIO

A.K.Basu(1) , T.K.Panigrahi(1) , S.Chowdhury (2) , S.P.Chowdhury (1) , N.Chakraborty(1)

A.Sinha (3) and Y.H.Song(4)
(1) Jadavpur University, India (2) Womens Polytechnic, India (3) Tata Consultancy Services Ltd., India
(4) Liverpool University, UK

ABSTRACT
Micro grid is an epitome of a macro grid but works in low voltage comprising of various small-distributed energy
resources (DERs), energy storage devices, and controllable loads being interfaced through fast acting power electronic
devices. Combined heat and power (CHP) produced by DERs are utilized in the local market where Micro Grid
operates either in island mode or in grid-connected mode. The CHP mode of operation makes the Micro Grid most
efficient and economic. Like deregulation regime in Micro Grid market, multi agent generator providers may be
considered to make the Micro Grid market competitive. The reason for competitive electricity market is to serve the
consumers at a reduced price. The main purpose of this paper is to analyze and propose the pricing mechanism for
Micro Grid energy in the competitive electricity market. Central controller of the Micro Grid (cc) is the main brain
behind all energy management system (EMS) activities, which includes participation in the bidding to settle marketclearing price (MCP). Two important market settlement techniques Day-ahead and Real-time have been discussed
briefly in this paper. Uniform and Pay-as-bid pricing rules have been discussed separately for electricity pricing fixation
in the context of Micro Grid. In this paper marketing strategies of some of the renewable DERs mainly Photovoltaic
(PV) and wind generator have been considered. Wind power is now a potential candidate in non-conventional power
generation family. Power available from wind and PV system cost high and is of intermittent in nature. Participation of
these two renewable DERs along with Micro turbine, Diesel generator, fuel cells etc. in the bidding for market clearing
price (MCP) make the market complex. This paper gives a brief guideline for marketing of PV and wind power.
Consumers in the Micro Grid system are categorized as shed-able and non-shed-able according to their priority. How
these loads affect demand curve have also been discussed. This paper presents a case study on price determination
based on demand and supply side bidding strategies. The impacts of congestion management, market power, carbon
taxation, price volatility, etc. on pricing have also been discussed in the context of Micro Grid.
Keywords: Energy Management, Market, Microgrid, Distributed Energy Resources (DERs), Market Clearing Price

1 INTRODUCTION
Electric power system all the three sections
Generation, Transmission, and Distribution is
ushering a progressive transition from a centralized
control to distributed control regime.
Micro-Grid is a concept where local energy
potentials, both in renewable (such as small wind, PV,
etc.) and non-conventional (micro-turbine, Fuel cells,
Diesel generator) resources, are tapped and
interconnected among themselves as well as with LV
Macro-Grid. These small DERs have different owners.
They take decisions scheduling of generation as per
load forecast (i.e., unit commitment) and Economic
dispatch of loads locally with the help of local
controllers (c) connected with each DER and MicroGrid Central Controller ( cc). In the islanding operation
of Micro-Grid, each source caters only those loads,

which are stipulated for the source. (3, 9) But when these
sources are grid-connected, which is most desirable,
then the action of the controllers (both c and cc)
should have a certain degree of intelligence for
participation in the common and competitive market.
The purpose of the Energy Management System
(EMS) in the Micro-Grid scenario is to make decisions
regarding the best use of the generator for producing
electric power and heat i.e. combined heat and power
(CHP) operation. (3) Such decisions will be based upon
the heat requirements of the local establishments, the
climate, the price of electric power, the cost of fuel and
many other considerations. Micro-Source central
controller ( cc) acts as a main operator to take decisions
regarding the supply of CHP services to be provided as
per demand. Like deregulated regime in the MacroGrid, multi-agent generating providers are considered in
the Micro-Grid system. The main idea of this paper is to
determine the market clearing price (MCP) due to

