S V ENGINEERING COLLEGE

KARAKAMBADI ROAD, TIRUPATI-517507

DEPARTMENT OF ELECTRICAL AND ELECTRONICS
ENGINEERING

LECTURE NOTES

15A02702-POWER SYSTEM OPERATION AND CONTROL

Reulation-R15
Academic Year (2019-20)
Year/semester: IV-I

Prepared by
N.Thirupataiah(Assistant Professor)
Maximum Generation Allocation with line losses neglected (or)
Economic Dispatch neglecting losses
 Optimum Generation Allocation including the effect of Transmission
line losses (or) Optimum Load Dispatch including Transmission losses
 UNIT-V
POWER SYSTEM OPERATION IN COMPETITIVE ENVIRONMENT
Module1: Introduction
The power industry across the globe is experiencing a radical change in its business as well as in an
operational model where, the vertically integrated utilities are being unbundled and opened up for
competition with private players. This enables an end to the era of monopoly. Right from its inception,
running the power system was supposed to be a task of esoteric quality. The electric power was then
looked upon as a service. Control consisting of planning and operational tasks was administered by a
single entity or utility. The vertical integration of all tasks gave rise to the term – vertically integrated
utility. The arrangement of the earlier setup of the power sector was characterized by operation of a
single utility generating, transmitting and distributing electrical energy in its area of operation. Thus,
these utilities enjoyed monopoly in their area of operation. They were often termed as monopoly
utilities.

Why were earlier utilities the ‘monopolies'? The reason for monopoly can be traced right back to the
early days when electricity was comparatively a new technology. The skeptical attitude of the
government towards electricity led to investment by private players into the power sector, who in
turn, demanded for the monopoly in their area of operation. This created a win-win situation for both-
government and the electrical technology promoters. However, the government would not let the
private players enjoy the monopoly and exploit the end consumer and hence introduced regulation in
the business. Thus, the power industries of initial era became regulated monopoly utilities . The
structure of a conventional vertically integrated utility is shown in Figure 1.1. As evident from the
figure, there was only a single utility with whom the customer dealt with. Thus, only two entities
existed in the power business: a monopolist utility and the customer.

Fig 1.1

What does ‘regulation’ mean? The regulations are generally imposed by the government or the
government authority. These essentially represent a set of rules or framework that the government
has imposed so as to run the system smoothly and with discipline, without undue advantage to any
particular entity at the cost of end consumer. All practical power systems of earlier days used to be
regulated by the government. This was obviously so. The old era power industries were vertically
integrated utilities and enjoyed monopoly in their area of operation. Whenever a monopoly is sensed
in any sector, it is natural for the government to step in and set up a framework of way of doing
business, in order to protect end consumer interests. Some of the characteristics of monopoly utility
are:

1. Single utility in one area of operation enjoying monopoly.

2. Regulated Framework: The utility should work under the business framework setup by the
government.
3. Universal Supply Obligation (USO): Utility should provide power to all those customers who
demand for it.
4. Regulated Costs: The return on the utility's investments is regulated by the government.

Reasons for restructuring / deregulation of power industry

The next obvious question is, “what is deregulation or restructuring of an industry?” From the
name, one can sense discontinuation of the framework provided by the regulation. In other
words, deregulation is about removing control over the prices with introduction of market
players in the sector. However, this is not correct in a strict sense. An overnight change in the
power business framework with provision of entry to competing suppliers and subjecting prices
to market interaction, would not work successfully. There are certain conditions that create a
conducive environment for the competition to work. These conditions need to be satisfied while
deregulating or restructuring a system. Sometimes, the word ‘deregulation’ may sound a
misnomer. ‘Deregulation’ does not mean that the rules won’t exist. The rules will still be there,
however, a new framework would be created to operate the power industry. That is why the word
‘deregulation’ finds its substitutes like ‘re-regulation’, ‘reforms’, ‘restructuring’, etc. The
competitive environment offers a good range of benefits for the customers as well as the private
entities. It is claimed that some of the significant benefits of power industry deregulation would
include:

