Understanding the Structural Characteristics of Convergence Bidding in Nodal Electricity Markets

Abstract

Convergence bidding, a.k.a., virtual bidding, is a market mechanism that is used by several independent system operators (ISOs) to increase market efficiency in electricity markets by closing the gap between the day-ahead market (DAM) prices and the real-time market (RTM) prices. However, some recent reports by ISOs have questioned whether convergence bids (CBs) act as intended. Motivated by such reports, this article provides a methodology to identify under what conditions a CB results in price divergence, instead of price convergence. The analysis is done in nodal electricity markets and factors such as transmission line congestion are investigated. It is proven that price convergence is guaranteed under some transmission lines congestion configurations. In contrast, there are certain transmission lines congestion configurations that can result in price divergence when CBs are submitted at certain nodes. It also explains how the aggregate impact of multiple CBs may lead to decrease (or increase) in the price gap at each bus. Importantly, the analysis in this article also covers the stochastic case, where we obtain the probability of price convergence (or divergence) when we are uncertain about some system parameters.