Chapter - 1

INTRODUCTION

1.1 Introduction
Electric power systems are among the most complex and large systems that exist in the world. Broadly
speaking, a power system is composed of the three functional zones of generation, transmission, and distri-
bution. Over the years, electric power industry is owned by large utilities which have all the control over
all the functions of electric power system. These utilities are referred as vertically integrated utilities. Each
utility has one or more control centers that maintain security and reliability of a specific region. The basic
function of a power system is to provide electric power to its customers as economically as possible
and with an acceptable degree of continuity and quality [29]. Reliability is one of the most important fac-
tors considered in power system planning and operation in both vertically integrated and deregulated utility
environments.

Figure 1.1 Power System Structure under Vertically Integrated Utilities [31]

Reliability is an inherent characteristic and a specific measure of any component, device or system, which
describes its ability to perform its intended function. In terms of a power system, the measures of reliabil-
ity indicate how well the system performs its basic function of supplying electrical energy to its cus-
tomers [3]. The likelihood of customers being disconnected for any reason can be reduced by in-
creased investment during the planning phase and/or the operating phase. Over investment can lead to
excessive operating costs. On the other hand, under investment can lead to lower reliability. How to trade-
off these two aspects is a major challenge to power system managers, planners, designers, and opera-
tors.

In order to resolve the dilemma between the economic and reliability constraints, design, planning, and op-
erating criteria and techniques have been developed and applied over many decades.

1.2 Deregulated Power Industry

1.2.1 Introduction
During the nineties decade, many electric utilities and power network companies world-wide have been
forced to change their way of operation and business, from vertically integrated mechanisms to open mar-
ket systems. This can be specifically observed in countries like UK, Sweden, Finland, Norway, US and
some countries of South America. The reasons for change have been many and have differed over regions
and countries. For developing countries, the main issues have been a high demand growth coupled with in-
efficient system management and irrational tariff policies. This has affected the availability of financial re-
sources to support investments in improving generation and transmission capacities. In such circumstances,
many utilities were forced to restructure their power sectors under pressure from international funding
agencies. In developed countries, on the other hand, the driving force has been to provide electricity at low-
er prices and offer them a greater choice in purchasing economic energy. The goal of changing the way of
operation, i.e. re-regulation, or deregulation, as we say, is to enhance competition and bring consumers new
choices and economic benefits. Under Deregulation, the former vertically integrated utility, which per-
formed all the functions involved in power, i.e. generation, transmission, distribution and retail sales, is dis-
aggregated into separate companies devoted to each function. The electricity bill for the end consumer now
involves at least two components: one from the distribution and transmission network-operator responsible
for the network and services, and the other from the company that generates the electrical energy. All this
seems to be very straightforward at first glance, but there are several complexities involved in restructuring
and many issues have been raised.

In the discussions to follow, the issues involved in the restructuring process will be considered Electric
power systems have traditionally been organized and operated as regulated monopolies. In these cases, an
electric power utility or entity owns and operates all the three functional zones of the power system and
therefore controls all aspects of system planning, design and operation. The power industry is now under-
going considerable changes due to deregulation. The main aim of restructuring is to let market forces drive
the price of electric supply and reduce the net cost through increased competition. Restructuring
creates an open market environment by allowing competition in power supply and allowing consumers to
choose their supplier of electric energy.

1.2.2 Brief Concepts of Regulation and Deregulation

• Regulation: Regulation means that the Government has set down laws and rules that put limits on
and define how a particular industry or company can operate. Nearly all industries in all nations are regu-
lated to some extent. Very competitive businesses such as auto manufacturing, airlines and banking are all
heavily regulated with myriad government requirements defining what they must, can, and cannot do, and
what and to whom and when they must report their activities. Regulation of electric utilities is not the only
way government can control the electric power industry within its jurisdiction. The other way is to own and
operate the power company directly, as a government utility.

• Deregulation: Deregulation in power industry is a restructuring of the rules and economic incen-
tives that government set up to control and drives the electric power industry. As the terms suggest, they
represent fundamentally opposite ideas. But neither concept is necessarily good or bad. Both regulation
and deregulation make sense, and one or other is preferable under certain conditions.