1. Electricity price will go down: It is a common understanding that the competitive prices
are lesser than the monopolist prices. The producer will try to sell the power at its
marginal cost, in a perfectly competitive environment.
2. Choice for customers: The customer will have choice for its retailer. The retailers will
compete not only on the price offered but also on the other facilities provided to the
customers. These could include better plans, better reliability, better quality, etc.
3. Customer-centric service: The retailers would provide better service than what the
monopolist would do.
4. Innovation: The regulatory process and lack of competition gave electric utilities no
incentive to improve or to take risks on new ideas that might increase the customer value.
Under deregulated environment, the electric utility will always try to innovate something
for the betterment of service and in turn save costs and maximize the profit.

The deregulation of the industry has provided electrical energy with a new dimension where it is
being considered as a commodity. The ‘commodity’ status given to electrical power has attracted
entry of private players in the sector. The private players make the whole business challenging
from the system operator’s point of view, as it now starts dealing with many players which are
not under it’s direct control. This calls for introduction of fair and transparent set of rules for
running the power business. The market design structure plays an important role in successful
deregulation of power industry.

Understanding the restructuring process

The process of deregulation has taken different formats in different parts of the world. Also, the
reasons for power sector to adopt the reforms vary from country to country. For the developed
countries, introduction of competition to achieve social welfare was probably the most important
reason. On the other hand, the developing countries mainly banked on the capacity addition through
entry of private players. It is observed that neither, there is lone reson for driving deregulation of
power industry nor is there a single objective of the same.

The restructuring process starts with the unbundling of the originally vertically integrated utility. This
essentially leads to separate the activities involved in an integrated power system leading to creation
of functional partition amongst them. For example, the unbundling of power industry involves
separating transmission activity from the generation activity. Further, distribution can be separated
from transmission. Thus, these three mutually exclusive functions are created and there are separate
entities or companies that control these functions. Then, the competition can be introduced in the
generation activity by allowing other private participants in this segment. In contrast to the vertically
integrated case where all the generation is owned by the same utility, there is a scope for private
players to sell their generation at competitive prices. The generators owned by the earlier vertically
integrated utility will then compete with these private generators. The transmission sector being a
natural monopoly is most unlikely to have competing players in the sector. This is because for natural
monopolies like transmission companies, the business becomes profitable only when output is large
enough. Figure 1.2 shows the representative structure of deregulated power system. In contrast to
the vertically integrated utility structure, it can be seen that there are many alternative paths along
which the money flows. It is evident that there are many more other entities present, apart from the
vertically integrated utility and the customers. It should be noted that there can be many more
versions of deregulated structure.
Various Entities Involved in Deregulation:

The introduction of deregulation has introduced several new entities in the electricity market place and
has simultaneously redefined the scope of activities of many of the existing players. Variations exist
across market structures over how each entity is particularly defined and over what role it plays in the
system. However, on a broad level, the following entities can be identified:

