Restructured Power System

RPS.1
ReSTRUCTURED PowER SvSTEM

INTRODUCTION TO RESTRUCTURING
OF PowER INDUSTRY 1
IMPORTANT QUESTIONNS

PART-A Q.4 List the objectives of restructured power market.

Ans. Objectives of Restructured Power Market:

Q.1 What is meant by regulation? 1. To provide electricity for all reasonable demands
2. To promote competition in the generation and supply
Ans. Regulation: Regulation means government has set ofelectricity.
down laws and rules that puts limits on and defines how a 3 To protect the interests of electricity customers in
particular industry or company can operate respect to prices charged, continuity of supply and the
quality of services provided.
Q,2 What is Deregulation? 4 To promote efficiency and economy on the part of
licenses in supplying and transmitting electricity.
ns. Deregulation: Electric deregulation is the process of
changing rules and regulations that control the electric industry State roles and responsibilities
Q.5 of independent
to provide customers the choice of electricity suppliers who system operators.
are either retailers or traders by allowing competition.

Ans.
Q.3 State some advantages of deregulation. Entity responsible for ensuring reliability, security and
efficient operation
Ans. Advantages of Deregulation 2. Administers transmission tariffs
1. Encourage privatization 3 Coordinates maintenance scheduling
2. Increase competition 4. Independent supreme entity
3. Increase efficient power generation 5. Does not participate in electricity market trades
4. Increase efficient transmission
6. Has authority to commit and redispatch the system
5 Increase efficient distribution resources and to curtail load for maintaining system
6. Restructure Indian power network security
7. Public and private sector coordination 7. Helps functionality of TDCMS-Transmission Dispatch
8. Reduce power cost and Congestion Management System
 B.Tech. (V Sem.) E.E. Solved Papers
RPS.2
8. Can procure ancillary services e.g. supply of A designated purchasing agency is allowed to buy from
emergency reserves, reactive power from other entities independent power producers. This introduces competition
to maintain reliability in power generation. This model avoids some costs of
system: transaction costs of spot markets and
9. Does not have any financial interest and association deregulated
with participants transmission access, increased cost of capital when
generators bear technology risk. It usually requires long-tem
contracts between the buyer and the independent power
PART-B producers.
3. Open Access Model: In this, the integrated utilities exists
but provision must be provided for grid access to independent
power producer on non-utility generator either by wholesale
Q.6 How to organized model of utility restructuring in
wheeling where generators have a right to sell to other utilities
countries? (but not directly to consumers) generally on long term basis,
This type of model is also termed as, wholesale competition
Ans. Model of Utility Restructuring in Countries model .Distribution or retail companies buy electricity directly
Electric energy can be separated commercially as a product from producer and deliver it over a transmission network.
from transmission as a service. In past, electricity viewed as Distribution and retail companies still have monopoly overfinal
a product used only at the point of delivery and pain for in a consumers. There is open access to transmission lines.
single tariff. In recent 45years, restructuring and reengineering Distribution and retail companies authorized to buy directly
of power industry is taking place in several countries. The from competing generators, but retain local franchise over
possible organizations differ with different functions ofelectric retail customers. Generators must have access to transmission
supply, namely Generation (G), Transmission (T) and network, requiring trading arrangements for the network. In
Distribution (D) to the Customers (C). a wholesale access system, the competition is expanded,
1. Vertically Integrated: The vertically integrated model where all generators can sell to many customers. More buyers
is also termed as, monopoly at all levels . In this type of make the market more competitive and dynamic.
model, generation not subjected to competition and there is 4. Retail Competition Model: This type of model is also
no choice of suppliers. A single company has monopoly of called as, direct access model , where all the customers are
producing electricity and delivering it over the transmission choose their own suppliers. There is open access to
network to distribution companies or customers. In a vertically transmission and distribution lines. The distribution is separate
integrated organization, the generation, transmission and from retail activity and later is competitive retail wheeling
distribution controlled by one utility. Retail competition makes the most of competitive forces, by
2. Integrated Model: In this model, the generation and bringing all final consumers into the market. Retail competition
transmission functions are strongly coordinated on a long term also greatly increases transaction costs by requiring more
basis. The generation and transmission entities are integrated complex trade arrangements and metering.
or at least have cross ownership. The distribution can also be 5. Spot Market Model: In
this model, the generation and
integrated to the generation-transmission utility. There exists transmission entities are seperated,
there exists a, spot market
a competitive integrated model where generation is open to organized by the transmission or grid entity under certain
competition, but independent power producers or Non-Utility regulations where generators
and consumers can compare
Generators(NUG) have no access to the grid and can only their offers and demands.
Spot market is only short term (a
sell to the utility to which they are connected on long-term day ahead generally),
and generators and distributers can
contact basis. It is also termed as, purchasing agency model have long-term contracts with consumers to generate the
A single buyer (purchasing agency) chooses from a number stability of prices.
of 46 different generators to encourage competition in
6. Decentralized Generator Model: This model will come
generation. Access to transmission is not permitted.
| up in future with Decentralized Generation (DG) means (fuel
Purchasing agency has monopoly on transmission network.
cells, photovoltaic, wind, etc.), directly comes to distribution
Restructured Power System
system or consumers. This model differs from each country
RPS.3
business opportunities where new firms selling new
depending upon objectives to fulfill are: products and services will appear, consumers will have
(a) To lower electricity costs, alternatives in buying electricity services, and new
(b) To guarantee security and quality of power supply, technologies such as metering and telecommunication
devices will develop.
(c) To seek private investment,
Disadvantages of Deregulation:
(d) To limit environmental consequences,
1. Improper implementation or hasty implementation of
(e) To contribute to social and political objectives.
restructuring may lead to very high whole sale market
prices leading to electricity crisis like that happened in
Q.7 Explain the advantages and disadvantages California in 2000-2001, which threatened to wreck its
of economy and caused collateral damage throughout the
deregulation.
West.

