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A new stability constrained optimal power flow technique is proposed in this paper. The proposed methodology accounts for system dynamics through the use of a recently proposed stability index as an additional optimal power flow (OPF) constraint. The technique is developed with the objective of maximizing social benefit in the context of competitive electricity markets. An interior point method (IP) is used to solve the proposed OPF problem, and a 3-bus test system with both supply- and demand-side bidding is used to illustrate its application in electricity markets. The results obtained for the system are compared with respect to results obtained for a previously proposed voltage-stability-constrained OPF technique to demonstrate the effect of oscillatory instabilities on the network and market conditions, in particularly locational marginal prices. A power system stabilizer (PSS) is then introduced in the test system to eliminate the oscillation problems, using the proposed technique to determine the PSS effect on electricity pricing and thus suggest a possible mechanism to price the services provided by this controller.