UPEC 2007 - 854

2
dispatch of an aggregated group
DERs and an aggregated group
consumers. These consumers
controllable loads i.e., which
uninterruptible loads.

of different kinds of
of different kinds of
are categorized as
can be shed and

An electricity market is a system for effecting the

purchase and sale of electricity using supply and
demand to set the price.(1) Reducing the price paid by
consumers for electricity is invariably the first reason
given for introducing competitive electricity markets.
Micro-Grid operates in a local market and usually cater
to the customers of medium sizes (such as, commercial
complex, small industries etc.) and residential. These
customers do not have the financial incentives and the
expertise required to contribute effectively in the price
matter to such a complex local market. Possibly as a
consequence of this lack of representation, most
electricity markets do not treat consumers as a genuine
demand side capable of making rational decisions, but
simply as a load that needs to be served under all
conditions.(2) Active participation in these markets by
demand side remains minimal. This paper has
considered an active participation of both supply and
demand side and thus shown a power-trading model as
in fig. 1.Two important market settlement techniques
are generally adopted in the electricity market Dayahead and Real-time. The day-ahead energy market is
designed for market participants with the day-ahead
prices. After the day-ahead market bidding period
closes, the system operator calculates day-ahead market
clearing prices (MCP) based on bids, offers, and
schedules submitted based on least cost, security
constrained, unit commitment and makes the day-ahead
scheduling for each hour of the next operating day. The
real time market is designed to provide opportunities for
generators that are available but not selected in the dayahead scheduling, might alter their bids for use in the
real-time market, otherwise their original day-ahead
market bids remain in effect for the real-time energy
market.(1)

Supply Side
Bidding

Generator
Provider

Power
Exchange
Controlled
by cc

Bids &
Offer

Demand
Side
Bidding

MCP
Index

On-line
Bulletin
Board

Govt. Licensed
Representatives

Figure 1 Proposed Micro-Grid market model commercial

structure

With the rising environmental concerns, the wind

and solar energies are better choice at present. The

benefits of grid-connected PV schemes may be seen as

expressing concern for the environment, energy credit
associated with reduction in fuel consumption and an
opportunity to participate and contribute into a new
technology[4]. PV and wind were viewed primarily as a
power source for remote applications far from a MacroGrid. With the development of inverters for gridconnected applications, interest in grid-connected PV
and wind grew[6][7]. Today, due to these changes and
burgeoning Government incentive programs, gridconnected solar and wind are the fastest growing market
for generation technology. For power systems with a
substantial natural gas component, wind and solar
actually provides a hedge against fluctuations and
spikes in gas costs. This paper also analyses and
proposes the pricing mechanism for wind and solar
integrated into the electricity market.
A good trading mechanism is a basic need for the
market, but due to oligopolistic nature of the electricity
market there are fair chances of having the market
power and market abuse, which reduce the market
efficiency.[5] This paper discusses a few aspects, such
as congestion management, carbon taxation, market
power, price volatility, etc. which affect the price.

2 BIDDING PROCEDURE
In oligopolistic market, several producers compete
to win a share of the market and bid against each other
to supply electricity to the consumers. In current
electricity markets, either a single side bidding (the
generator side) or a double side biding (both generator
side and consumer side) is adopted. No matter whether
it is single side bidding or double, the generator
providers do not know the current level of demand and
consumers do not know the available capacity of
generators. This causes the more complications and
uncertainties in bidding for both sellers and buyers in
the electricity market. Furthermore, electricity auction
markets may have more than one commodity being bid
for simultaneously, for example, real-time energy,
operating reserve, and other ancillary service products.
There are two options of bidding followed by
generator providers (1) block-generation bidding, (2)
sealed bid auction. In the first one, the portion of the
load curve a supplier hopes to win depends on
production cost estimate, temporal considerations of
demand variations, unit commitment costs and other
commercial considerations. In the second case, suppliers
submit their competitive bid to the pool operator for the
supply of the load forecasted by the operator. Each
suppliers objective is to maximize benefit and on the
other hand, pool operator uses a dispatch strategy that
minimizes customers burden.
Two types of bidding mechanism are in vogue in the
electricity market (1) single side bidding where only