1.2.2.1 Need for regulation

During early days of the electric power industry, both government and business favored utility regulation.
The reasons are manifold:
 Regulation offered a risk free way to finance the creation of electric industry. Establishment of elec-
tric industry required large capital for infrastructure building. At the dawn of the electrical era, government
leaders were resistant to invest large amounts of public capital in an untried technology. Early electric busi-
nessmen like Westinghouse, Edison, Brush, etc. knew that their technology was sound. So, it was agreed
from both the sides that, the businessmen would risk their money, not the government, towards capital in-
vestment. In turn, the government guaranteed them a fair return on their investment through regulated
rates. Government also assured businessmen the local monopoly and a stable market. Thus, regulation pro-
vided both sides with risk minimization they needed.

 Regulation legitimized the electric utility business. Government franchises and regulation clearly
implied to a possibly skeptical public that civic leaders thought electricity was a good thing.
 It gave electric utilities recognition and support from the government, which was necessary to solve
problems like ‘Right of Way’.

 It established a local monopoly. The utility leaders could focus on building up their systems without
having to worry about the competitors undercutting the prices to gain market share etc.

1.2.2.2 Characteristics of regulated electric industry

 Monopoly franchise: Only the local electric utility can produce, move, or sell commercial electric
power within its service territory.

 Obligation to serve: The utility must provide service to all electric consumers in its service territory,
not just those that would be profitable.

 Regulatory oversight: The utility’s business and operating practices must confirm to guidelines and
rules set down by government regulators.

 Least-cost operation: The utility must operate in a manner that minimizes its overall revenue re-
quirements.

 Regulated rates: The utility’s rates are set in accordance with government regulatory rules and
guidelines.

 Assumed rate of return: The utility is assured a fair return on its investment, if it confirms to the
regulatory guidelines and practices.

1.2.2.3 Structure of Regulated Industry

The electric power industry has over the years been dominated by large utilities that had an overall authori-
ty over all activities in generation, transmission and distribution of power within its domain of operation.
Such utilities have often been referred to as vertically integrated utilities. Such utilities served as the only
electricity provider in the region and were obliged to provide electricity to everyone in the region. The util-
ities being vertically integrated, it was often difficult to segregate the costs involved in generation, trans-
mission or distribution. So, the utilities often charged their customers an average tariff rate depending on
their aggregated cost during a period.

1.2.2.4 The Reasons for Deregulation

The reasons for initiating the idea of deregulation in power industry are many. Following are the main rea-
sons:
 The need for regulation changed.
More fundamental than any other reasons for change was the fact that the basic needs for regulation of
electric industry had died away before the end of 20th century. First, the original need for regulation, which
was to provide risk free finance to build the infrastructure, did not exist anymore. Second, the present elec-
tric system created, was paid for, decades ago. The revenues gained by the electric utilities was invested to
renew their system and the level of risk in doing so was less as compared to that existed in the initial era.
Being a proved technology, the risk involved in investing money in such a technology was nullified. The
electricity could be thought of an essential commodity, which can be bought and sold in the marketplace in
a competitive manner, just like other commodities.

 Privatization
Usually the motive was the government’s firm conviction that private industry could do a better job of run-
ning the power industry. This belief, of course came from better privatization experiences of the other in-
dustries. Deregulation does not necessarily have to be a part of privatization efforts. The deregulation to
free up the rules nearly always accompanies privatization.

 Cost is expected to drop

Competition brings innovation, efficiency, and lower costs. The rate of cost decline is different in different
areas. The reasons for this are manifold. The overall experience all over the world is that the electricity pri-
ces have declined.

