Pokhara University

Faculty of Science and Technology

Master of Science in Electrical Engineering in Power System
(M. Sc. EEPS)

Power Market and Deregulation

Chapter 3

Deregulation and Reconfiguring Power Systems

(i)
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 3.1 Deregulation (Reconfiguring Power Systems)
Traditionally, utilities were ‘regulated monopoly’ business and their structure was
vertically integrated. The power sector was characterized by operation of a single
utility generating, transmitting and distributing electrical energy in its area of operation.
Electric power was looked upon as a service and not a commodity.
- Power industry was economical only in large and centralized form and needed
massive investment.
- Monopoly status was granted to companies to protect their large investment.
- Single utility in one area of operation and universal supply obligation (USO)
- Regulations were introduced to prevent utilities misusing their monopoly and
harming the customers.

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 Generation

Owned by the
Inter utility sales Transmission same
company

Distribution
Money Flow
Energy Flow
Customer
Information Flow

Typical Structure of a vertically Integrated Company

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 3.1.1 Need for Restructuring (Deregulation):
 Monopoly status of utilities didn’t provide any incentive for efficient operation of the
system.
- Privately owned utilities imposed all the costs on the consumers and power became
expensive.
- In case of government owned utilities, factors like overstaffing and corruption
resulted in sluggish performance.
So economists envisioned a competitive market of electricity.
 No competition, no innovation
 Advances in power generation technologies
Cost effective power generation is now possible in small scale too. Wind power, Solar
PV, etc. have developed into sizes which can’t be neglected. So an opportunity was
created for private players (small and medium investors too) to generate and sell it to
the utilities.

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 Electricity price ‘then’ and ‘now’ ~

Centralized System Deregulated System

 Generation, transmission  Price of electrical energy
and all other costs and  Price of energy delivery
wholly charged to the  Price of other services such as frequency
customer regulation and voltage control
- priced separately and charged independently
- may not be visible in the electricity bills

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  So ‘Restructuring’ means ‘Reorganization of company/sector in response to a change
in market condition.
Goals:
 Reducing electricity cost
 Competitive market, choice for consumers
 Attracting private capital
 Maximizing public revenues from the sale of government owned assets
 Creating environmentally sustainable electricity sector
 Innovation: Due to competition, utilities will try to develop new innovative
equipment and processes to reduce their cost of operation. This will propel
technological development of the power industry.

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 Typical Structure of a Deregulated Electricity System

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 Constraints:
Electricity: ‘Physics’ first, market only after that
Existing subsidy: subsidized customers may oppose
There might be a need for tariff increase for quality supply, which may not be
‘politically’ possible
Reduction in workforce may not be possible due to politics and trade unionism
Infrastructure:
- Sharing of infrastructure already built
- Building new infrastructures
 National security concerns
Pre-requisites:
Non-discriminatory equal access to transmission
Access to information to both buyers and sellers

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 3.1.2 Background to Deregulation and the Current Situation
around the World

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 Deregulation started in developed countries despite having well functioning and
efficient systems.
- To introduce competitiveness in the market
- To reduce and costs and tariffs
Europe - unbundled and privatized the previously monopoly utilities
US – Utilities were predominantly private
Whereas, deregulation in the developing countries was to improve the power sector
which had become very inefficient and lethargic due to excessive political intervention.
They had :
 Inefficiency in generation, transmission, distribution and use
 Irrational pricing policies
 Overstaffing in the utilities
In most of the cases of the deregulation in the developing countries, donor agencies like
WB put pressure on the governments to deregulate the system. ‘Deregualtion’ was
presented as the ‘condition’ for getting loans and assistances.