UPEC 2007 - 855

3
generator providers participate; (2) double side bidding
where both generator providers and consumers
participate. This paper formulates both types in the
section (iv).
3 MARKET CLEARING PRICING RULES
There are three important pricing rules for
electricity auction, but only two of them are generally
used in real-time markets (1) uniform or single price
market clearing rules and (2) discriminatory or pay-asbid market clearing rules. First one is very common in
electricity market. In this process, sellers would receive
the market-clearing price (MCP) for their electricity,
even if they bid less than that price and all consumers
would pay the MCP, even if they bid more than that
price. The theory behind such a biding system is that all
bids to sell electricity would be priced at the marginal
cost of that electricity. As per the second rule, every
participant with winning bid pays or is paid at the price
of his bid. In this system, bidding is made by guessing
the cut-off price, not on marginal cost. There is mistake
in guessing from observing the results of the hourly
bids, twenty-four a day. Some lower cost firms would
guess incorrectly and bid above the cut-off price. Thus,
some high cost firms would generate and lower cost
firms would remain idle. Cost of generation would,
therefore, be increased above the market clearing cost.
Pay-as-bid system could be expected to increase the
total cost of generating electricity and would therefore
be less efficient than uniform market clearing system.
With the introduction of deregulation in the power
sector, the implementation of the uniform pricing
system came as a natural choice, since it is believed to
offer to the bidders the incentives to reveal their true
cost.

clearing price (MCP) in the competitive market for

linear bid cases.
(a) SINGLE SIDE BID MARKET: In this market
supply companies participates in the bidding. And
demand of the consumers is considered as constant
whatever the market price is. Authors have considered a
market comprising of CHP generators (e.g., microturbines, fuel cells, etc.), renewable generators (e.g.,
wind, solar), and diesel back-up generators. Diesel
generator is generally used as back up but for
comparison purpose it has been taken with the
mainstream generators.
Q1 (p) = KW generated by bidder-1 (say, micro-turbine)
at a price p $/kWh = Q1elec + Q1Th
Where Q1elec is electrical KW generated by microturbine and Q1Th is thermal load generated by microturbine converted to equivalent electrical load, using
Joules constant.

p
----------------------------------- (1)
m s1
Where m s1 is the slope of the linear supply curve

Q1 ( p ) =

of bidder-1. Similarly,

Q2 ( p ) =

= Q2elec +

Q2Th

Where Q2 (p) is KW generated by bidder-2 (say,

fuel cell) at a price p $/kWh
Likewise, combined supply curve for N bidders will
be
Q (p) = Q1 (p) + Q2 (p) + Up to N
=

p
. (2)
ms 2

FORMULATION OF MARKET CLEARING

PRICE

p
p
+
m s1 ms 2

=P

1
msj

(3)

j =1

The market-clearing price is the lowest price

obtained at the point of intersection of aggregated
supply and demand curves. At this price both suppliers
of generation and customers are satisfied and would
provide enough electricity from accepted sales bids to
satisfy all the accepted purchase bids. The sales bids are
usually arranged from the lowest offer price to the
highest offer price, i.e., in the bottom-up order. Whereas
purchase bids are arranged from their highest offer price
to the lowest offer price, i.e., top-down order. At the
MCP, the total sales bids would be equal to the total
purchase bids.
In a market, both the supply and demand bids are
of the same type, i.e., either block or linear bids.
Authors have presented the detail analysis of market

As demand is fixed at D (say), therefore at the

market clearing price (p*),
Q (p*) = D
N

P*

1
msj

=D

j =1

P*=

D
1

j =1 m sj
N

(4)