1. Genco (Generating Company): Genco is an owner-operator of one or more generators that

runs them and bids the power into the competitive marketplace. Genco sells energy at its sites
in the same manner that a coal mining company might sell coal in bulk at its mine.
2. Transco (Transmission Company): Transco moves power in bulk quantities from where it is
produced to where it is consumed. The Transco owns and maintains the transmission facilities,
and may perform many of the management and engineering functions required to ensure the
smooth running of the system. In some deregulated industries, the Transco owns and
maintains the transmission lines under the monopoly, but does not operate them. That is done
by Independent System Operator (ISO). The Transco is paid for the use of its lines.
3. Discom (Distribution Company): It is the owner-operator of the local power delivery
system, which delivers power to individual businesses and homeowners. In some places, the
local distribution function is combined with retail function, i.e. to buy wholesale electricity
either through the spot market or through direct contracts with Gencos and supply electricity
to the end use customers. In many other cases, however, the Discom does not sell the power.
It only owns and operates the local distribution system, and obtains its revenue by wheeling
electric power through its network.
4. Resco (Retail Energy Service Company): It is the retailer of electric power. Many of these
will be the retail departments of the former vertically integrated utilities. A Resco buys power
from Gencos and sells it directly to the consumers. Resco does not own any electricity network
physical assets.
5. Market Operator: Market operator provides a platform for the buyers and sellers to sell and
buy the electricity. It runs a computer program that matches bids and offers of sellers and
 buyers. The market settlement process is the responsibility of the market operator. The
market operator typically runs a day-ahead market. The near-real-time market, if any, is
administered by the system operator.
6. System Operator (SO): The SO is an entity entrusted with the responsibility of ensuring the
reliability and security of the entire system. It is an independent authority and does not
participate in the electricity market trades. It usually does not own generating resources,
except for some reserve capacity in certain cases. In order to maintain the system security
and reliability, the SO procures various services such as supply of emergency reserves, or
reactive power from other entities in the system. In some countries, SO also owns the
transmission network. The SO in these systems is generally called as Transmission System
Operator (TSO). In the case of a SO being completely neutral of every other activity except
coordinate, control and monitor the system, it is generally called as Independent System
Operator (ISO).
7. Customers: A customer is an entity, consuming electricity. In a completely deregulated
market where retail sector is also open for competition, the end customer has several options
for buying electricity. It may choose to buy electricity from the spot market by bidding for
purchase, or may buy directly from a Genco or even from the local retailing service company.
On the other hand, in the markets where competition exists only at the wholesale level, only
the large customers have privilege of choosing their supplier.

Module2:Fundamentals of Economics
The commodity market started with the barter system and eventually developed to the era of
electronic trading systems. In simple words, a market is defined as a meeting place for buyers and
sellers to strike a deal. The technological advances have progressed to such an extent that now-a-
days, a deal for a commodity can be struck with a click of a mouse. This is the concept of a virtual
market place that has the potential of eliminating a physical market place. Microeconomics is the
branch of economics that deals with how households or firms make decisions and how they interact in
the markets. The restructured power systems treat electric energy as a commodity rather than a
service as in vertically integrated systems. As in the case of any other commodity, the behavior of
consumer and suppliers in electricity markets are analyzed using the concepts of microeconomics. This
chapter is aimed at providing some fundamental concepts associated with microeconomics that are
relevant to electricity market. We start by modeling consumer behavior, followed by supplier behavior
modeling. Later on we will see how these behaviors set equilibrium at the marketplace.

Consumer Behaviour

Total Utility and Marginal Utility

It is a common practice to explain concepts of microeconomics using common consumer goods as an

example. However, we will explain it by considering number of units of electrical energy as a
commodity. This would help the reader to relate things later on while studying concepts associated
with electric power markets.

Total utility and marginal utility

We begin with the notion that the consumer achieves some satisfaction from consuming a product,
electric energy in this case. If this satisfaction is absent, the consumer would not demand it at all. This
term is called total utility. Similarly, marginal utility is the utility obtained from the last unit consumed.
Let us explain these terms with the help of an example.

Let there be a square shaped room as shown in Figure 2.1. Small circles in the figure represent
incandescent lamps located at the same height from the ground, as a source of light for the whole
room. Suppose there are nine lamps in all, fitted in the room as per the plan shown in the figure. Let
us assume that all lamps are of the same rating and illuminance (a scientific word for brightness).
When all lamps are off, there is complete darkness in the room. Let us assume that there is an
interlock arrangement in the switchgear such that for putting lamps ON at L level, the lamps at M level
should be ON. Similarly, for putting lamps at M level ON, the central lamp - C should be ON. Now
suppose a person enters the room and puts lamp C ON. Since this lamp is at the center, it spreads
even light all across the room. This light is good enough for a person to move to each and every
corner of the room. Let us assume that the ‘satisfaction' this person gets by putting lamp C ON is 10
units.