Ans. Advantages of Deregulation: The competitive 2. Employee Uncertainty: Restructuring often causes
employees to panic and wonder how the changes will
environment offers a good range of benefits for the customers
affect their job security. When the news gets out that
as well as the private entities. It is claimed that some of the
the company is restructuring, some employees may
significant benefits of power industry deregulation would
begin looking for new employment.
include:
3. The stres of the restructuring sometimes takes away
1. Electricity price will go down : It is a common from the staff's focus on their actual work.
understanding that the competitive prices are lesser
than the monopolist prices. It significantly reduces the
cost ofpower charged to small business and customers. Q.8 Explain the various types of IsOand their role and
The cost of electricity generation will be reduced by responsibility in implementation of deregulation of
driving prices through market forces and more electrical power system.
competition.
2. Choice for customers: The customer will have Ans. Independent System Operator (ISO)
choice for its retailer. The retailers will compete not A competitive generation market and retail direct
only on the price offered but also on the other facilities access necessitated an independent operational control
provided to the customers. These could include better of the grid. However, the independent operation ofthe
plans, better reliability, better quality, etc. This will grid was not guaranteed without an independent entity
provide greater incentives for short and long term , the so called Independent System Operator (ISO).
efficiencies than is provided by economic regulation.
An ISO is independent of individual market participants
3. Customer-centric service: The retailers would such as transmission owners, generators, distribution
provide better service than what the monopolist would companies and end users. The basic purpose of ISO is
do. to ensure a fair and a non-discriminatory access to
4. Innovation: The regulatory process and lack of transmission services and ancillary services to maintain
competition gave electric utilities no incentive to improve the real-time operation of the system and facilitate its
or to take risks on new ideas that might increase the reliability requirements.
customer value. Role of ISO:
5. Under deregulated environment The electric
:
The primary objective of the ISO is matching electricity
utility will always try to innovate something for the supply with demand as necessary to ensure reliability.
betterment of service and in turn save costs and
maximize the profit.
ISO should control generation to the extent necessary
to maintain reliability and optimize transmission
6. Restructuring in electricity industry will create new efficiency.
 RPS.4 B. Tech. (V Sem.) E.E. Solved Papers
In Order No.888, FERC developed eleven principles 10. An ISO should develop mechanisms to co-ordinate ite
as guidelines tothe electric industry restructuringto forma activities with neighbouring control areas.
properly constituted IsO, through which public utilities could 11. An 1SO should establish an Alternate Dispute
comply with FERCs non-discriminatory transmission tarift Resolution (ADR) process to resolve disputes in the
requirements: first instance.
1.
ISO governance should be structured in a fair and An ISO is mainly responsible for maintaining system
nondiscriminatory manner integrity by acquiring resources necessary to remove
2. An ISO and its employees should have no financial transmission violations, balance the system in second
interest in the economic performance of any power to second manner and maintain system frequency at
market participant. An ISO should adopt and enforce an acceptable level to retain stability.
strict conflict of interest standards According to FERC order 888, ISO is authorized to
3. An ISO should provide open access to the transmission maintain transmission system reliability in real time.
system and all services under its control at non As per FERC order 888, each ISO may take one of
pancaked rates pursuant to a single, unbundled, grid- the following structures:
wide tariff that applies to all eligible users in 'a non- 1. The first structure is mainly concerned with
discriminatory manner. maintaining the transmission reliability by operating
4. An ISO should have the primary responsibility in the power market to the extent that the ISO would
ensuring short-term reliability of grid operations. Its schedule transfers in a constrained transmission
role in this responsibility should be well defined and system. An example of this proposal is Midwest
comply with applicable standards set by NERC(North ISO.
American Electricity Reliability Corporation) and The second proposal for a ISO includes a PX that
regional reliability council. is integral to the ISOs operation. In some proposal
5. An ISO should have control over the operationof as those of the UK and PJM interconnection, the
interconnected transmission facilities within its region. PX would function within the same organisation
6. An IsO should identify constraints on the system and and under the control of the ISO.
be able to take operational actions to relieve these The ISO is responsible for dispatching all generators
constraints within the trading rules established by the and would set the price of energy at each hour on the highest
governing body. These rules should promote efficient price bid in the market.
trading. An essential task of the ISO in all restructuring models
7. An ISO should have appropriate incentives forefficient is the service of mitigating transmission constraints.
management and administration and should procure This management process includes billing and
services needed for such management and accounting procedures for the cost of mitigating
administration in an open market. constraints and paying those participants who provide
8. An ISOs transmission and ancillary services pricing mitigation services.
policies should promote the efficient use of and Also ISO will ensure that proper economic signals are
investment in generation, transmission and consumption.
sent to all parties, which in turn, will encourage efficient
An ISO or a Regional Transmission Group (RTG) of use and motivate investment in resources capable of
which the ISO is a member should conduct such studies alleviating constraints.
as may be necessary to identify operational problems
or appropriate expansions. In emergency conditions, system reliability is an
absolute responsibility of ISO.
An ISO should make transmission system information
In these situations, ISO has the authority to commit
publicly available on a timely basis via an electronic
and dispatch some or all system resources or
information network (OASIS) consistent with the
components. ISO has the ability to call for increase or
commissions requirements.
Restructured Power Systemn
RPS.5
decrease in generation and to curtail loads to maintain
The UK: The transformation of the British power sector
system security.
proceeded'along three paths in 1990. First, the traditional
To make these services available, ISO contracts with industry was unbundled both vertically and horizontally. High
service providers, so that the services are
under the ISOs request.
availablevoltage transmission assets were transferred to a new
National Grid Company (NGC). Coal and oil fired units were
When service provider is called by ISO, the provider
divided among two companies National Power and
is paid extra to cover its operating costs. Capacity
resources are contracted seasonally by the ISO PowerGen. Nuclear Electric retained control of all nuclear
and
providers send their bids to an auction operated by units. At the outset, National Power had 52 percent of total
the
ISO. The ISO chooses successful providers based generating capacity, PowerGen had 33 percent, and Nuclear
on
a least-cost bid basis. Power had the remaining 15percent. The second set of
When determining the winners, the ISO takes into changes involved ownership. Both National Power and
account factors such as time and locational constraints PowerGen became private companies in 1991, whereas the
and the expected use of resources. difficulties associated with nuclear power resulted in continued
If the ISO finds that spot market services are less government ownership of all nuclear units. Approximately
expensive than contracted ones, ISO experiences its 30 percent of shares in National Power and PowerGen were
authority by acquiringthese services from the energy sold to the public, an equal amount to foreign and institutional
spot market. investors. The remaining 40 percent was held by the
government until 1995. The third set of changes sought to
open the system to competition, wherever possible, while
9.9 How deregulation policies adopted in the other
countries? continuing necessary regulations. Vertical and horizontal
restructuring of power generation was based on the
Ans. The US: The US electric utilities, from the very assumption that generation had become workably competitive
and would become increasingly so with newmarket entrants
beginning were privately owned and worked in a vertically
integrated fashion. The developed countries like US had good Dde: The case of developingcountries is different from that
functioning and efficient electricity systems. However for ofother countries. In these countries, the electricity supply is
some systems, so long as consumers were concerned, they treated as a social service rather than a market commodity.
were not satisfied with the rising costs of electricity. For some
The ownership of the power sector in these countries is
other systems, utility management found that running the
directly under the governments of respective countries. These
system was not viable due to low tariff. In some systems,
pressure from smaller players to open up the business for state owned-controlled systems have led to the promotion of
competition played a major role. By and large, deregulation inefficient practices over a period. The power sectors ofthese
took place in developed countries by pressure to reduce costs countries are marked by supply shortages. There has been
while simultaneously increasing competitiveness in the an inability to add to the generating capacity. The subsidies
market. Existence of market power shows the signs of and high transmission and distribution losses are the major
deviation from the prefect competition. In general, market
concerns before these systems. Another consequence of state
power is referred to as ability of market participants to
profitably maintain the market price above or below the control over electric utilities was the high level of
competitive level for a significant period of time. To tackle overstaffing.The inability to raise funds for capacity addition
the situation, an indirect regulatory intervention in the form invited financial support from international financial institutions
of market design rules is needed. Thus, deregulation does like World Bank. These institutions mandated opening ofthe
notmean ceasing to have rules. It is the "restructuring"of power sector for private companies which were contracted
the power business framework.
under build, own, operate and transfer (BOOT) scheme.
 RPS.6- B. Tech. (V Sem.) E.E. Solued Papers
In a PoolCo, sellers and buyers submit their bids to
inject power into and out of the pool. Sellers compete
PART-C for the right to inject power into the grid, not for specife
customers.
Ifa power provider bids too high, it may not be able to
Q.10 Discuss in detail sell power. On the other hand, buyers compete for
the different restructuring models
in a power system. buying power and if their bids are too low, the mav
not be getting any power.
Ans. Restructuring Models: Three major models are being In this market, low cost generators would essentially
discussed as alternatives to the current vertically integrated be rewarded. Power pools would implement the
monopoly. The three models are: economic dispatch and produce a single price for
1.
electricity, giving participants a clear signal for
PoolCo Model
consumption and investment decisions.
2 Bilateral Contract Model 2. Bilateral Contracts (Direct Access) Model
3. Hybrid Model The Bilateral Contracts model has two main
1. PoolCo Model: characteristics that would distinguish it from the PoolCo
model.
A PoolCo is defined as a centralized market place that
clears the market for buyers and sellers where electric These two characteristics are: the IS°'s role is more
limited; and buyers and sellers could negotiate directly
power sellers/buyers submit bids and prices into the
pool for the amounts of energy that they are willing to i the marketplace.
sell/buy. This model permits direct contracts between customers
and generators without entering into pooling
The main characteristic of this model is the
arrangements.
establishment ofindependently owned wholesale power
In this model, small customers aggregation is essential
pools served by interconnected transmission systems.
to ensure that they would benefit from competition.
This pool becomes a centralized clearing market for
By establishing non-discriminatory access and pricing
trading electricity which would implement competition
rules for transmission and distribution systems, direct
by forcing distribution utilities to purchase their power
from the PoolCo instead of trading with generating
sales of power over a utility's transmission and
distribution systems are guaranteed.
companies.
Wholesale suppliers would pay transmission charges
These companies sell power at a market clearing price
to a transmission company to acquire access to the
(MCP) defined by the PoolCo, instead of a price which
transmission grid and pays similar charges to a
is based on generation cost (as is the case in a vertically
distribution company to acquire access to the local
integrated monopoly). distribution grid.
The final price for spot market power (spot markets is In this model, a distribution company may function as
where market generators are paid for the electricity an aggregator for a large number of retail customers
that they have sold to the pool and market consumers in supplying a long-term capacity
are charged for their electricity consumption.) may
Any two contracted parties would agree on contract
exceed MCP to account for charges that the ISO could
terms such as price, quantity and locations, and
obligate customers to pay for the associated ancillary
generation providers would inform the ISO on how its
services and to cover ISO's overhead costs.
hourly generators would be dispatched.
PoolCo does not own any generation or transmission
The ISO would make sure that sufficient resources
components and centrally dispatches all generating units
are available to finalize the transactions and maintaim
within theservicejurisdiction of the pool. the system reliability.
 Restructured Pouwer System RPS.7
To maintain reliability in real time, the suppliers would 2. You can opt for greener energy: According to The
supply incremental and detrimental energy bids to American Environmental Values Survey, "77% of Americans
prevent transmission flow congestion. say they worry about the environment a great deal or a fair
3.Hybrid Model: amount." If you'd like to make your electricity and gas
greener, deregulation can help you do so. AtAmerican Power
The hybrid model combines various features of the
previous two models. and Gas, we've spent the past 15 years surveying millions of
customer?, and we found that most wanted more
The hybrid model differs from the PoolCo model as
environmentally friendly energy. As an alternative supplier,
utilizing the PX is not obligatory and customers are
we seek out the greenest possible power sources to help
allowed to sign bilateral contracts and choose suppliers
protect the planet while serving your needs. We've also
from the pool.
created The Green Effect initiative to help educate,people
The California model is an example ofthe hybrid model. about environmental issues. Deregulation allows you to put
This structure has advantages Over a mandatory pool your money where your mouth is and support energy
as it provides end-users with the maximum flexibility companies whose priorities align with your own.
to purchase from either the pool or directly from 3. Your service won't be interrupted if you switch
suppliers.
Deregulation only affects the supply of energy, not its
distribution or delivery channels. Ifyou decide to change from
Q.11 Explain the reform motivation and fundamentals your local utility, you'I simply receive a different bill (and
have access to different customer support resources) at the
of deregulated market
end of every month. You will not have to install any new
hardware or go without power for any length of time as you
ns. The energy industry is rapidly changing due to the trend make the transition. Making the most of deregulation and
of deregulation. In the past, governmental authorities worked choosing a new supplier is typically a convenient, smooth
with individual local utility companies to offer home and process.
business owners with a single standardized option for their
power. New legislation keeps the basic means oftransmitting 4. You can enjoy better customer service: How many
and delivering energy in place while allowing alternative times have you tried to call your local utility with a question
suppliers to enter the market, thereby "restructuring" or about your bill or rates only to be put on hold for a seemingly
"unbundling" energy. While it is actually relatively simple, interminable amount of time? Since regulation gives these
the dynamics of energy deregulation can seem confusing, companies a monopoly on the energy market, many of them
and your local utility is (for obvious reasons) not particularly simply aren't up to snuff in the customer service department.
motivated to advertise alternatives, so you may not even With deregulation, another way energy companies can garner
realize what your options re. However, many consumers business is with outstanding customer service. For example.
appreciate deregulation because this shift makes room for American Power and Gas has an excellent team of live, US-
innovative companies like American Power and Gas to better based customer service representatives available to handle
serve their needs. In the following blog, we discuss the top your questions, address your concerns, and exceed your
four benefits of energy deregulation so you can better expectations.
understand and experience them. Fundamentals of deregulated market : Electric
1. You could save money on your monthly power and eregulation is the process ofchanging rules and regulations
gas bills: It's a fundamental tenet of capitalist economics that control the electric industry to provide customers the
thatcompetition drives down prices, and the energy industry choice of electricity suppliers who are either retailers or
15 no
different. When alternative energy suppliers enter the traders by allowing competition. Deregulation improves the
deregulated market, they often try to win over customers by economic efficiency of the production and use ofelectricity.
offering attractive rates. At American Power and Gas, our Due to competition in the electric industry, the power prices
energy experts leverage their extensive knowledge of the are likely to come down which benefits the consumers.
field to find the highest quality, lowest price fuel sources.
 B.Tech. (V Sem) E.E. Solved Papers
RPS.8D
The main objectives ofthe deregulated power market: will be new power flow patterns. New transmission
To provide electricity for all reasonable demands. difficulties will be created and some existing transmission
constraints will be binding more often and with more
To encourage the competition in the generation and economic significance. The interconnections are used at their
supply of electricity. capacity due to increased interchanges in power markets
To improve the continuity ofsupply and the quality of This reality has brought into focus the practical limitations of
services. interconnections and the associated problem of transfer
To promote efficiency and economy of the power capability. All these issues will have to be considered when
system. transmission planning for a project is undertaken. Figure
explains the transition process from regulated industry to a
In the deregulation process, some new entities arderegulated one.
expected toappear and hold major rules in power industry.
The structural components representing various segments of Before Afer