In the equation (4), it is assumed that bidders have

enough capacity of generation. If the capacity limit
both minimum generation (Qmin) and maximum
generation (Qmax) is specified then the combined
supply curve (3) can be represented as,

UPEC 2007 - 856

4
N

Q (p) = p

1
msj

j =1

P*=

Where functions
U (Q - Qmin) = 1, When Q>= Qmin;
= 0, When Q< Qmin;
And U (Q - Qmax) = 1, when Q >= Qmax
= 0, when Q< Qmax

market

p0

j =1 m dj

m
j =1

the

. (6)
dj

Figure 2 Linear Demand and supply bid curves

Where P0 is the price axis intercept of demand curve
varies with type of consumers. If at a particular price
(p), D (p) is considered aggregated demand for all the
participating consumers, therefore
N

D (p) =

N
p0
1
P

j =1 m dj
j =1 m dj

-------------------- (7)

At the MCP (p*),

N

P*

dj

1
1

mdj
j =1 m sj
5

(b) DOUBLE SIDE BID MARKET: In this market, elasticity

of demand curve has been considered. Both supply side
and demand side bidding are taken into account for
determination of market clearing price (p*). Both linear
supply and demand variations with price have been
considered for analysis.
D (p) = combined demand at price p $/kWh
obtained from bids of N numbers of consumers
in

j =1

(9)

Equating (5) with the demand D, the marketclearing price (p*) can be determined.

participating

p0

[U (Q - Qmin) U (Q- Qmax)].. (5)

N
N
p0
1
1
=
P*
. (8)

j =1 m sj
j =1 m dj
j =1 m dj

STUDY- CASES

Authors have studied a Micro-Grid system

comprising of following DERs, as shown in Table 1.
For the sake of simplicity, only three types of
conventional DERs along with renewable sources (wind
and solar) have been considered to bid into the market.

Table 1
Generator
type

Ms,
$/kWh

Qgmax,
KW

Qgmin, KW

Bidder 1
(MicroTurbine)

0.1056

30

Bidder 2
(Fuel cell)
Bidder 3
(Diesel
gen.)
Bidder 4
(wind
gen.)
Bidder 5
(solar PV)

0.1386

50

Minimum
power for
satisfying
the thermal
load
Do

0.063

60

---

0.27

10

---

0.4756

20

---

Heat
rate,KJ
/kWh
12,186

9,480

As the number of DERs increases, combined

supply curve is to be obtained, as explained in section
(IV). In the study following bidding strategies have
been considered:
Case-1: Linear supply bid with fixed demand (i.e.,
single sided bid market)
Case-2: Linear supply bid with linear demand bid (i.e.,
double sided bid market)
CASE-1: In this case, a constant demand of 80 KW is
considered. Analysis is performed for the following
cases:
(a) First, renewable energy sources (RES) i.e., wind
and solar are considered non-available. Demand is
met only by the other three DERs. MCP is obtained
from the intersection of the cumulative supply curve of
bidders-1, -2, -3, and fixed demand line of 80 KW, as
shown in Fig.3.

UPEC 2007 - 857

Figure 3 Individual & combined supply curves and

fixed demand line
As per Fig. 3, MCP = $2.5/kWh
Power supplied by each generator to meet the demand
of 80 KW is shown in Table 2.
Figure. 4 MCP vs. Bid Rate & Output vs. Bid Rate
curves when demand is fixed
Bidder
1
(MicroTurbine)
2 (Fuel cell)
3
(Diesel
gen.)
Total

Table 2
Generator
Payment, $
output, KW
24.0
60
18.0
48.0

45
120

80.0

225

(b) Considering both RESes are available, their

combined generations are 30 KW. RESes are considered
not participating in the bidding process. Therefore, their
generation only reduces the bidders (i.e., -1, -2, -3) total
dispatch from 80 KW to 50 KW. It is being considered
that both wind and solar power are available in the
daytime.
The corresponding MCP is now $1.5 /kWh (as per
Fig. 3). Since MCP is reduced, it may not be possible to
recover the cost of RESes and also the excess cost
during the non-availability of RESes. Therefore the
MCP is to be kept fixed at $2.5/kWh, but output of
bidders
would
be
reduced
by
Qi

p
=
m sj

(10)

as shown in Fig. 3.
(i) Impact of bidding of RESes: The generation of
wind and solar are uncertain. Output variation of wind
and solar as well as MCP with the different bidding
rates are shown in Fig. 4.