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 3.1.2.1 USA
Public Utilities Holding Company Act (PUHCA) – 1935
PUHCA was the first act to regulate the utilities. It was enacted after the great
depression, when many companies, including those in energy sector collapsed.
 The Securities and Exchange Commission became responsible for approving a holding
company that wanted to participate in non-utility business.
 Non-utility business had to be kept apart from regulated utility business.
 All companies needed to register with the Securities and Exchange Commission.
 The Securities and Exchange Commission then had to limit the holding company to
ownership of one integrated system.
The Public Utilities Regulatory Policy Act (PURPA) – 1978
 PURPA initiated the deregulation process in US.
 Allowed non-utility generators (NUG) to enter the wholesale power market.
 The act required the utilities to purchase surplus electricity from the NUG at prices up
to its avoided cost.
 NUG capacity increased from 42,000 MW in 1989 to 98,000 MW in 1998.
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US Energy Policy Act (EPACT) - 1992
 Mandated the electric utility industry to become deregulated
 Ordered the Federal Energy Regulatory Authority (FERC) to facilitate this transition
April 1996, FERC issued final rules on Open Transmission Access (Orders 888 and 889),
thereby facilitating the transition and requiring the transcos to allow non-affiliated selling/
buying organizations to access their transmission systems in a non-discriminatory manner.
• Monopoly in transmission eliminated.
• Open access transmission and non-discriminatory tariffs
• Provision of all users the same access to transmission information
FERC issued “Order 2000” (December 1999)
- Transcos required to reorganize into different Regional Transmission Organizations (RTO)
Thus the traditional vertically integrated utilities broke up into various organizations composed
of generation, transmission and distribution entities and they were required to operate
independent of each other.
New entities like ‘independent power marketers’, ‘independent power producers’, ‘independent
system operators’ and ‘power exchanges’ were born.
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 Energy Policy Act – 2005
This act transferred the regulation of utilities from the Securities and Exchange
Commission to the Federal Energy Regulatory Commission (FERC).
FERC to function as the primary regulator for energy within every state across America.
Due to the changes implemented by the Energy Policy Act, several amendments also had
to be made to the PUCHA created in 1935.
2016
Energy deregulation has arrived (at least in some capacity) to close to two dozen
states. Some states have a deregulated electric market, others natural gas, a few with
both. No state is entirely deregulated — Texas comes the closest at nearly 86% of the
state being deregulated.
There are some states that have experimented with deregulation on a trial basis, but have
since suspended these initiatives until the impacts of energy deregulation are better
understood.

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 3.1.2.2 Europe
EU Directive on the
Internal Electricity Market
- 19th February 1999
It was envisaged, over a
period of time, to allow all
large and medium sized
purchasers of electricity to
choose their suppliers freely
from throughout the EU

 Induced full competition amongst

generators immediately leading to
significant price reductions

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BG
  As the result of the opening of the market, cross-border trading is rapidly increased.
 In July 1999, a European body exclusively for transmission system operators was
founded, The Association of European Transmission System Operators (ETSO).
ETSO members include the TSOs from the 15 EU countries, as well as those from
Norway and Switzerland.
 The principal objective of ETSO – “Promote the conditions for an efficient
European electricity market” by
- Formulating an effective regulatory framework for transmission of power between
countries
- Formulating effective price structures for power transmission
According to the EU directive:
~ Investment in power generation and construction of new power plants can be made anywhere within
the EU subject to meeting the set procedures of member countries.
~ Large and medium-sized customers will be able to choose their electricity supplier
~ The transmission and distribution network owners are required to provide access to their lines to others.
Three alternative models have been proposed- regulated third party access, negotiated third party access,
and the single buyer model.
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 The British Power Pool
1988 – Central electricity Generating Board, which owned nearly 60,000 MW of
generation and all the HV lines in England and Wales broken up
- National Power
- Power Gen
- Nuclear Electric
- National Grid Company (NGC)
 NGC responsible for the national transmission system
 14 licensed regional distribution network operators (DNOs) manage the sub-
transmission and distribution networks. These 14 DNOs are owned by six different
groups.
 NGC manages the market by organizing the bidding process, receiving bids, settling
the market price everyday including unit commitment and dispatch. It is also
responsible for tr. System security, reliability, congestion management and setting of
transmission prices.
 Participation of all the generators in the power pool (NGC) is mandatory.

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 3.1.2.3 Nordic Deregulation Process
Sweden:
• Till 1991, the sector was dominated by a company Vattenfall
• It owned about 50% of the total generation and also managed the 400 kV and 220kV
transmission lines, and some large networks at lower voltage levels, down to the
customers. There were about a dozen other large generating companies and 270
distribution companies, which operated the networks at lower voltage levels and often
owned their own generation.
• The large generating companies had a joint agreement- the Pooling Agreement aimed at
optimizing the operation of the generating resources.
 Each power company owned enough generating capacity to be able to meet its dedicated
customer demand during normal operating conditions
 As in all Nordic countries, most of the generating companies used to enter in to direct
bilateral contracts with the customers.

