The stability of electric energy markets

Power system markets represented by dynamic equations provide insights into the market behavior which are not available from static models. In particular: (1) markets that are required to balance supply and demand precisely at all times may be unstable if one supplier exhibits economies of scale and will be unstable if two suppliers exhibit this behavior. The instability is characterized by one or more positive eigenvalues. (2) Markets where some energy imbalance is allowed to accumulate can exhibit an instability, depending on the exact values of time constants and delays in the system. (3) Congestion can be helpful from the perspective of stability: a market can become unstable in the eigenvalue sense if congestion is removed. (4) A power system (with stable electromechanical dynamic behavior when considered by itself) and market (by itself stable) can, when analyzed jointly, exhibit unstable behavior. Some of the instabilities alluded here are nothing more than fluctuations in demands and prices. However, fluctuations are likely to require larger security margins, thus greater costs to operate the system.