There are two situations shown in the Fig. 4 (i)

Restricted RESes: If the RESes bid at zero, it will be
completely dispatched and MCP will be 1.5 $/kWh.
Restricted output from RESes is possible in micro-grid
system due to presence of storage.
(ii) Unrestricted RESes: The MCP with restricted
RESes (i.e., 30 KW) is same as MCP at the unrestricted
RESes at bidding rate of 1.0. Maximum and minimum
MCP can be found out by partial differentiation of
Equation (4) with respect to bidding rate (ms) and then
equating to zero. For various bidding rate (ms) varying
from 0 to 10, payments and output are shown in the
Table 3 for the following two options:
Option 1: with fixed RESes of 30 KW, MCP=1.5$/kWh
when ms <1
Option 2: When ms between 1 and 10, MCP calculated
with RESes and output of bidders 1, -2, -3, as adjusted
by Eq. (10) are shown in Table 3.
Table-3
Gen. Type

Bidder 1
Bidder 2
Bidder 3
RESes
Total

Output
(KW)

Payments, $
option 1

ms <1
14
12
24
30
80

21
18
36
45
120

Output, KW

1<ms<10
14
12
24
30
80

Payment
s, $
Option 2
33.6
28.8
57.6
72
192

CASE 2: Two consumers participating in the bidding

are considered and shown in Fig. 5.Bidding data of the
consumers are given in Table 4. Linear bid data for
demand has been considered.

UPEC 2007 - 858

Consumer
Bidder 1
Bidder 2

Table 4
Mdj,
($/kWh/KW)
0.041
0.077

From Fig. 5, when RESes supply 30 KW, then supply of

other three bidders will be as follows:
Bidder 1 (micro-turbine): 23 KW, bidder 2 (Fuel
cell): 29 KW and bidder 3 (Diesel-gen): 49; Total
generation = 101 KW.

Po, ($/kWh)
6.0
7.0

MCP is calculated from the intersection of supply

and demand curves and it is found out as
$3.4/kWh.Corresponding demand
of individual
consumers is found out from Fig 5.

From Figure 6, when bidding rate of RESes less

than 1.0, then there is no impact on the MCP with
restricted RESes of 30 KW. With the increase of
bidding rate MCP increases, but power dispatched from
RESes is less. Table 4 shows the payments at various
MCP and corresponding output.
Table 4
Generator:
supply side
payment

Figure 5 Supply (aggregated) & Demand (Individual

and aggregated) curves

Bidder 1
Bidder 2
Bidder 3
RESes
Total
payment
Demand
side:
Bidder 1
Bidder 2
Total
payment

Without
RESes:
power
output
(KW)

Without
RESes:
payment (at
$3.4/kWh)

With
RESes:
power
output
(KW)

With
RESes:

33
26
51
0
110

112.2
88.4
173.4
374.0

23
29
49
30
131

Payment
(at
$3
/kWh)
69
87
147
90
393

64
46
110

217.6
156.4
374.0

76
55
131

228
165
393

VARIOUS IMPACTS ON ELECTRICITY

MARKET

The bidding strategies, used by generating

companies with the goal of maximizing their own
profits, show various potential possibilities to exercise
market power. Market power is simply the power that
market participants hold to manipulate the market in
their own favor. Various reasons for the existence of
market power are transmission congestion, market
players, and market structure.