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  Trade was mostly carried out during the day of delivery on an hourly basis, but there
was also a small amount of weekly and monthly trading.
 The price was calculated by splitting the difference between the buyer's and the seller's
declared marginal operation costs at the geographical point of interchange. To be able to
do this, the companies had to have access to the transmission networks to convey the
purchased power to their customers.
 Smaller players did not have any access to the market for supplying power occasionally.

In 1991, the Swedish government removed transmission activities from Vattenfall and
created the state owned transmission company, Svenska Kraftnat, to manage the national
transmission network.
Svenska Kraftnat was assigned the task of promoting competition in the electricity
market. One aim of this reorganization was to open up the national transmission network
and interconnections to all the companies, large or small.
January 1, 1995 – Introduction of new transmission tariff based on the point of connection,
aimed at promoting competition.
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 Norway:
 The Norwegian electricity sector was dominated by small and medium sized
municipality owned power companies, each vertically integrated and supplying to
their own dedicated customers.
 Most of the transactions were on a bilateral basis, between the utility and the bulk
customer
 The system being completely (100%) hydro based, there was enough volatility of
prices, depending upon water availability and therefore a regular mechanism of
power import from Sweden was in place
 Statkraft was the largest player in this market, owning about 35% of the generation,
in addition to the transmission network
 In 1991, transmission responsibilities was divested from Statkraft and passed on to
the newly established company Statnett
 A tariff system called ‘grid access tariff’ introduced as the prerequisite for the
customers’ ability to choose their suppliers freely

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 NordPool: The Nordic Electricity Market

 In 1994, Statnett and Svenska Kraftnat started investigating into the possibility
of a joint Norwegian-Swedish electricity trading exchange.
 NordPool was established in 1996, the first international power exchange in the
world, owned equally by Statnett and Svenska Kraftnat.
 Finland joined the NordPool power exchange in 1998 and Denmark in 1999.
 Nord Pool currently is a nominated Electricity Market Operator in 14 European
countries (Austria, Belgium, Denmark, Estonia, Finland, France, Germany,
Great Britain, Latvia, Lithuania, Luxembourg, the Netherlands, Poland and
Sweden)
 Nord Pool offers both day-ahead and intraday markets
 NordPool is the World’s first multinational power exchange.

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 3.1.2.4 Australia and New Zealand
Australia and New Zealand have models similar to the UK power pool model.
Australia:
 Deregulation started in 1991
 Full fledged National Electricity Market (NEM) came into being in 1998. The
National Electricity Market Management Company (NEMMCO) was entrusted with
the role of the ISO as well as of the market operator
 Selling/purchase is done on half hourly basis
 Provision of ‘direct trading’ (spot market trading, vesting contracts and bilateral
contracts) and ‘secondary hedge market’.
New Zealand:
The New Zealand Electricity Market (NZEM) began its operation on 1st October 1996.
The trading is conducted by the Electricity Market Company (EMCO) based on a day-
ahead settlement from bids submitted at half-hour blocks.

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 3.1.2.5 Japan
Japan power sector is composed of 10 vertically integrated regional utilities.
Although the initial steps towards deregulation started in 1995, the pace was very slow
compared to other developed countries.
 Full fledged deregulation started in 2016.
 Regulated tariffs were planned to be abolished in 2020.
3.1.2.5 China
Five major generating companies and their subsidiaries.
 Three grid operators
- State Grid Corporation of China
- China Southern Power Grid
- Wenzhou CHINT Power Grid
 Deregulation in China is planned in 3 phases, the first phase said to be started in
1985.
 Full deregulation is planned at the end of current 3rd phase.
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 South America: The Initiators
Previously, Mismanagement of the system, sub-optimal pricing strategies, lack of
funds for investment
Chile restructured its power sector in 1982. Other countries like Argentina, Bolivia,
Colombia, Peru and Brazil soon followed.
Impacts:
Losses came down from 21% in 1986 to 8.6% in 1996 (Chile)
Productivity in terms of energy generated per employee almost doubled in Chile’s
largest electricity company Endesa, during the period 1989 to 1996.
Price reduced from $39/MWH in 1994 to less than $32/MWH in 1996 (Argentina)
Model:
Centralized pool and nodal pricing scheme

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 3.1.3 Benefits from a Competitive Electricity Market
Competition → Innovation → Efficiency and Cost Reduction

 Cheaper electricity – attracts more industries

 Efficient capacity expansion planning
 Pricing is cost effective rather than a set tariff
 Cost minimization
 More choice
 Better service
 More diverse employment opportunities

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 3.1.4 Power System Restructuring Models
From worldwide experiences, the power system restructuring models can be
summarized into the following.