the electricity market are: Generation Gencos

Generation Companies (GenCos.)

=
Deregulation
Transunission Transcos ISO
Transmission Companies (TransCos.)
Deregulation
Distribution Companies (DisCos.)
Distribution Discos
Independent Power Producer (IPP)
Deregulation
Independent System Operator (ISO)
Customers Customers
Power Exchange (PX)
Gencos Generation companies
Retail Energy Service Companies (RESCos.) Transcos-Transmission Companies
DiscosDistribution Compauies
In the deregulated electricity market, increased PX-Power Exchange
ISO-Independent System Operator
infrastructure utilization increases capital returns and Rescos Retail Energy Services Companies
increased competition increases economic energy Fig.: Deregulated Power Utility Structures
transactions. Due to introduction of less costly sources, there
O00
 FUNDAMENTALS OF EcONOMICS

IMPORTANT QUESTIONS
2
E, [(Aq/q)x 100]+[(Ap/p)x100]
PART-A = (Aq/q)+ (Ap/p)
Aq The change in quantity supplied
9 The quantity supplied
What is demand?
.1 Ap The change in price

ns. Demand : Demand in economics is defined as P The price

Consumers' willingness and ability to consume a given good.
An increase in price will decrease the quantity demanded of
04 What is law ofdiminishing marginal atility?
most goods. A decrease in price will increase the quantity
demanded of most goods. The inverse relationship between
Ans. Law of Diminishing Marginal Utility
price and quantity demanded of a good is known as the law
ofdemand and is typically represented by a downward sloping ) This law is a fundamental law of economics.
line known as the demand curve. i) It relates to a man's behavior as a consumer.
(ii) The law states that as a man gets more and more units
02 Define supply. ofa commodity, marginal utility from each successive
unit will go on falling till it becomes zero or negative.

Ans. Supply: Supply is an economic termthat refers to the ((iv) Marginal utility means the additional utility obtained
from one particular unit of a commodity.
amount of a given product or service that suppliers are willing
to offerto consumers at a given price level at a given period. (v) Itis expressed in terms of the price that a man is willing
to pay for a commodity.
(vi) The basis of the law is stability of a particular want.
Q3 State the meaning of elasticit of supply.
(vii) Although human wants are unlimited in number yet a
particular one can be fulfilled.
Ans. Elasticity of Supply: The elasticityofsupply establishes
a
a quantitative relationship between the supply of commodity
and it's price. Hence, we can express the numeral change in Q.5 List the factor of supply.
Supply with the change in the price of a commodity using the
concept of elasticity. Note that elasticity can also be calculated
Ans. Factors of Supply: The factors of supply for a given
with respect to the other determinants of supply.
product or service is related to the followings:
 RPS.1o B.Tech. (V Sem) E.E. Solved Papers
(a) The price of the product or service
(b) The price of related goods or services
TU
(c) The prices of production factors
(d) The price of inputs
(e) The number of production units
(Productiontechnology
( Expectations of producers
h) Government policies
MU
Random, natural or other factors. Fig.: Marginal Uility and Total Uiliy Curve
In this graph the curve MU is marginal utility curve. h
PART-B has a negative slope denoting the fact that as the quantity of
a commodity increases, marginal utility goes on following. At
Q it is zero and after it, it becomes negative.

Q.6 Distinguish between total and marginal utility. Draw

the curve between marginal utility and total utility. Q.7 Explain the law of demand with the help of a
demand curve and demand schedule.

Ans. Difference between Total and Marginal Utility:

Ans. Law of Demand: The law of demand is one of the
(a) Utility, or usefulness, is the ability of something to satisfy
most fundamental concepts in economics. It works with
needs or wants. Utility is an important concept in the law of supply to explain how
market economies allocate
economics because it represents satisfaction resources and determine the prices of goods and services
experienced by the consumer of a good.Utility is a that we observe in everyday
transactions. The law of demand
representation of preferences over some set of goods states that quantity purchased varies inversely with price. In
and services. One cannot directly measure benefit, other words, the higher the price, the lower the quantity
satisfaction or happiness from a good or service, so demanded. This occurs because of diminishing marginal utility
instead economists have devised ways of representing That is, consumers use the first units of
an economic good
and measuring utility in terms of economic choices that they purchase to serve their most urgent
needs first, and use
can be counted. Economists consider utility to be each additional unit of the good to serve successively lower
revealed in people's willingness to pay different valued ends.
amounts for different goods.
In certain cases, the demand curve slopes up from left
(b Total utility is the aggregate sum of satisfaction or to right, i.e., it has a positive slope. Under certain
benefit that an individual gains from consuming a given circumstances, consumers buy more when the price of a
amount of goods or services in an economy. The commodity rises, and less when price falls, as shown by the
amount ofa person's total utility corresponds to the D curve in fig.1.
person's level ofconsumption whereas Marginal utility
is the additional satisfaction, or amount ofutility, gained D
from each extra unit of consumption.
(c) Total utility usually increases as more of a good is
consumed whereas Marginal utility usually decreases
with each additional increase in the consumption of a
good. This decrease demonstrates the law of Quantity Demanded
diminishing marginal utility Fig. 1
Restructured Power System RPS.11
Example of the law ofdemand is explained in terms of Table 2: Amount of Beef Bought at Each Price Point
table and figure 2.
1

Price/b. Quantity in lbs)

Table 1: Demand Schedule

$3.46 10.0
Price (Rs) Quantity Demanded
100 Units $3.55 9.8
5
200 Units $3.69 9.5
3 300 Units
2 400 Units $3.80 9.4
600 Units
$3.85 9.3