 Customer focus will improve

Although monopoly franchise utilities have an obligation to serve all customers, that does not promote the
pro-active attention to customer needs. A monopoly franchise utility listens to its customers when they ex-
plain their needs, and then responds. A competitive electric service company anticipates customer’s needs
and responds in advance. The technological advances that will be applied under deregulation, address cus-
tomer service. More important gain of competition in the electricity market is the customer value rather
than lowering the cost.
 Encourages innovation
The regulatory process and the lack of competition gave electric utilities no incentive to improve on yester-
day’s performance or to take risks on new ideas that might increase customer value. If a new idea succeed-
ed in cutting costs, the utility still made only its regulated rate of return on investment; if it didn’t work, the
utility would usually have to ‘eat’ a good deal of the failed attempt, as imprudent expenses. Furthermore,
why would a regulated utility want to use new ideas to lower its costs under a regulated rate of return
framework?

Under deregulated environment, the electric utility will always try to innovate something for the betterment
of service and in turn save its costs and maximize the profit. By means of this, the utility will try to ensure
that it will maintain its customer base in spite of competition.
Some other forces supporting the main reasons for motivating the deregulation can also be enlisted as fol-
lows:
 Overstaffing in the regulated electric industry.
 Global economic crisis
 Political and ideological changes
 Managerial inefficiency in the regulated company
 Lack of public resources for the further development
 More demanding environment issues
 Pressure of financial institutes

It is unfair to blame the electric utilities for their unwillingness to take risks, and their lack of technological
progress and lower customer focus under regulation. They were simply responding to the system of rules
set down by government. The problem was with the regulatory system, itself. It had provided growth and
stability when that was needed. But, too much stability means stagnation and that was the ultimate result in
the electric utility industry.
Thus, what needed to be fixed was the regulatory framework, and, hence deregulation.

1.2.3 Structure of Deregulated Power System

In the new structure, generation companies (GENCO) can be separately owned and compete to sell energy
to consumers, and are no longer controlled by the same entities that control the transmission system. Trans-
mission companies (TRANSCO) move energy over high-voltage lines. Distribution companies (DISCO)
move energy at the retail level and may aggregate retail loads. These entities must work cooperatively
to provide cost-effective and reliable electric power supply. Independent entities designated as Independ-
ent System Operators (ISO), coordinate the activities of the GENCO, TRANSCO, and DISCO to ach-
ieve the overall goal of serving the customers.

A GENCO is a regulated or non-regulated entity (depending upon the industry structure) that oper-
ates and maintains existing generating plants. It may own generating plants or interact on behalf of plant
owners with the short-term market (power exchange, power pool, or spot market). GENCO have the oppor-
tunity to sell electricity to entities with which they have negotiated sales contracts. They may also opt to
sell electricity to the Power Exchange (PX) from which large customers such as DISCO and aggregators
may purchase electricity to meet their needs. In addition to real power, GENCO may trade reactive power
and operating reserves. GENCO communicate the need for generating unit outages for maintenance
to the ISO within a certain time (usually declared by the ISO) prior to the start of the outages. The ISO
then informs the GENCO of all approved outages.

Figure 1.2 Unbundling of Power System

A TRANSCO transmits electricity using a high-voltage, bulk transport system from GENCO to DIS-
CO for delivery to the customers. It is composed of an integrated network that is shared by all par-
ticipants and radial connections that join generating units and large customers to the network. The
use of TRANSCO assets is under the control of the regional ISO, although the ownership can
continue to be held by the original owners in the vertically integrated structure. TRANSCO are
regulated to provide non-discriminatory connections and comparable service for cost recovery. A
TRANSCO has the role of building, owning, maintaining, and operating the transmission system in a
certain geographical region to provide services for maintaining the overall reliability of the electrical
system. The ISO handles the operation and scheduling of TRANSCO facilities. Transmission maintenance
and expansion is coordinated between the TRANSCO and the ISO. A TRANSCO advises the ISO of the
list of required equipment maintenance outages, or any changes to the scheduled outages, within a certain
time (usually declared by the ISO) prior to the start of the outages. The ISO then informs the TRANSCO of
all approved outages.