Now suppose the person switches the lamp - M1 ON. This bulb still adds to the brightness of the room,
but the satisfaction that it adds to the person is lesser than that provided by lamp C. For this lamp,
the person in the room may not get a satisfaction of 10 units, but it will definitely be lesser than 10
units as room is already lit from the state of total darkness by lamp C. Let us say the person gets
satisfaction equal to 9 units. Similarly, for all lamps sequentially put ON thereafter would render
diminishing satisfaction to the person in the room. This satisfaction for each of the lamps lighted is
nothing but the marginal utility. For first lamps C, it was 10 units, for subsequent lamps it went on
reducing. Let us define total utility as the sum of marginal utilities.

Figure 2.1:Room with lamp positions

The results of marginal and total utility gained by putting lamps on sequentially are tabulated in Table
1

No. of Marginal Total

Lamp
Lamps utility utility

- 0 - 0
 C 1 10 10

M1 2 9 19

M2 3 8 27

M3 4 7 34

M4 5 6 40

L1 6 5 45

L2 7 4 49

L3 8 3 52

L4 9 2 54

Table 2.1: Marginal and total utility after putting the lamps on
Law of Diminishing Marginal Utility

The above pattern of marginal utility provided by sequence of putting bulbs on is called as law of
diminishing marginal utility. It states that after consuming a certain amount of a good or service, the
marginal utility from it diminishes as more and more is consumed. This law is quite natural and should
hold for most of the products one consumes.

Consumer Surplus

The person entering the room in the previous example would have been indifferent to the number
lamps to be put ON had electricity been for free. Then the person would not have bothered about the
marginal utility and the total utility. But as soon as the person is made to pay for the usage of electric
energy, he would start thinking and would rather make a judicious choice about how many lamps to
put on. The person then would have calculated how much utility he could have obtained if he had
spent same amount of energy on other usage, for example say, air conditioner. In other words, how
many lamps the person would have put ON depends not only on the marginal and total utilities but
also on the price of electricity.

Market Demand Curve

The relation shown in Figure 2.2 is termed as individual demand curve. It is easy to infer
that the peculiar nature of this curve is due to law of diminishing marginal utility. Thus, the
demand curve can be termed as marginal utility curve. If, instead of the discrete demand
curve as shown in Figure 2.2, a continuous function is established, the nature of the curve
will be the one with negative slope or downward sloping.

It is unlikely that all the persons entering the dark room will feel the same marginal utility
with each of the lamps. If we aggregate the individual demand curves of sufficiently large
number of consumers, the discontinuities of Figure 2.2 will be smoothened and will give a
market demand curve or the demand function. This is shown in Figure 2.3.
 Figure 2.3: Demand function
Demand Elasticity

The downward sloping demand curve can be seen from a different perspective. It
emphasizes that a small increase in the price of a commodity will decrease its demand. The
rate of change of the demand curve with respect to price would surely quantify the change.
However, to make the changes comparable, the percentage changes rather than absolute
changes are computed. Thus, the price elasticity of demand becomes the ratio of relative
change in demand to the relative change in price. It is given as:

............................................................................................(2.1)

Where ε depicts elasticity, π price and q, the quantity.

The price elasticity of demand can be defined as a measure of how much the quantity
demanded of a good responds to a change in the price of that good, computed as the
percentage change in quantity demanded divided by the percentage change in price.
Downward sloping demand function of Figure 2.3 and equation 2.1 together depict that the
price elasticity of demand will be a negative number. Many a times, elasticity is presented
as an absolute value by dropping a minus sign. Measuring demand responsiveness then
becomes a simple task. If the elasticity number is higher, higher is the demand
responsiveness. We follow the convention with negative sign in-tact. Various cases of price
elasticity of demand are established in Table 2.3.