$3.88 9.3

$3.88 9.3

$4.01 91
Demand
Curve $4.09 8.9

$4.45 8.5

Demand Curve: The price quantity combinations may be

plotted on a curve, known as a demand curve, with price
represented on the vertical axis and quantity represented on
the horizontal axis. A demand curve is almost always
100 200 300 400 500 600
Quantity Demanded downward sloping, reflecting the willingness of consumers
Fig. 2 to purchase more of the commodity at lower price levels.
Any change in non-price factors would cause a shift in the
The table 1 shows that when the price of say, orange,
demand curve, whereas changes in the price of the commodity
is Rs. per unit, 100 units are demanded. If the price falls to
5
can be traced along a fixed demand curve.
Rs.4, the demand increases to 200 units. Similarly, when the
price declines to Re.1, the demand increases to 600 uni Price
On the contrary, as the price increases from Re. 1, the demand
continues to decline from 600 units. Demand Curve
In the figure 2, point P ofthe demand curve DD, shows
demand for 100 units atthe Rs. 5.As the price fals to Rs. 4,
P
Rs. 3, Rs. 2 and Re. 1, the demand rises to 200, 300, 400 and
600 units respectively. This is clear from points Q, R, S, and
T. Thus, the demand curve DD, shows increase in demand P
of orange when its price falls. This indicates the inverse
relation between price and demand.
Demand Schedule: The demand schedule is a table or Quantity
formula that tells how many units of a good or service will a,
be demanded at the various prices, ceteris paribus. Here is
an example of a demand schedule: Fig. 3: Demand Curve
 RPS.12 B.Tech. (V Sem.) E.E. Solved Paper

htPrice is on the x-axis and quantity bought is on the y- Equilibrium price $5

axis. At P2, the higher price, people will only buy Qo. the Equilibrium demand =500
lower quantity. If the price drops to P1, then the quantity
bought will increase to Q. Calculating Deadweight Loss: To figure out how.
to
calculate deadweight loss from taxation, refer to the grank
When the demand curve is relatively flat, then people ph
shown below:
will buy a lot more even if the price changes a little. When
the demand curve is fairly steep, then the quantity demanded Supply
Deadweight Loss
doesn't change much, even though the price does. Supply

Q.8 What is deadweight loss and its causes and how to

calculate deadweight loss?

Demand
Ans. Deadweight Loss Deadweight loss refers to the
loss of economic efficiency when the equilibrium outcome is
not achievable or not achieved. In other words, it is the cost
born by society due to market inefficiency. Qo Hantity

Causes of Deadweight Loss Fig. 2

) Price floors: The government setting a limit on how The equilibrium price and quantity before the imposition
low a price can be charged for a good or service. An of tax is Qo and Po-
example ofa price floor would be minimum wage. With the tax, the supply curve shifts by the tax amount
(i) Price ceilings : The government setting a limit on from Supplyo to Supply. Producers would want to
how high a price can be charged for a good or service. supply less due to the imposition of tax.
An example of a price ceiling would be rent control The buyer's price would increase from Po to P and
setting a maximum amount of money that a landlord
the seller would receive a lower price for the good
can collect for rent.
from Po to P2
ii) Taxation: The government charging above the selling Due to the tax, producers supply less from Qoto Q.
price for a good or service. An example of taxation
would be cigarette tax. The deadweight loss is represented by the blue triangle
and can be calculated as follows.
Graphical Representation of Deadweight Loss
Deadweight Loss % * (P2- P) x (Qo-Q)
Supply
Q.9 Explain economic welfare with the help of diagram
aumar Suipis and also explain its importance.
NO TAK
$5 S
Producer Surplus

Ans. Welfare Economics Welfare economics is a branch

Demand
ofeconomics that focuses not only on efficiency, but also
improvinghuman welfare and social conditions. Often known
as economics with a heart, it is done principally through the
500 Quuantiy
optimum distribution of wealth and the best allocation ot
Fig. I resources economic welfare is economic wellbeing expressed
At equilibrium, the price would be $5 with a quantity in terms of the sum of consumer and producer surplus also
demand of 500. known as community surplus. z
t
Restructured Pouwer System RPS.13
Price how to make the people (macro) or the individual
(micro) better off (Fwelfare). In international
economics, welfare economics is important to find out
who benefits better. In bilateral trade, calculation is
simple; and assumption goes like the strong country
Consumer gets better off and the weak country gets worse of
Surplus that should be tested. In multilateral trade, welfare is
divisive to much more trading partners than the
Producer bilateralism. Welfare economics is benefit minus costs.
Surplus

Q.10 The price of a commodity decreases from Rs.6 to

Rs. 4. This results in an increase in the quantity
D
demanded from 10 units to 15 units. Find the
coefficient of price elasticity.
Quantity
Fig.
Ans. The coefficient of price elasticity
Consumer surplus exists whenever the price a
consumer would be willing to pay in terms oftheir expected
private benefit is greater than they actually pay. Producer
surplus exists when the price a producer would be prepared
Where, q is quantity, p is price and Aisthe change
to supply at is less than the actual market price.
Assuming the demand curve is downward sloping and Therefore, we have
he supply curve is upward sloping, any transaction which Aq 15-10-5
creates an equilibrum will generate consumer and producer
surplus which in the diagram is the area A, B, E.
Ap 6-4-2
Economic welfare as measured by consumer and 6
producer surplus is used to assess and evaluate the effects
Hence, E 15
of changes in market conditions, including changes in demand,
supply, price and quantity
Q.11 What is the importance of consumer behavior in
Welfare economics is important with respect to the following
marketing ?
two aspects.
(a) One aspect is graph. Welfare economics is easy to
find out in demand and supply curve with x-axis price Ans. The importance of consumer behaviour in marketing
of consumer
and y-axis quantity. They are just rectangle areas of management is also known as the significance
PKQ:This simple math is important because it connects. behaviour.
thelaw of demandand supply with benefit ofthe people () To design production policies: This is the
(macro); or one individual (micro). first importance of consumer behaviour and it means that all
(6) The other aspects is the governmental policy. Welfarethe production policies have designed taking into consideration
economics is important before designing policy for the consumer preference so that product can be successful
redistribution. Mixed system of every government on in the market. In every business, the main motive is to
globe makes it necessary to calculate whether the enhance the production and as well as sales of the company
welfare exists or not; often, calculation is hard. Welfare and to do all these, any company or business has to win the
economics learns all the history of failure or success trust of its customers and studying about their tastes, likings,
and preferences.
ofthe govemmental policy about economics; simply,
 RPS.14- B. Tech. (v Sem.) E.E. Solved Papers
(ii) Know the effect of price on buying: This is the change in price. In other words, it is the percentage change in
second consumer behaviour importance and it means quantity demanded divided by the percentage in one of th he
that consumer behavior can help in understanding the effect variables on which demand depends.
of price on buying. Whenever the price is moderate on cheap
The elasticity of demand formula is calculated by dividing
more and more customer will buy the product. After the time the percentage that quantity changes by the percentage price
of production, there comes a time in which the company has changes in a given period. It looks like this,
to decide what the price of our product will be because it
helps to divide the categories of the customer and also helps Percentage change in quantity
Elasticity=
to attain more sales. Percentage change in price
iii) Exploit the market opportunities : This is the
The variables on which demand can depend on are as below
third importance or significance ofconsumer behaviour and
it means that the change in consumer preference can be a )Price ofthe commodity
good opportunity for the mark to bring something which canuot ) Prices of related commodities
as a revaluation in the market. For Example; When palm pops Cii) Consumer's income, etcC.
introduced in the market, it was successful due to the stylish
and sleek design. Example
iv) Design marketing mix This is the fourth importance (a) The price of a radio falls from Rs. 500 to Rs. 400 per unit.
consumer behaviour and it means that consumer behavior is As a result, the demand increases from 100 to 150 units.
of
very much vital in designing and approaching marketing mix (b) Mary has red and black pencils. Ifthe price ofred pencils
to be chosen like product, price, place, and promotion. drops because consumers are not interested in the color
The product should be valuable, the price should be of the pencil but in utility, demand will increase for the
moderate, place distribution should be intensive and an black pencils for one reason: black and red pencils are
appropriate. Promotion mechanism should be there. perfect substitutes, so either can meet consumer needs.
However, ifthe price ofred pencils drops and the quantity
(V) Implement STPStrategies: This is the fifth importance demanded decreases as well, the demand for red pencils
of consumer behaviour and it means that the segmentation, is elastic since the quality demanded is highly responsive
targeting, and positioning strategies are implemented by to price changes due to the existence of black pencils.
understanding the behaviour of consumers towards the
various brands. Types of Elasticity of Demand: Based on the variable
that affects the demand, the elasticity of demand is of the
The products are targeted grouping the customers followingtypes
having common taste and preference and finally positioned
in the market. Thus, building a positive image of the product
1. Price Elasticity: The price elasticity of demand is the
of a company related to the competitors and as well as help response ofthe quantity demanded to change in the price of
a commodity. It is assumed that the consumer's income,
to beat them also.
tastes, and prices of all other goods are steady. It is measured
as a percentage change in the quantity demanded divided by
PART-C the percentage change in price. Therefore,
Price Elasticity,

Percentage change in quantity

demanded
Q.12 Explain elasticity of demand and its classifications. E,
Percentage change in price

Ans. Elasticity of Demand: Demand elasticity means how

Change in quantity x 100
much more, or less, demand changes when the price does.
Original Quantity
It's specifically measured as a ratio. It's the percentage or,Ep
change of the quantity demanded divided by the percentage Change in price 100
Original price
Restructured Power System RPS.15
reduce the price of their good or service to clear their inventories.
Change in quantity Original price
x They probably will also slow down their production or stop ordering
Original Quantity Change in price
new inventory. The lower price entices more people to buy, which
will reduce the supply further. This process will result in demand
2. Income Elasticity: The income elasticity of demand is
increasing and supply decreasing until the market price equals
the degree of responsiveness of the quantity demanded to a the equilibrium price.
change in the consumer's income. Symbolically,
If the market price is below the equilibrium value, then there is
Percentage change in quantity demanded excess in demand (supply shortage). In this case, buyers will bid
E Percentage change in income up the price of the good or service in order to obtain the good or
service in short supply. As the price goes up, some buyers will
of a
3. Cross Elasticity: The cross elasticity demand quit trying because they don't want to, or can't, pay the higher
commodity X for another commodity Y, is the change in price. Additionally, sellers, more than happy to see the demand,
demand of commodity X due to a change in the price of will start to supply more of it. Eventually, the upward pressure
commodity Y. Symbolically, on price and supply will stabilize at market equilibrium.