Model 1 :Monopoly at all levels

Model 2 :Purchasing Agency
Model 3 :Wholesale Competition
Model 4 :Retail Competition

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 Model 1: Monopoly at all levels

Generation is not subject to competition; no independent

generators exist
Single monopoly company handles the transmission and
distribution
Traditional type of utility structure

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 Model 1: Monopoly at all levels (1)
Vertical Integration

Generator

Wholesaler Owned by the

Inter utility sales same company
/transmitter

Energy sales Distco

Energy flows in the

same company
Customer

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 Model 1: Monopoly at all levels (2)
Separate Retailer

Generator
Owned by the
same company
Wholesaler
Inter utility sales
/transmitter

Distco
Energy sales
Energy flows in the Customer
same company

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 Model 2: Purchasing Agency

Competing independent power producers exist

Only the purchasing agency is allowed to purchase from
generators
No choice for retails and final consumers
Also called “single buyer model”
Design of PPA, a major feature

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 Model 2: Purchasing Agency
(I) Disaggregated version
IPP IPP IPP

Wholesale purchasing
agent

Distco Distco Distco

Customer Customer Customer

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 Model 2: Purchasing Agency
(II) Integrated version

IPP Own generators IPP

Owned by
Energy flow Wholesale purchasing the same
in the same agent company
company

Distco

Customer Customer Customer

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 Model 3: Wholesale Competition
Competition in generation
Choice of supplier for distributor companies i.e. distribution
companies are allowed to purchase directly from IPPs
Open access to transmission
Retail consumers however do not have choice of suppliers.
Hence distribution companies have a monopoly over energy
sales to final consumers

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 Model 3: Wholesale Competition

IPP IPP IPP IPP

Wholesale
market

Distco Distco Distco Distco

Customer Customer Customer Customer

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 Model 4: Retail Competition

Retail consumers can choose the suppliers

Open access to transmission and distribution wires
Competition at generation and retail activities
Spot market essential

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 Model 4: Retail Competition

IPP IPP IPP IPP

Wholesale
market

Distco Distco Distco Distco

Retail
market

Customer Customer Customer Customer

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 Even within the traditional vertically integrated system, a franchise model
can be considered.

Variants of franchise model:

i) Outsourcing of certain activities related to distribution
ii) Revenue collection
iii) Revenue collection and O&M (operation and maintenance)
iv) Input based: Franchise operates on behalf of the utility for reasonable period (e.g.
15 years) and carries out metering, billing, revenue collection and maintains the
assets of the utility
v) Input based and investment: In addition to the activities mentioned in ‘input
based’, the franchise constructs networks for load growth, implements anti-theft
measures, provides new connections and disconnects connections for non-payment.
Franchise would own the assets for the period of contract and would be handed over
to the utility after the termination of contract.

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 3.1.5 Different Entities in the Deregulated Market
The introduction of deregulation has brought several new entities in the electricity
market place and has redefined the scope of activities of many of the existing players.
On a broad level, the entities in a deregulated market are as follows.
Generator companies (gencos): A group of generating units within a single company
ownership structure with the sole objective of producing power, and commonly
referred to as independent power producers (IPP)
Transmission Companies (transcos): Entities which own and operate the
transmission lines
- Transport electricity from the generator to the consumers
- Making transmission lines available tot all the entities in the system
- Charge transmission tariff for their services
Transcos can be national transcos (400 kV and 220 kV) and regional transcos (132
kV).
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 Distribution Companies (discos) : Entities owning and operating the local distribution
network in an area. They buy wholesale electricity either through the spot-markets or
through direct contracts with gencos and supply to the end-use customers.
Customers: An entity which consumes electricity. It may bid and buy from the spot-
market, or may buy directly from the genco or from the local distribution company
Prosumer: Special case of consumers who have installed small DG in their premises.
The local DG production can cover, wholly or partly, the consumption of the owner, and
the surplus can be exported to the main power grid.
Independent System Operator (ISO): An entity entrusted with the responsibility of
ensuring the reliability and security of the entire system.
- independent authority
- does not participate in the electricity market trades
- does not own generating resources (except some reserve capacity)
Market Operator: An entity responsible for the operation of the electricity market
trading. It receives bid offers from market participants and determines the market price
based on certain criteria. The markets may have different trading schemes such as
hourly trading for the next day or trading in futures- weeks, months or years ahead.
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