Sr. Elasticity Type of

No. Range Elasticity

Perfectly
1 ε=0
inelastic

2 -1 < ε < 0 Inelastic

3 ε = -1 Unit elastic

-∞<ε<-
4 Elastic
1
 5 ε=-∞ Perfectly elastic

Table 2.3: Various cases of demand elasticity

Supplier Behaviour

Law of Diminishing Marginal Product:

Just as we have law of diminishing marginal utility in case of consumer, we have law of diminishing
marginal product for supplier. This law establishes the input-output relationship for the producer in
short-run. This law is depicted in Figure 2.5

Figure 2.4: Various cases of demand elasticity

Supply Function

Suppose, the total commodity output is called as y. Let us assume that there is only one factor of
production, ‘x'. Thus, the production function is given as

y = f(x).........................................................................................................................(2.2)

For almost all goods and technologies, the production y increases with x at the beginning. But as
cheaper resources start depleting, costlier resources are employed for production and for the same
quantity of production, the cost starts increasing. In other words, the rate of increase of y decreases
as x gets larger. The inverse of production function will be:

x = g(y).......................................................................................................................(2.3)

This function indicates how much of the variable production factor is required to produce a specified
amount of commodity. If unit cost of factor of production x is w, then, the cost function is given as:

cos t (y)= w. g(y)...............................................................................................................(2.4)

Figure 2.6 shows cost function and the marginal cost function which is the derivative of the cost
function. The convexity of the function is due to law of diminishing marginal product.

Figure 2.6: Cost function and marginal cost function

Supply functions

Suppose there are many suppliers and they make use of different technologies and fuels to produce
electric energy. Thereby, these producers will have different marginal costs and will have different
power producing quantities at different price levels. If the amount supplied by a large number of
producers is aggregated, a smooth and upward sloping curve is obtained as shown in Figure 2.7. This
is typically known as supply curve.
 Figure 2.6: Cost function and marginal cost function

Module 3: Philosophy of Market Models

Creating trading arrangements to exchange a commodity called electrical energy adds complexity to
the overall process of generating and transferring the same to the end customer. Deviating from a
vertically integrated structure towards unbundled operation requires structural and constitutional
changes. This is true for any commodity market that is undergoing the paradigm change. In this
module, we discuss various market models for trading of electricity and the need for designing the
same. Eventually, we answer the following important questions:

• What are the possible ways in which buyers and sellers can trade electrical energy?
• Which section of consumers has a choice of selecting their energy provider?
• What are the peculiarities of electricity that make market arrangements of this commodity different
from other commodities?
• What is the role and involvement of system operator in the market decisions?

Philosophy of market models is influenced by the multiple ways in which the above questions can be
answered. In this module, first we explain choices of industry structures for trading of electricity.
Next, we present the peculiarities associated with electricity and discuss how these characteristics
influence the market design. The peculiar characteristics of electricity lead to evolvement of various
markets in which the same electricity is treated as a different product. The arrangement of these
markets and their alignment and linkage with main energy market is an issue of market architecture.
The market architecture intricacies are discussed in detail.

MARKET MODELS BASED ON CONTRACTUAL ARRANGEMENTS

As mentioned earlier, unbundling of the conventional vertically integrated power system creates
groups of various commercial and technical activities. Since one of the major aims of deregulation is
introduction of competition, it is worthwhile to explore every avenue where competition can be
introduced. Eventually, competition provides a choice for entities to choose another entity or a group
of entities to do a profitable transaction. In electricity parlance, either the load or an entity
representing a group of loads gets a choice to select its energy provider, or there may exist some
mechanism which would cater to the electrical energy needs of these loads at a competitive level.

The former mechanism essentially requires bilateral involvement of the entities who wish to get into a
power buy and sell contract. In this, the sellers and buyers mutually agree upon the terms and
conditions, including the price and time of delivery. A repetitive bilateral interaction between buyers
and sellers may lead to an equilibrium point where everyone is happy. Alternatively, a similar result
would be obtained if a common exchange for the commodity is set up, where, buyers and sellers,
instead of interacting with each other, communicate their expectations to this marketplace. This
represents a simultaneous market clearing process and a common market price of electrical
commodity.

While moving from a vertically integrated structure to a competitive one, various policy and structural
issues crop up. One of the important concerns is regarding the entity that should be allowed to take
part in competitive activity. Similarly, issue of rearrangement of various elements of power system,
when a new set of rules is introduced to buy and sell power, also needs to be addressed. It is obvious
that the commercial arrangements and virtual boundaries between various functional entities can take
many shapes and forms. Consequently, various models can be classified according to the levels at
which the entities are given the choice of buying or selling electricity.