EApy9 Supply
Demand
Where, E is the cross elasticity
Aq, is the original demand of commodity X,
Ag, is the change in demand of X,
Ap, is the original price of commodity Y, and

Ap, is the change in price of Y. Quantity

Fig.
Q.13 Explain market equilibrium with the help of
supply
Changes in Demand and Supply: When both supply and
and demand. When both supply and demand increase demand change at the same time, the impact on equilibrium
at the same time, what happen to the equilibrium price and quantity cannot be determined for certain without
price? knowing which changed by a greater amount. Suppose shiny
salamander stickers fall out of popularity, and therefore the
demand for them decreases. At the same time, the price of
Ans. Market Equilibrium : Market equilibrium is a market
state where the supply in the market is equal to the demand glitter goes up, which leads to a decrease in supply. On the
a
in the market. The equilibrium price is the price of good or one hand, the decrease in demand should make
price decrease and quantity demanded decrease. On the other
service when the supply of it is equal to the demand for it in
hand, the decrease in supply should also make price increase
the market. If a market is at equilibrium, the price will not
change unless an external factor changes the supply or and quantity demanded decrease. That means the quantity
demand, which results in a disruption of the equilibrium. of giant shiny salamander stickers will decrease,. But what
will happen to price? In figure 2, we see a'decrease in supply
Supply, Demand and Equilibrium: Ifa market is not at
and a decrease in demand. The effect on quantity is easy to
equilibrium, market forces tend to move it to equilibrium. Let's determine (quantity will definitely decrease). On the other
break this concept down. hand, it is hard to tell if the equilibrium price has increased,
If the market price is above the equilibrium value, there is an decreased, or stays the same. Because we cannot say which
excess supply in the market (a surplus), which means there is of these has happened with certainty, we say that the price
more supply than demand. In this situation, sellers will tend to change is indeterminate or ambiguous.
 RPS.16) B.Tech. (V Sem.) E.E. Solved Paper
P Price is higher and quantity is higher
Price is higher and quantity is lower
Price is lower and quantity his higher
Price is lower and quantity is lower
P

P 5-

Fig. 2
When modeling changes in a graph it is possible to see
changes in both equilibrium price and quantity when shifting
both demand and supply depeniding on how much each curve
shifts. In the interactive graph below, move both demand and
supply in different directions. Each time, move the equilibrium
point to the new intersection of demand and supply. Try to
create new equilibrium at which:
Fig. 3
 IMPORTANT QUESTIONS

and pricing decisions

models that explain oligopoly output
stackelberg model,
include cartel model, cournot model,
PART-A bertrand model and contestable market theory. The reason
oligopoly is that the
there are more than one model of
depends on
interaction between firms is very complex.
It
differentiated,
Q.1 Define the term marketing. whether the product is homogeneous or
firm, whether firms compete
whether there is a dominant
Ans. Marketing: Marketing is an organizational function based on output or price, etc.
and a set of processes for creating, communicating and
delivering value to customers and for managing customer
relationships in ways that benefit the organization and its
PART-B
stakeholders.

Q.2 What is spot market for electricity? Q.5 Describe single buyer model.

Ans. A spot market contract is an agreement to buy or sell a Ans. Single Buyer Model: Single buyer model is relatively
clearly defined amount of a certain good which is traded for simple and quick to implement. It basically provides for
immediate delivery at a specific price. transition mechanism through all levels of competition. It
handles the process of separating the purchasing function
from the grid function by establishing separate financial
Q.3 Write the feature of electricity market.
accounts. Finally, it provides mechanism to supply franchise
Ans. Features of Electricity Market customers.
1. Inelastic demand; continuity and coincidence of the Advantages:
This model have been identified as providing
a relatively simple and quick first step toward higher levels
processes of production and consumption.
competition, and a mechanism for handling stranded costs.
2 Impossibility of accumulation and storage largeofIts main disadvantages were listed as providing no clear
in

enough quantities.
signals as to the value of improving the transmission network,
3. Inability to address delivery of electricity and capacity
its regulation structure being very complicated, and finally
from a specific manufacturer to a specific user.
not setting up the independence of the institutions that an
4. Technological and infrastructural constraints in the
eventual competitive market will require.
supply of electric energy and capacity to consumers.
Disadvantages: This model does not provide any clear
5. A standardized range.
signals as to the value of improving the transmission network.
Regulation is much more complicated to formulate and
Q4 What is oligopoly models? implement than in models with higher levels ofcompetition.
Finally, but maybe most importantly, it is proneto corruption,
Ans. Oligopoly Models:An oligopoly is a market structure
and imposes significant contingent liabilities on the government.
characterized by significant interdependence. Common
 (RPS.18 B.Tech. Sem.) E.E. Solved Papers)
(V

2 Amonopolist with no substitutes would be able to derive

Single Wires Distribution the greatest monopoly power.
Generation
Buyer Costs&
Revenue
MC
bilateral agrecn

Fig. : Single Buyer Model

ATC

Q.6 Explain monopoly with the help of curve and also Super-emal
give advantage and disadvantage. Profits

Ans. A monopoly model is a single supplier in a market. For

AR
the purposes of regulation, monopoly power exists when a
single firm controls 25% or more of a particular market.
The following are key features that are typically found
in a monopoly market structure:
MR Output
1.A Lack of Substitutes: One firm producing a good without Fig
close substitutes. The product is often unique. Ex: When Apple
Advantages of a Monopoly
started producing the iPad, it arguably had a monopoly over
1. Stability of Prices : In a monopoly market structure the
the tablet market.
prices are pretty stable. This is because there is only one
2. Barriers to Entry : There are significant barriers to firm involved in the market that sets the prices since there is
entry set up by the monopolist. Ifnew firms enter the industry, no competing product. In other types of marker structures
the monopolist will not have complete control of a firm on prices are not stable and tend to be elastic as a result of the
the supply. These barriers imply that under a monopoly there
competition.
is no difference between a firm and an industry.
2. Economies of Scale : Since there is a single seller in the
3. Competition: There are no close competitors in the market it leads to economics of scale because big scale
market for that product. production which lowers the cost per unit for the seller. The
4. Price Maker: The monopolist decides the price of the seller may pass this benefit down to the consumer in terms
product, since it has the market power. This makes the of a lower price.
monopolist a price maker. 3. Research and Development: Since the monopolist is
5. Profits While a monopolist can maintain supernormal making abnormal or supernormal profits, the firm can invest
profits in the long run, it doesn't necessarily make profits. A that money into research and development. Customers
mmonopolist can be a loss making or revenue maximizing may get better a quality product at reduced price leading to
too. This is not possible under perfect competition. If enhanced consumersurplus and satisfaction.
abnormal profits are available in the long run, other firms will Disadvantages of a Monopoly
enter the competition with the result abnormal profits will be 1. Higher Prices: The monopolist could set a very high price
eliminated.
for the product leading to exploitation of consumers as they
1. Monopolies can maintain super-normal profits in the have no option but to buy it from seller due to the lack of
lang run. As with all firms, profits are maximised when competition in the market.
MC MR. In general, the level of profit depends upon 2. Price Discrimination Monopolists can sometimes use
the degree of competition in the market, which for a price discrimination, where they charge different prices on
pure monopoly is zero. At profit maximisation, MC =F
the same product for different consumers. This depends on
MR and output is Qand price P. Given that price (AR)
market conditions.
is above ATC at Q, supernormal profits are possible
2 Inferior Goods and Services: The lack of competition
(area PABC). With no close substitutes, the
monopolistmay cause the monopoly firm to produce inferior goods and
can derive super-normal profits, area PABC.
services because they know the goods will sell.
Restructured Power System
RPS.19
Due to the less attention towards demand side, the
0.7 Discuss about the four pillars of market design.
rising electricity bills and the less competition in the
Ans. Market Design: Four pillars of market design are: retail market are not able to provide the full benefits of
1. Flow (Non storable) retail business, particularly to households and small
Imbalances: Because of complications in production industrial clients.
& delivery systems, mismatches will always exist in supply The wholesale electricity price is varying in nature and
& consumption as against contracted power system operator the retailer charges a fixed averaged out the amount
manages these imbalances.
of price from the consumers. The fixed cost of power
2. Laws of Physics to the consumer do not give them the opportunity to
Congestion Management: This coomodity travels
take benefit of low-cost power during off-peak load .
as per laws of physics which are unique to itself. We can't
tell electricity where to go or not to overload a route/line. One The consumers face problems in switching between
transaction ofelectricity can affect any or all other transaction suppliers due to execution, cancellation and cost of the
for delivery. whole process, resulting in less consumer participation
3. Interdepencies in the retail markets, making it less competitive.
Ancillary Services: Production & consumption of In rural and remote areas, the affordability of electric
electricity is dependent on ancillary services which make the
power is the concern issue. The investment cost in
transaction system work, such as operating reserves, reactive
transmission and distribution (T and D) lines are high.
power, etc.
4. Speed of Light
The economic condition of the customer is also
Scheduling & Dispatch: So schedules contracts in regarded. The cost of power is the major issue in rural
advance and mingles energy in real-time by dispatching area which is done by providing subsidies to the
generation to meet demand. customers. Thus, the electrification process is followed
by high risk and low rate of return.
Q.8 Explain retail electricity market structure. The customer pays a fixed amount even on varying
cost of electricity production. Thus, the system
:
Ans. Retail Electricity Market Structure REM is shown
operator is not able to alter the energy use pattern of
in Fig.The distribution and supply system is unbundled. The
Distribution System Operator(DSO0), is regulated and provide the customer to shed peak power demand.
access of distribution network to the supplier (retailer) who Unavailability of demand response creates local power
deliver electricity to end-user. In REM the drawback of WEM in electricity market which reduces competition.
is eliminated by giving access to the consumer to choose the Consumer demand is inflexible, unplanned and follows
retail service. The distribution market becomes more seasonal change. The system operator keeps track on
competitive as free entry to retails is provided. The consumers the generating unit and spinning reserve to balance the
can change their retailers for better services and price. The system. Due to variable RES and requirement of
retail market is going through following challenges: backup generation adds to the flexibility requirement
GENCO GENCO GENCO GENCO forsystem operator.
Variable cost of wholesale market during base and peak
wHCLAL hour and the additional investment cost of large-scale
NARLIT
TRANSMISION NETWORK renewable generation are added to the customer bill
through retailer. The cost of T and D network is also
reflected in the bill which increases due to congestion
o DISCO LARGE DISCO in transmission lines and increasing power demand.
cONSUMER