A DISCO is an entity that distributes electricity through its facilities to customers. It constructs and main-
tains distribution wires connecting the transmission grid to the customers. A DISCO has the responsibil-
ity of responding to distribution network outages and power quality concerns. A DISCO coordi-
nates its functions with the TRANSCO and the ISO to ensure the flow of energy. They are respon-
sible for maintenance and ancillary services including coordination with the ISO, and generally perform
metering, billing and collection services.

The ISO is a neutral operator responsible for maintaining the instantaneous balance of the system. The
ISO performs its function by controlling the dispatch of generation and giving orders to adjust or cur-
tail loads to ensure that loads match available generating resources in the system. Although the
ISO’s responsibilities differ among restructuring models, in general, the objective is to guarantee a
comparable and non-discriminatory access by power suppliers and users to regional electric trans-
mission systems. The ISO should be independent of any participants with commercial interests in the sys-
tem operation. It has the operational control of the transmission grid components, administers system wide
transmission tariffs, maintains and ensures system reliability, coordinates maintenance scheduling, and has
a role in coordinating long-term planning.

The ISO should collect all generation and transmission planned outage requests from market partici-
pants, i.e., GENCO and TRANSCO. It should review all submissions of planned outages based on operat-
ing reliability criteria and the time/date of request for maintenance and then decide whether to permit,
deny, or adjust planned outage schedules to preserve the system reliability. The electric utility in-
dustry is moving to new planning criteria in the new market environment where broader engineer-
ing considerations of transmission access and risks must be explicitly addressed. Specifically, the
likelihood of the occurrence of worst possible scenarios must be recognized in the analysis and the
acceptable risk levels incorporated in the decision-making process [5]. Intense competition in pow-
er markets will result in more complicated facility maintenance scheduling and create additional
pressure on the GENCO and the TRANSCO to create optimal maintenance schedules for their facilities. It
is imperative to develop efficient decision-making tools for the GENCO, the TRANSCO, and the
ISO to create the most appropriate maintenance schedules in a competitive situation.

1.2.4 The Competition

In a deregulated environment, two levels of competition exist, rather, encouraged. At what can be termed
as wholesale level, GENCO produce and sell bulk quantities of electric power. Power is typically sold in
bulk quantities to other companies or very large industrial customers, through some deregulated power
market mechanism. The GENCO bid their power at the marketplace so as to maximize their profits.

Locally, retail delivery is accomplished by retailers, who compete for the business of the consumers in the
area by offering low price, good service and additional service features. These are the companies buying
power at the wholesale level and arranging for transport to each community where they do business, so that
they have power to divide up and sell to individuals locally. Thus, a restructured, completely competitive
electric industry is a sandwich of competition above and below a power delivery system. This structure can
be conveniently divided into wholesale and retails levels. The important thing to note is that the power de-
livery i.e. transmission and distribution remains the monopoly franchise. This is shown in figure 1.3.

Figure 1.3 The Competition

1.2.4.1 The Wholesale Power Marketplace

In order for a deregulated power industry to work well, apart from the entities discussed earlier, two addi-
tional entities or functions must be created:
 Power Market: There must be some way for power producers to sell their power, and for buyers to
buy the power.
 System Operation: The transmission system can move power from sellers’ site to the buyer’s loca-
tions, but it must be kept under proper control on a real time basis.

Both of these functions must be accomplished in one form or another in every deregulated electric power
industry. Both require objectivity and equality of operation towards all competitors. None of the competi-
tive companies involved (GENCO, RESCOS) can possibly serve either of these roles. System operation
can be accomplished by TRANSCO and DISCO, under some types of deregulated structure, but the power
market is a concept that was completely unfamiliar to the power industry prior to deregulation. For this rea-
son, deregulation usually requires that one or more new entities be created in one form or another.

1.2.4.2 The Market Place Mechanisms

Under deregulation, some system must be put in place where competitive sellers of electricity can offer
their product (i.e. power) and transact sales. There are three basic ways in which it can be done: POOLCO,
Bilateral Trading and Power Exchange. Often these are combined in different ways to form a composite
mechanism.
 POOLCO
There is only one buyer in this system. The POOLCO is a governmental or quasi-governmental agency that
buys for everyone, taking bids from all sellers and buying enough power to meet the total need, taking the
lowest cost bidders. The POOLCO operator also has responsibility for running the power system, and is
thus a combined buyer-system operator.