Various trading models can be proposed based on the above discussion. The choice of choosing a
model is a policy decision and is dominated by various prevailing conditions. They need to be
accounted for before making structural changes. In [1], four basic models of industry structure are
suggested. These are:

1. Monopoly model
2. Single buyer mode
3. Wholesale competition model
4. Retail competition model

Every model needs different amount of structural change and rearrangements of functions in the
industry. These models are discussed next.

Monopoly Model

In this model, a single entity takes care of all the businesses such as generation, transmission and
distribution of electric power to the end users. One of the versions of this model is shown in Figure
3.1(A). In this, a single utility integrates the generation, transmission and distribution of electricity.
Usually (but not necessarily), in this kind of model, the monopoly lies with the Government. It is quite
natural that this kind of model should have strict regulation in order to protect end consumers against
monopoly. Most of the electric power systems followed this model prior to deregulation.

Another version of the monopoly model is shown in Figure 3.1(B). In this model, generation and
transmission are integrated and operated by a single utility and it sells the energy to local distribution
companies, which themselves represent local monopolies.
 Figure 3.1: Two different versions of monopoly model
Single Buyer Model

In this model, as shown in Figure 3.2, there is competition in the wholesale sector, i.e., generation.
Here, the single buyer agency buys power from Independent Power Producers (IPPs) in addition to its
own generation. The power purchasing agency in turn sells it to state distribution utilities or
distribution companies in the service area. All power generated by generating companies (Gencos)
must be sold only to a purchasing agency and not to any other agency. Distribution companies
(Discoms) are only able to purchase from the single buyer agency. They do not have a choice of
choosing their power supplier.

In this model, sales from power pool to retailers take place at a pre-set tariff price. The single buyer
or the existing utility makes a long term contract with IPPs. A contract is necessary because, without
it, a generator would be reluctant to invest large amounts of capital in a generating plant. The
contracts are generally of life-of-plant type, indicating sale of all capacity of generating units for its
lifetime.

Figure 3.3 shows another version of this model, which has further evolved from the original single
buyer model. In this model, the single buyer does not own any generation and buys all the power
from IPPs. The distribution and retail activities are also disaggregated. This model has an advantage of
introducing some competition between generators without the expense of setting up a competitive
market. The tariff set by the purchasing agency must be regulated because it has monopoly over the
Discos while monopsony over the IPPs. The single buyer model is looked upon as a way of attracting
private participation in the generation sector, especially in the developing countries.

In this model, transmission and distribution network can be owned and operated by State and
Regional transmission utilities. Inter-state tie line should be sufficient to maintain a loose regional
power pool. Merits and demerits of this model are as follows:

Merits:

• Private participation in power generation

• Introduction of some competition without expensive set up for a competitive market.

Figure 3.2: Single buyer model

Demerits:

• Long term contracts. Setting up a contract is problematic.

• No true competition.
• Price is not decided by demand-supply interaction.
• End consumers' price is regulated .

Wholesale Competition Model

This model is one step closer towards competition. There is an organized market in which the
generators can sell their energy at competitive rates. The market may be organized either by a
separate entity or may be run by the system operator itself. There is not much choice for the end
user. The end user is still affiliated to the Discom or retailer working in that geographical area of
operation. The large customers or the bulk customers, so to say, are privileged to choose their energy
provider. However, the definition of bulk customer is a subjective matter and changes from system to
system.
 Figure 3.3: Single buyer model with only IPPs

this model, as shown in Figure 3.4, provides the choice of supplier to Discoms, along with competition
in generation. Implementation of this model requires open access to the transmission network. Also, a
wholesale spot market needs to be developed. Since this model permits open access to the
transmission wires, it gives the IPPs to choose an alternative buyer. Discoms can purchase energy for
their customers either from a wholesale market or through long term contracts with generators.