Q.9 Explain Stackelberg Model with the help of

DISTREUTONNETWORK
UARET example.

Ans. Stackelberg Model: Heinrich von Stackelberg

ENERGY FLOw cONSUMERR CONSUMER
presented an important oligopoly model in 1934. In the
Stackelberg model, one firm acts before the others. The leader
Fig.: Retail Electricity Market Structure
 B.Tech. (V Sem.) E.E. Solved Papers
RPS.20 the other firms are free to
firm picks its output level and then their knowledge ofthe
choose their optimal quantities
given
best response is determined
9s1 = a(m+,
AA
q.
m
a

leader's output. The follower's

competitors output is assumed
as in the Cournot model that
action is different fromn a(m2 +r)
to be fixed. However, the leader's
the followers actions in Cournot
model. P B
A m2+2r
The leaderpicks the output to maximize its profit subject
to the constraint that the follower firm chooses its where, A=m,m, +2r(m, +nm,)+2r,
corresponding output using its Coumot best response function. ABmm, +r(2m, +m,) +r9s1
In Stackelberg equilibrium (SE), the leader is better offand follower's output and
is the leader's otuput, 9,, is the
the follower is worse off than in a Cournot equilibrium P is the market price. The subscript's denotes for the SE
(CE).Stackelberg pointed out history, institution, law, discovery, and the subscript 'c' is used for the NCE.
and development as factors affect the determination ofthe
leader and the followers in general industries. But in an
electricity market, the transmission network is an important
am2,
+r
AA
a
Ic2AA+
m+r)

factor. Because the physical limits oftransmission lines can

restrict the economic dispatch of the generation power, the a(m+m2 +D
P.
generation firms change their strategies by depending on the AA +r
site with respect to the congested line.
Example-Let's lookintothe duopoly system and derive Q.10 Write short note on Cournot Model and Bertrand
the Stackelberg equilibrium (SE). Firms have generating Model.
marginal cost; MCi= miqi ,and the inverse demand functions
ofthe market is pi a-r(q t9,). The firm F l is assumed Ans. Cournot Model: The Cournot model of oligopoly
a leader, F 2 follower. The follower's best response condition applies where (a) the firms produce homogeneous goods, (b)
they compete simultaneously on output and market. share,
isas follows; and (c) they expect their rivals to not change their output in
response to any change that the make.
a Pg2 Cq)
O.00
Reaction Cuves (Bost-Response Curves)

+92
q2
+P-m292 25.00

20.00

-T.42 +P m292=0 .(1)

The leader's best response condition is derived by
considering the follower reaction. 10.00
COumot Equlibrium

5.00

ôq q 2 091
Dorme'
Reacton
Curve
Q.00
10.00 15.00 20.00 25.00

2
-r.q +p-mq, +(-r.q)- 00 2)
Reach's Output

Fig.
Cournot equilibrium is the output level at which each
firm in the oligopoly maximizes its profit given the output level
where,
where, a,
Oq1 is obtained from eq.1). of all other firms. No firm can gain from changing its output
level away from Cournot equilibrium because the response
The SE is derived from (2) and the demand functionis of other firms will wipe out any additional profit. Cournot
as follows, equilibrium is the point of intersection of the best-response
 Restructured Power System
curves (also called reaction curves) of the firms. If there are RPS.21
The actors in electricity market include the participants
two firms, Reach and Dorne, the reaction curve of Dorne like producer, trader, retailer, and consumers and the market
plots Dorne's profit-maximizing output given different output facilitators (Transmission System Operator (TSO),
levels of Reach and vice versa. As shown in the graph, the Independent System Operator (1SO) and Distribution System
Cournot equilibrium is the point of intersection of both reaction Operator (DSO), shown in fig.1. It compromises of
curves. wholesale electricity market and retail electricity market.
Bertrand Model: There are two versions of Bertrand model Wholesale Electricity Market (WEM): The electricity
depending on whether the products are homogeneous or market structure under the wholesale competition is shown
differentiated. in fig.2. The market participants include Gencos (generating
companies), Transco (transmission companies), Discos
The homogeneous-products Bertrand model of
(distribution companies), customers and Independent System
oligopoly applies when firms in the oligopoly produce
Operator (ISO). Generating companies compete to sell
standardized products at same marginal cost. When the
electricity to competing buyers (Discos and large customers)
marginal cost is same, it is in the best interest of each firm in
oligopoly to undercut its rival (i.e. beat its price), because the connected to the high voltage transmission network. Discos
provides bundled services to the consumers. ISO provides
other firms are also trying to beat it. This price war leads to
non-discriminatory open access to transmission network to
a situation at which market price is equal to the marginal all users, manages the congestion and network constrainis,
cost. The output and price level in a Bertrand oligopoly is the provides ancillary and balancing services, and administrate
same as in perfect competition. energy loss. The risk of power plant construction and
Thedifferentiated-products Bertrand model contends technology enhancement now shifted to Gencos only.
that when an oligopoly produces differentiated products, price
competition doesn't necessarily lead to a competitive outcome. GENCO GUMCO GENCO GENCO
It is because when each firm produces a differentiated product,
its demand doesn't become zero when it raises its price. In
fact, the Bertrand model concludes that if one firm increases TRASMSSsON NETWORK
it price, the other firms in a differentiated oligopoly should
also increase theirs because this will increase its profit.
DISCO
LARGE osco
CONSUMER
PART-C
ENERGY FLOW CONSUMER cosUMER