Figure 6 MCP vs. Bid Rate & Output vs. Bid

Rate curves when demand is elastic

Demand of:- Bidder 1: 64 KW and bidder 2: 46 KW;

total demand = 110 KW.
Generator providers meet this demand by supplying as
per schedule shown in (Fig. 3 & Fig. 5):
Micro-Turbine 33 KW, Fuel cell 26 KW, and Dieselgen. 51 KW; Total generation = 110 KW.
If wind and solar RESes do not participate in the biding
process, then their contribution of 30 KW will reduce
the MCP at $3 /kWh and consumption of the consumers
will increase to:
Bidder 1: 72KW and bidder 2: 52 KW; total demand =
124 KW.

Congestion is common in the electricity

transmission system. Micro-Grid system itself helps
respite from macro-grid congestion. Due to congestion,
price of energy increases from one part to another.
Scheduling of energy production in the day-ahead
market will also help to mitigate transmission
congestion issues. A large company (i.e., a big market
player) can easily manipulate energy prices that are set
far from its marginal cost. In the micro-grid market both
conventional (micro-turbine, fuel cell) and RESes
participate. Due to inconsistence behavior of RESes, the
market structure and market rules are also important
causes for some kind of exercise of market power, such
as what pricing mechanism is implied uniform price
or pay-as-bid. Chances of market volatility in the micro-

UPEC 2007 - 859

7
grid market are almost absent. Though a perfect match
between power production and power demand is hardly
possible, still due to presence of the storage system this
gap can be mitigated easily. Carbon emission alerts us
every time to shift the nature of electricity generation
from the fossil fuel type to non-conventional (i.e.,
renewable) type. In this case, micro-grid system of
generation has an edge over the conventional type.
Carbon taxation will indirectly encourage the micro-grid
system.

3.
4.

5.

6.
7

CONCLUSION

This paper presents a comparative analysis of MCP at

various combinations of non-conventional (i.e., RESes)
and conventional energy sources. With the uncertain
availability of RESes, it becomes difficult to find out
actual MCP at which trading is to be done. For this
RESes have been considered, in one case, participating
in the market as and when available basis. Also a case
with storage system has been considered for smooth out
this uncertainty of generation and responsible
participation in the bidding. Though Government
subsidy on price and environment-friendly nature of
generation are the encouragement for the use of RESes,
still uncertain availability is the main difficulty in their
wide spread use. Proper and transparent trading practice
can make a win-win situation. This paper could guide
market researchers with an idea of micro-grid market
comprising of RESes.

8
1.
2.

7.

8.

9.

J.D.Kueck, et.al. Micro grid energy management

system, CERTS, Jan.2003.
Martel, S. et.al. Avoided cost benefits of pv on
diesel-electric grids, 24th IEEE pv specialties
conference proceedings, 1994, pp 1048-1053
A. Fabbri, et.al, Assessment of the cost associated
with wind generation prediction errors in a
liberalized electricity markets, IEEE Trans. on
power systems, vol. 20, no. 3, pp.1440-1446,
august.
G. N.Bathurst, et.al. Trading wind generation in
short term energy market; IEEE Trans. on power
systems, vol.17, no.3,
pp782-789,
Aug2002.
This
paper presents
a comparative analysis of M
K.Khouzam, Prospect of domestic grid connected
pv systems under existing tariff conditions 26th
IEEE pvsc, Sept.30-oct.3, 1997
Chris Marnay, et.al, Modeling of customer
adoption of distributed energy resources, CERTS,
Aug.2001.
R.Lasseter, et.al, Integration of distributed energy
resources, the CERTS micro grid concepts,
CERTS, 2002.

AUTHOR'S ADDRESS
The first author can be contacted at
Electrical Engineering Department
CIEM, Kolkata, India
Email (ak_basu2004@yahoo.com)

(spchowdhury@theiet.org)

REFERENCES

Yon-Hua Song, Xi-Fan Wang (Eds.), Operation of

market-oriented power systems, springer, 2003
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wholesale markets through market-based pricing in
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