 Bilateral Exchange
In this type of multi-seller/ multi-buyer system, individual buyers and sellers make a deal to exchange a
power at prices and under the conditions they agree to, privately.
 Power Exchange (PX)
The Government sets up, or causes the power industry to establish, a trading exchange for electric power,
which operates much like a stock exchange. The buyers and sellers enter their needs into the power ex-
change. For example, a buyer would say, “I need up to 200 MW at 1600 hours IST. I would pay Rs. 3.5/
KWhr, whereas, the seller would enter his demand as, “I have 400 MW and would like to sell it at Rs.4/
KWhr. When they transact business with the power exchange, buyers and sellers are really talking to the
‘marketplace’ and not the individual buyers and sellers. As in stock exchange, the power exchange con-
stantly updates and posts a market clearing price (MCP), which is the current price at which the transac-
tions are being done. Note that when buyers and sellers communicate to the power exchange, they don’t
know whom they are dealing with. These three market mechanisms are not mutually exclusive. Multiple
combinations of all three could be made to work. It is common for two of these three mechanisms to be
present simultaneously. For example, transactions through Bilateral Exchange are permitted in California,
but Western Power Exchange (WEPEX) was created to permit buyers and sellers to do business with the
marketplace on a real time, next hour or day-ahead basis (Power Exchange).

The details of implementation of these three mechanisms can vary a great deal, too, from one political ju-
risdiction to another. For example, some jurisdictions force the parties to any bilateral power sale agree-
ment to disclose publicly the quantity, the place, the time and the price of their deals. Others don’t. This
disclosure requirement affects the strategies buyers and sellers adopt in the marketplace.

Likewise, the time period of power sales trade through the PX varies from one deregulated system to anoth-
er. Many power exchanges permit trading of power for only day ahead and an hour ahead trading. Anyone
wanting longer term purchases must find an entity with which to make ‘bilateral deal’. Other power ex-
changes permit buyers and sellers to make deals of power for longer periods, even months or years. But re-
gardless, every competitive power industry establishes a ‘power marketplace’ with some form of one or
more of the three structures discussed.

1.2.4.4 Energy Auction and Competitive Bidding

In a competitive electricity market, the sellers and buyers submit bids for energy buy and sell. The bids are
generally in the form of price and quantity quotations and specify how much the seller or buyer is willing
to buy or sell and at what price. After the bids are available to the market operator, it settles the market
based on some criteria. Once the market is cleared, all selling participants receive a uniform price for their
power delivered, i.e., the market price from the buying participants. In case of an auction, where all win-
ning bidders are offered the same price without discrimination, and regardless of their individual bid, is
known as non-discriminated or second price auction. This is usually, the price of the highest priced bid that
is cleared in the market. The non-discriminated auction provides incentives to bidders to bid their true costs
and avoid guessing the bids of others. On the other hand, in a discriminated auction or first price auction,
all bidders are not offered the same price after the market is settled. The bidders get the price that they had
actually bid for, in the first place. A disadvantage of this system is that, it can give rise to gaming opportu-
nities for the participants thereby providing ample scope for over-bidding and pushing up the market clear-
ing price. Once the buyer and seller bid the amount of energy and the price, the power exchange forms an
aggregate supply bid curve for suppliers and aggregate demand bid curve for consumers. The curves are
plotted on the coordinates of, supply and demand energy and price as shown in the figure 1.4.

Figure 1.4 Supply and Demand MWHr

The point of intersection of the two curves determines the market-clearing price (MCP). At this point, the
supply satisfies the demand.