Q.11 Discuss wholesale electriciny market with the help Fig. 2: Wholesale Electricity Market
of diagram and give its drawback. Central auction (PoolCo or Power Exchange) and
bilateral trading are two basic market trading mechanism of
Ans. WEM. In central auction, Gencos and Discos submit their
POWERFLOW
bids in price and volume in the forward market. Market is
INFORMATION
FLOW
cleared when equilibrium is set between incremental
(marginal) supply and demand curves. Forward markets run
wHOLESAL in advance of delivery time (day-ahead, hour-ahead and in
MARK
real-time) giving the opportunity to generating units to schedule
their power output according to demand. In bilateral contracts,
- power trading takes place directly between the seller and
RTNL
AMARKET D50 DISCO buyers through direct contracts. The trade includes energy
supply, contracts for reserves, ancillary services and other
cusSTOMER services also. Bilateral contracts help in hedging price volatility
in a central auction. Despite interaction between supply and
Fig. 1: Deregulated Electricity Market Structure demand.
RPS.22- B.Tech. (V Sem. E.E. Solved Papers
Wholesale Electricity Market Drawbacks: marker
Q.12 Discuss about design of local electricity
Small consumers do not have the option of choosing LEM).
their supplier and get power only from their affiliated OR
Disco. The benefit of price from the wholesale Distinguishing feature of electricity as a commodity
competition is not accessible to customers as the price
is still regulated for them. Due to transmission Ans. The LEM can be categorized according to the locality
constraints, the supplier raises the electricity price and drivers which support its planning, implementation and
above the competition level. It results in strategic .operation. The broad categorization is shown in Fig.1.
LEM need
bidding through locational marginal price and thus 1.Ownership: The creation and developmentofparticipate
and active participants and stakeholders to
results in market power causing market inefficiency. base
involve, and interact. The community-owned LE emphasis
Expansion of transmission lines involves all the on the saving money by reduced electricity bills and thus
stakeholders and is a complicated process which helping in less power production by fossil fuels. Such plants
requires economic analysis. Thus, transmission lines are of the people, for the people and by the people of the
limits act as a bottleneck between the generation and community. The local authority owned LE address the
increasing electricity demand. transformation of the community. It targets the reduction on
bills of locality and becomes a means to tackle fuel poverty
Liquidity, the ability to sell or purchase the electricity The privately inherited LE are profit-making independent
without much change in bid-offer price, is required in power plants to manage the price risk in the community as
WEM to trade and manage the risk. Small generating well as to meet the undertaking of principle focus on
units face barrier during entry in the market due to the environmental sustainability.a The local community and privately
joint avenue to get benefits frOm
insufficient liquidity and transparency. It limits the owned LE can function as
both
competition and ability to manage risk.
WEM are not designed for the variable generation or LOCAL EN ERG

renewable energy sources (RES). In energy-only

markets, the price ofelectricity in the wholesale market OWNERSHIP LNKTO MR ser
cOMMUNM MECHANS
is set by system marginal cost. The renewable sources FLEXBL
COMMUNTY
have negligible or zero marginal cost, resulting in ACIOC SMALY
ENERGY SECURITY STORAGE
MEDUM
reduced need for higher-cost plants in the market for LOCAL AUTNORITY
DIVERSITY N
RAD
power generation. They got government support like cOST TO
CONSUMERS ENERSY SOURCE TYPEOP

Feed-in Tariff, subsidy, etc. and did not rely on the PRNATELY
CNG CUSTOMERS

CARBON
market to cover their cost. In typical operating markets, REDUCTION
JONTLY
it does not promote competition where the generating
unit of the low cost will enter into the market to lower SoURCE OF
NVESTMENT

the price for other producers. It gives rise to Pecuniary

externalities as other producers do not get any such Fig. 1:Categorization of LEM
support when playing in the same market. 2. Delivery Mechanism: The installed power, type (ACI
DC), type of load and quantity of produced energy forms the
Electricity generation from RES is intermittent in
driving mechanism in LEM. The trading mechanism or
nature and increases price risk due to divergence
method followed between the market players, market clearing
caused by day-ahead and real-time electricity prices. and pricing mechanisms forms the market platform. The
Thebackup generation recommended in such case have services procured from market players canIbe price based
a great flexibility which comes with an enormous or incentive based.
marginal cost. The cost of ancillary services is also 3. The link between Local Community: The LE reduces
get increased due to its requirement in matching the the energy demand on the traditional electricity system and
demand and supply. acts as a source of investment. Public understanding helps m
Restructured Power System
RPS.23)
raising awareness of energy use and their role in environment energy market trading, metering, etc. are economical
protection. The customer gets energy at a lower price as perspectives of local energy.
omparedto conventional energy due to non-involvement of
transmission and balancing cost. GENCO GENCO CENCO GENCO

4. Size:According to the locality sources and demand and

TRANSMIssICN NETWORK
some small or independent/community joined forming a big
cluster can categorize the LE and share its benefits. Thus, it DISCO
can be small, medium or large size depending on the OIScO LcoNSUMER DISCO

participants.
AETAK
MARKEY
DISTRIBUTION NETWORK
5. Structure of Local Electricity Market: The structure
ofLEM incorporated with TEM is shown in fig.2. The retail PROSUMER MARKET SMALL
market and local energy market share the same distribution GTNERATING
UNITS
network. The structure oflocal energy can be solved in two
contexts, that is, technical and economical. The technical cONSUMER coNSUMER
features include the power stability, voltage and frequency ENERGY FLOW
stability, transient stability, active and reactive power control, Fig. 2: Local Electricity Market Structure
energy storage, etc. 1The business models, market structure,
 TRANSMISSION CONGESTION MANAGEMENT 4
IMPORTANT QuESTIONS

94 Define available transfer capability (ATC).

PART-AA
Ans. Available Transfer Capability: ATC is defined as
the maximum amount of additional MW transfer possible
Q.1 What is meant by congestion? between two parts of a power system.
Mathematically, ATC is defined as the Total Transfer
Ans. When producer and consumer of electric energy desires Capability (TTC) less the Transmission Reliability Margin
to produce and consume energy in the amount that would (TRM), less the sum of existing transmission commitments
cause transmission system to operate beyond its transfer limit, and the Capacity Benefit Margin (CBM).
the system is said to be congested. ATC- TTC-TRM- "Existing (TC and CBM)".

Q.2 State the scope of congestion management Q.5 State the purpose of ATC?

Ans. Ans. Purpose of ATC

1.It defines a set of rules to ensure control over 1. To deliver electric power reliably.
generators and loads in order to maintain acceptable 2. To provide flexibility for changing system conditions.
level of system security and reliability. 3. To give the indication about the additional
amount of
2. It also ensures market efficiency maximization with power transfer.
short term as well as long term horizons 4. To allow trading of electric power among
systems.
3. The robustness of rule set is important as under open
market structure a set of players. Q.6 Define Total Transfer Capability (TTc).

Q.3 What are the methods Ans. Total Transfer Capability: Total Transfer Capability
available to tackle (TTC) is defined as the amount of electric power
transmission Congestion? that can be
transferred over the interconnected transmission network in
a reliable manner under specified conditions.
Ans.
1. Price Area Congestion management employed inQ.7 Define Transmission Reliability
Nordic pool (Norway, Sweden, Denmark and Finland) Margin (TRM).
2. Available Transfer Capability (ATC) based congestionAns. TRM:It is defined as that
amount of transmission
management system employed in US. Optimal Power transfer capability necessary to ensure that the interconnected
Flow (OPF) based congestion management system transmission network is secure under a reasonable range or
employed in UK. uncertainties in system conditions.
 Restructured Power System RPS.25
different dispatch options thereby reducing total congestion
9.8 Define Capacity Benefit Margin (CBM). cost along with. The method has been applied to three bus
and eight bus test systems. A generalized deregulated model
Ans. CBM : It is defined as that amount of transmission
applied to the IEEE-30 bus test system, a novel control
transfer capability reserved by load serving entities to ensure
scheme by using nodal prices in electrical power systems to
access to generation from interconnected systems to meet
achieve congestion management and optimal powerbalancing
generation reliability requirements.
They have also presented an explicit controller which detects
all line flow constraints in steady state and guarantees
0.9 What doyou mean by Locational Marginal Pricing
(LMP)? economically steady-state operation. Kang et al. implemented
a novel zonal marginal pricing. The approach is based on
Ans. Locational Marginal Pricing : LMP mechanism is congestion contribution identification and sequentiai network
one of the most commonly employed tools for market partition which was implemented on IEEE-39 nodes system,
settlement in the deregulated power system environment. The Bat algorithm based DC optimal power flow (DCOPF) to
Locational Marginal Price (LMP) at a bus signifies the cost evaluate spot prices in single auction model whiie minimizing
of supplying the next increment of load at that bus. The LMP fuel cost and improving social welfare of the system. Bat
is the sum of supplying energy marginal cost, cost of losses algorithm is proved to perform better than Linear
due to the increment and transmission congestion cost, ifany, Programming (LP) and Genetic Algorithm (GAA).
arising from the increment. and congestion, if any, arising
from that increment. The LMP is the true indicator of marginal
Q.11 Discuss about location marginal pricing.
pricing of energy
Ans. Locational Marginal Pricing: LMP stands
PART-B for Locational Marginal Pricing and represents the cost
to buy and sell powerat different locations within wholesale
electricity markets, usually called Independent System
Operators (ISOs). Examples of ISOs include PJM, ISONE,
Q.10 Explain nodal pricing method MISO, CAISO, and NYISO. LMPs are made up of three
components, Energy Price, Congestion Cost, and Losses.
Ans. Nodal Pricing Method: The nodal prices vary Most ISOs have Day Ahead and Real Time LMPs. Day-
according to the geographic locations, hereby giving them ahead LMPs represent prices in day-ahead markets which
the name Locational Marginal Prices (LMP). The nodal prices let market participants buy and sell wholesale electricity a
lead to generation of heavy surplus. This surplus is then day before the operating day to avoid volatility. Real-time
utilized to pay the 'contract rights'.Acontract right gives the LMPs represent prices in real time markets which let
right holder the ability to inject power at one node and remove participants buy and sell power during the day of operation.
at another in the transmission network. LMPs are calculated
it
in the following fourways LMP System
Energy
Transmission
Congestion
Cost of
Marginal
1. The system can be made to operate after 1 MW use Pice Cost Losses
and before 1 MW use. The difference in the two costs
of operation then gives the LMP Fig.
Locational marginal pricing reflects the value of the
2 LMP based on sensitivity factors of the marginal energy at the specific location and time it is delivered.
generators. The cost of generation at each generator
can be calculated using this method. When the lowest-priced electricity can reach all
locations, prices are the same across the entire PJM
3 LMP can be calculated as dual variables or Lagrange
multipliers from optimal power flow (OPF).
grid.
4. LMP can also be obtained from 'transposed jacobian When there is congestion heavy use of the
transmission system-the lowest-priced energy cannot
matrix' where the limiting constraints replace the rows
flow freely to some locations. In that case, more
and columns of the matrix.
expensive electricity is ordered to meet that demand.
It aimed to improve the outcome of social welfare As a result, the locational marginal prices are higher in
problem by introducing some performance indices to compare
those locations.
 RPS.26- B. Tech. (V Sem.) E.E. Solved Paper