The customers within a service area still have no choice of supplier. They will be served by a Discom in
their area. With this model, the Discoms are under Universal Service Obligation (USO), as they have
monopoly over the customers. They own and operate the distribution wires. The transmission network
is owned and maintained either by government and/or private transmission companies. System
operators manage the centrally accomplished task of operation and control.
 Figure 3.4: Wholesale Competition Model

The merits and demerits of this model are as follows:

Merits:

• Choice of seller provided for Discoms and bulk consumers.

• The buyers and sellers can make forward contracts or buy from a wholesale marketplace.
• The price is decided by interaction between demand and supply. Hence, indicates truly
competitive price.

Demerits:

• The end consumer still doesn't have a choice. It buys power from the affiliated Discom.
• Rates for end consumers are regulated rather than competitive.
• Discoms face competition at wholesale level, while their returns are regulated.
• Structural and institutional changes required at wholesale level.

Retail Competition Model

In this model, as shown in Figure 3.5, all customers have access to competing generators either
directly or through their choice of retailer. This would have complete separation of both generation
and retailing from the transport business at both transmission and distribution levels. Both,
transmission and distribution wires provide open access in this model. There would also be free entry
for retailers. In this model, retailing is a function that does not require the ownership of distribution
wires, although, the owner of distribution wires can also compete as a retailer.
 Figure 3.5: Retail Competition Model

Merits:

• Supposed to be 100% deregulated model.

• Every consumer has a choice of buying power.
• The price is decided by interaction of demand and supply. Hence, it is truly competitive price.
• There is no regulation in energy pricing.

Demerits:
• Need constitutional and structural changes at both, wholesale and retail level.
• Extremely complex settlement system due to large number of participants.
• Requirement of additional infrastructural support.

ELECTRICITY VIS-A-VIS OTHER COMMODITIES

The classification of market models based on contractual agreements discussed in the previous section
can be applied to most of the commodities that are traded in the market, if we assume a certain level
of abstraction by presenting only the buyers and sellers. However, when it comes to ‘electricity' as a
commodity, the same laws of economics or commercial trade arrangements may not hold good. This
is because, electricity as a commodity bears different characteristics from other commodities, or
rather, electricity is physically different from other commodities. This fact complicates the procedure
of electricity trading. In other words, the trade is not as simple as an interaction between two entities:
buyer and seller. The interdependencies of actions taken by various participants (primarily generators
and loads), mandate somebody to takeover the control of real time activities. This somebody is the
system operator, who makes sure that the whole system runs reliably and thus kept in synchronism.
Thus, it is worthwhile to understand the distinguishing features of electricity as a commodity, which
are presented next.

Distinguishing Features of Electricity as a Commodity

There are three basic distinguishing features of electricity. These are associated with electricity due to
its physical nature. These three basic features effectively lead to one distinguishing feature of this
commodity, the one that has commercial implications. Let us see these in details

Real Time Demand Supply Balance

Electricity can not be stored in bulk. Other commodities can be manufactured and kept in a warehouse
until the demand for the same is sensed. A manufacturer of other commodities gets sufficient
flexibility in planning the manufacturing activity and coordinating the dispatch. The same is not true
for electricity. The demand for electricity needs to be satisfied on real time basis.

The parties involved in electricity trade perhaps would like to do it through forward contracts . These
can be contracts for physical delivery or financial in nature. In many power markets, bulk trade of
electricity (> 80%) is done through forward contracts. Forward contracts can be done years ahead.
When a certain amount of electricity is bought in the forward contract, it is the estimate of the buyer,
how much it is likely to consume during actual delivery time. However, in real time, the actual
consumption may not match the predicted consumption that had been forecasted at the time of doing
forward trade. This difference is called as imbalance. Knowledge about this imbalance is exposed only
during real time operation or slightly before that. In this case, the system operator or some other
market mechanism stands ready to make up the imbalances (either on positive or negative side).

