System security control and optimal pricing of electricity

Optimal electricity spot pricing internalizes electricity transportation network costs and constraints. We extend spot pricing theory by including system security control issues in the model. The engineering and physics of system security control imposes a need for speed and precision of response. Traditionally this need has been met by central control of centrally owned equipment and little control of customer-owned equipment. We show that socially optimum prices exist which decentralize security control by internalizing its costs. These prices are robust and feasible to determine without unreasonable information requirements by the market maker. Families of optimal prices and price/quantity controls are determined and interpreted. Contingency planning and enhanced centre/market-maker roles are derived. Applications of immediate interest are also discussed, such as pricing of interruptible loads and assignment of power pool reserves. Symmetry between demand side and supply side security control is shown to be optimal.