The MCP is the price of electric energy that is paid by consumers at all the places. The sellers are also paid
the price equal to the MCP. Consider the power exchange auction. MCP is the highest sell bid or lowest
buy bid accepted in the auction. Thus, a seller is certain he will be paid no less than its cost of production if
he bids its marginal cost, and may be paid more. If a seller bids less than his marginal cost, he would lose
money because his bid may set the MCP. If he bids more than his marginal cost, he may bid more than oth-
er sellers and fail to be selected in the auction. If the seller’s bid sets the MCP then he would recover his
running cost and if the MCP is higher than his marginal cost, then he would earn profit or contribution to
fixed cost. Buyer itself makes similar considerations.

1.2.4.5 Market Models

There are mainly two models of deregulation presently preferred in the various countries all over the
world. The POOLCO model adopted primarily in UK, and the ISO model adopted in Nordic pool and Cali-
fornia in US. The various countries like Australia, New Zealand and European Union are employing one of
the two models with minor changes to meet their specialized demands.
 Pool model
The UK model is monophony, i.e., there is only a single buyer for all the energy generated by GENCO.
The buyer here is a POOLCO, which also operates the system. So, UK POOLCO is responsible for inviting
bids for energy and deciding the energy price for a particular period in the future markets like day-ahead
market. It is also responsible for real time operation of the system; hence it also buys ancillary services.

The way, UK market works is quite similar to centralized unit commitment and economic dispatch. The
difference is that in traditional unit commitment and economic dispatch the actual cost of the energy gener-
ations are considered but in deregulated environment, the GENCO place price curves of each of its genera-
tors and the actual cost is hidden from general knowledge. POOLCO being the system operator and auc-
tioneer as well, takes care of network congestion at the auction level itself in a manner similar to the eco-
nomic dispatch. Participation in the auction conducted by POOLCO is a must for all GENCO. As POOL-
CO is the only buyer, there are no bids from buyer’s side; the auction is single sided auction.

 Open access model

The models used in Nordic Pool and California are examples of this model. The energy auction and future
markets are conducted by an independent entity called Power Exchange (PX) and the system is operated by
another independent body called Independent System Operator (ISO), who
assures equal opportunities to all sellers and buyers through open access to grid. The buyers and sellers
have an option of entering in bilateral transactions or be participants in the energy auction conducted by the
PX. The auction conducted by PX is double sided auction as sellers as well as buyers place the bids. The
sellers and buyers are allowed to place a portfolio bid, i.e. a combined bid for many generators.

1.3 Power System Reliability Evaluation

Power system reliability can be divided into the two aspects of adequacy and security as shown in
Figure 1.5. Adequacy relates to the existence of sufficient facilities within the system to satisfy the custom-
er requirements. It is associated with static conditions and long-term analysis. Security relates to the ability
of the system to respond to disturbances. It is associated with dynamic conditions and short-term analysis.
 Figure 1.5 Subdivision of System Reliability

An overall power system can be divided into the three basic functional zones of generation, transmission,
and distribution. These three functional zones can be organized into the three hierarchical levels (HL)
shown in Figure 1.6.

Reliability assessment at hierarchical level I (HLI) is normally termed as generating capacity ade-
quacy evaluation and is concerned with only the generation facilities. In an HLI study, the total sys-
tem generation including interconnected assistance is examined to determine its adequacy to meet the total
system load demand.

Figure 1.6 Power System hierarchical levels

The transmission network and the distribution facilities are not part of the analysis at this level. Reliability
assessment at hierarchical level II (HLII) involves the analysis of the combined generation and transmis-
sion system in regard to its ability to serve the system load. The reliability of supply at the individual
load points in a composite system is a function of the capacities and availabilities of the individual
generation, transmission facilities, and the system topology. Reliability assessment at hierarchical level
III (HLIII) includes all of the three functional zones and is not easily conducted in a practical sys-
tem due to the computational complexity and the scale of the assessment. This thesis is centered on ade-
quacy assessment at HLII.

Various techniques have been developed and applied over many decades for reliability evaluation of power
system. Most of these techniques are deterministic in nature and some of them still used today. Determinis-
tic criteria were developed in order to account for randomly occurring failures. Their essential weakness is
that they do not and cannot account for the probabilistic or stochastic nature of system behavior, of
customer demands, or of component failures.