Due to storage limitation, the supply-demand matching decision needs to be done on a competitive
basis by letting supply and demand interact with each other. The operator buys and sells these
imbalances through some commercial mechanism. Due to this feature of electricity, an issue related to
the speed of operation pitches in. The system operator, while making a provision for imbalances, has
to take into consideration various network interdependencies. The system operator always has to
communicate with the active participants to tell them which generators should increase their output
and which ones should decrease it. This activity is called scheduling in advance and dispatch in real
time. Since the system operator has to work with seconds to spare, a delivery system to make up for
imbalances has to be in place. In real time, the only time available with system operator is what is
allowed by the energy stored in rotating masses of huge interconnected grid.

Thus, this exceptional feature of electricity leads to two issues related to power market design:
Imbalances and Scheduling and Dispatch. The question is how these difficult tasks get reflected in the
rules of marketplaces.

Power Flows Obey Laws of Physics

The electric power can not be told as to where and how it should travel, once the injection and take-
off points are decided. The electric power flow over transmission lines obey laws of physics.
Effectively, electric power can not be stopped from flowing on a transmission line that is already
hitting its power carrying capacity. The system operator has to ensure that none of the lines get
overloaded. To do this, only freedom left with it is the selection of pattern of nodal injections (either
generation or load).

Thus, any arbitrary set of forward contracts can not be scheduled by the system operator as this may
lead to exceeding of limits of physical parameters of some of the power system elements. Allowing
only the practically feasible set of transactions during scheduling and further making corrections while
dispatching so as to keep line loadings within limits is usually termed as congestion management.

Figure 3.6: Concept of network congestion

Generator Product Compatibility and Interactions

To ensure reliable delivery of electricity, only generation by generators at injection points and
take-off by loads at take-off points is not sufficient. The system operator must make
arrangements for provision of allied services necessary to do this. These allied services are
usually referred to as the ancillary services. Provision of reactive power, operating reserves
are some of the commonly required ancillary services. Mostly, ancillary services are provided
by generators. In this case, one is likely to witness the interdependencies involved in providing
these services. In other words, the production of ancillary services is also dependent on
production of energy. Then, the same generator is said to be providing two different products:
energy and ancillary services.

This complicates the matter because the single generator can be simultaneously needed to
produce multiple outputs, or to produce ancillary service rather than energy. This complication
is shown in Figure 3.7, where, a generator's capacity is divided into various products. The
defining question is how much of capacity should be allocated to each product? In centralized
markets (explained later), the system operator does a joint optimization, taking into account
various technical and commercial parameters of a generator to allocate it's full capacity to
each of the products. module 6 is devoted to ancillary service management where these issues
will be discussed more elaborately.
Figure 3.7: Generation capacity allocation to various products

Unusual Price Variation

The combined effect of various peculiarities of electricity is that it has large temporal variation in
its price. It is not prudent to run all generators throughout the day. Rather, the most
economical generators can be run throughout the day. Effectively, the price of electricity will
be low during low demand period. However, during peak demand situation, the costly
generators are brought on-line and the price of electricity goes high. Thus, marginal cost of
producing energy will vary throughout the day. Such rapid cyclic variations in the price of a
commodity are unusual, and arise due to peculiarities associated with electricity, basically, the
characteristic of matching supply and demand on real time basis. It should be noted that this
peculiarity of electricity has arrived because of one of the basic physical properties associated
with it.

Effects of Peculiarity: Four Pillars of Market Design

We have seen the characteristic features of electricity when compared with other commodities.
How do these affect the trading activities of this commodity? For example, what if network
congestion does not allow a set of transactions to be feasible? Should the generator sell its
generation capability in a single market that makes provision for energy as well as reserves,
or should there be different markets for the same? Some subtle questions like these provide
food for thought when designing criteria of markets are to be determined.

Hunt in [1] has described the design issues arising out of characteristics of electricity as pillars of
market design. These are:

• Imbalance
• Scheduling and Dispatch
• Congestion Management
• Ancillary Services
Figure 3.8 shows four pillars of market design arising due to the basic characteristics of electricity.

Figure 3.8: Four Pillars of Market Design