The objective of the electric utility or grid operator on an hour-to-hour basis is to minimize the total generation cost of meeting electricity demand. Economic Dispatch is the procedure by which the utility selects which of its generators it will use to meet electricity demand. You can think about economic dispatch like clearing the electricity market, as follows:
- The utility constructs a marginal cost (supply) curve for its entire system.
- Demand is often assumed to be price-inelastic (vertical demand curve).
- The marginal cost of generation at the market-clearing point (supply = demand) is called the "System Lambda."
- The generator whose output serves the marginal kWh of electricity demand is called the "marginal unit."
We will go through the economic dispatch procedure using two models for power generation costs. The first model assumes that the marginal costs of power plants are all constant. The second assumes that the marginal costs of power plants are all linear (so marginal cost increases as more power is generated).