Modeling Power Markets: Uses and Abuses of Locational Market Simulation Models
The Brattle Group Energy Newsletter 2006 No. 1
When it comes to power market simulation models, we frequently encounter two opposing perspectives. Some industry analysts and market participants (the fans) strongly believe in and readily apply market simulation models, while others (the skeptics) often see such models as a smoke screen for imperfect knowledge, questionable assumptions, and potentially sloppy analytics.
The skeptics have legitimate criticisms that strike partly at the fundamental limitations of simulation modeling and partly at the way simulations are typically performed. Indeed, simulation modeling can misinform, rather than illuminate, if the model is not well-calibrated and the model’s assumptions, biases, and limitations are not documented.
However, a well-calibrated simulation model with transparent and reasonable assumptions can provide a structure that is uniquely well-suited for analyzing assets and operations under future or “but-for” market conditions. Such simulations can help quantify the effects of changes in market fundamentals, transmission constraints, market participant behavior, and ISO operations.
