A New Method for Efficient Transmission Losses Allocation in Electricity Markets Without Losses Consideration in The Dispatch

Several electricity markets around the world have adopted a single-node dispatch model that does not account for transmission losses. This leads to efficiency losses as the merit order can change significantly. Marginal loss factors (MLFs) are known to provide the most efficient signal of loss responsibility. However, applying MLFs would result in allocating and charging almost twice the physical losses. We propose a novel method based on the application of loss factors to allocate transmission losses to generators and demand while internalizing these losses in energy dispatch. The applied loss factors are obtained by modifying the marginal ones in such a way that the total amount of losses allocated to market participants is exactly equal to the physical losses in the network. They are optimized to minimize the loss of efficiency in the dispatch. The process of computing these loss factors is formulated as a bilevel optimization problem in which the modified MLFs to be applied are computed in the upper-level problem, and the dispatch and operation resulting from the application of these factors are computed in the lower-level problem. By reformulating this bilevel problem as a single-level problem using the Mathematical Programming with Equilibrium Constraints (MPEC) technique, the problem is solved using a commercial nonlinear solver. We use the GAMS software. This method has been applied to compute dispatch and loss allocation for a simple test case of nine nodes with thirteen generation units, whose merit order changes when losses in the network are considered. The results show that applying this method leads to i) the most efficient set of generators being dispatched, ii) the energy prices applied to generators closely approximating the marginal value of the energy they produce, and iii) the losses allocated to demand being equitably distributed among loads.