load pattern by one or several TSO(s) in order to chanc

hange
Congestion generally raises the LMP in the receiving
area ofthe congestion and lowers the LMP in the sending physical flows and thereby relieve the physical congestion
area. Operating conditions that limit the delivery capacity of Redispatch is mainly bsed in regions with a hiph
specific transmission lines also can contribute to congestion proportion of renewable power production, such as Califomi
and result in LMP changes. This enables market participants or Germany. It is less common in other regions. To understan
to factor the information into their decision-making. redispatch, consider how power plants submit their schedules
The calculations used to determine LMPs take into to transmission system operators as previously outlined. As
account electricity demand, generation costs and the use of soon as the schedules have been received, the grid operators
and limits on the transmission system. The price tells PJM conduct what is known as a load flow or grid load calculation
market participants the cost to serve the next megawatt of to prepare an overview of the grid's expected feed-in and
load at a specific location. The calculations factor in all theconsumption for the next day. They analyze the dispatch to
available generating sources to come up with the mix that determine if any parts of the electricity grid might be
creates the lowest production cost, while observing all limits negatively impacted, and to what degree. To keep the number
on the transmission system. The use of actual operating ofthe next day's short-term, grid-stabilizing interventions at
conditions and energy flows in determining LMPs encourages a minimum, the transmission system operator can instruct
the efficient use ofthe electric grid and enhances reliability plant operators to postpone schedule power production based
LMPs give price signals that encourage new generation on the next day's load flow calculation to prevent grid
sources to locate in areas where they will receive higher bottlenecks. The request to shift electricity production is called
prices. It signals large new users to locate where they can a redispatch.
buy lower-cost power. It also encourages the construction of
newtransmission facilities in areas where congestion is
TSO
common, in order to reduce the financial impact ofcongestion
on electricity prices Camps down
Example: Let's say you lived in a neighborhood and at noon
today you expected you would have 100 MWs of electricity emporar
bottleneck
demand. Yesterday you would have bought 100 MWs of
electricity to be delivered at 12 today on the day-ahead PowerPlant 1
Power Plant2

market. However when 12 today rolls around, demand is Fig.

actually 105 MWs, you would buy the additional 5 MWs on
the real-time market. Real-time market prices are generally Q.13 Write short note on countertrading?
more volatile than day-ahead market prices.
Ans. Countertrading: Countertrading means a cross-zonal
Q.12 Write short note on redispatching. exchange initiated by system operators between two bidding
zones to relieve physical congestion. Countertrading is
Ans. Redispatching: Ifmeans a measure activated by one therefore considered a measure with the objective of relieving
or several system operators by altering the generation and/or physical congestions between two bidding zones, where the
load pattern in order to change physical flows in the precise generation or load pattern alteration is not predefined.
transmission system and relieve a physical congestion. This measure is a market-based solution, where the cheapest
Redispatching is therefore considered a measure with the bid is selected independently of the geographical location
within the bidding zone.
objective of relieving physical congestions by altering a
particular generation and/or load pattern. Specifically, this A part of the grid which limits electricity transmission
is called a bottleneck. Short-term "bottlenecks", or congestion.
refers to one or several TSO(s), when congestion appears,
and requires specific generators (or specific consumers) to in the grid is managed commercially through countertrade
start or increase production and specific other generators to while long-term congestion is dealt with through price areas
op or reduce production, in order to maintain the network or grid reinforcement.
security. The regional distribution of power plant production 15
With regard to the above-mentioned definitions, the based on market terms and can be changed through
general idea of RD and CT is to alter the generation and/or countertrade. For example, if transmission from Northem
Restructured Power Systemn RPS.27
Cinland to Southern Finland is too great, production can, at plants. This has negative implications on the systems operation
Fingrid's request and expense, be increased in the south and costs and the external costs that aren't covered by the EU
correspondingly reduced in the north. In such a way, Emissions Trading System, such as NOx emissions.
transmission is brought closer to what is desirable at a given
Wind Sector Management : Turbine loading is influenced
time (in this case, it is reduced), and the country's overall
by the wake effects from nearby machines. For some wind
balance remains the same.
farms with particularly close machine spacing, it may be
necessary to shut down certain turbines for certain wind
0.14 Explain curtailments and its effect.
conditions. This is referred to as wind sector management,
and will generally result in a reduction in the energy production
Ans. Curtailments: Some or all of the turbines within a ofthe wind farm.
wind farm may need to be shut down to mitigate issues Within certain grid connection
Grid Curtailment:
associated with turbine loading, export to the grid, or certain
agreements, the output of the wind farm is curtailed at certain
planning conditions.
times. This will result in a loss of energy production. This
The use of VRG curtailment not only for factor also includes the time taken for the wind farm to become
grid security but also for economic reasons can potentially fully operational following grid curtailment.
contribute to a significant reduction of investment needs in
Noise, Visual and Environmental Curtailment : In certain
both grid and storage extension. For that purpose, the power
jurisdictions, there may be requirements to shut down turbines
output of VRG plants would have to be limited in some hours
during specific meteorological conditions to meet defined noise
of the year, but their energy production over the year would emission or shadow flicker criteria at nearby dwellings; or
only decrease by a small percentage.
environmental conditions due to such aspects as birds or bats.
InGermany the reduction of the generation from wind
Ower plants to 70% of their maximum power output would
decrease their total energy output by only 1.3% in the year PART-C
2011.Apower limitation to 80% would have led to an energy
output reduction of 0.5%. For PV a limitation to 70% of the
maximum power would have caused a loss of 2% of the
Q.15 Discuss about price area congestion management
energy output in 2012. With a limitation to 80% this figure
capacity alleviation methods with the help of
would have been 0.5%.
diagram and example.
A current study by the German Energy
Agency indicates that the costs for distribution grid extension Ans. The socio-economic cost with respect to congestion is
in Germany to the year 2030 could decrease by 30% if the cost of not having enough transfer capacity as required
limitation of VRG plants to 70% of their maximum power by the unrestricted system price calculation. We call this cost
output was allowed. the congestion cost. The congestion cost (to society) can be
The economic importance of this effect depends on calculated as the reduction in producer and consumer surplus
the future development of the forecast accuracy and of due to the congestion. In the following sections these
market coupling effects on the reserve procurement need. consequences are analysed for the two models
There is also an effect of curtailment on the systems operation 1. Area Price Model : In the two area example in Figure 1
costs that goes in the opposite direction. Curtailment reduces the bid curves in Elspot Area A (deficit) and B (surplus) are
the share of the consumer load covered by renewable summed up to the common price cross in the middle defining
energies. When curtailment occurs because of network the System price (ps). The solid drawn lines in each area are
congestion, the "missing" electricity production must be met the original bid curves in the area. The line b-d is the transfer
elsewhere by conventional capacities. When curtailment capacity required by the market at system price. The dashed
ocCurs because of excess power supply, the curtailed energy line for area A represents the total supply curve including
cannot be brought back into the system later when the residual supply received from area B when available transfer capacity
load is positive. Consequently, curtailment increases fuel use is utilised. This new bid curve on the supply side leads to an
and generation-related emissions of the conventional power increased area price (PA).
 RPS.28D- B.Tech. (V Sem.) E.E. Solved Papers
Fma
(aurpkus)
Socio-economic Congestion Cost , (PA- PR)
Ted

Price Area A Prce System Price Area B 1)

The square in the figure 2 is equal to the income from
the Congested Capacity Fee, or from the Market Player point
PA
surphs of view the cost for utilisation of existing capacity
Producer Congested Capacity Cost (PA PB)F
suphs Pa ..2)
2. Buy Back Model: Assuming that only producers
are
FFlow Flow FrFlo bidding into the Regulation Power Market and the bids are
Fig. 1: Two area example according to marginal prices, the up and down regulation in
The consumer and producer surplus in the unrestricted the two areas can be illustrated as in Figure 3.
case are marked on the "System" curves in the middle. In The Regulating price (pRK) is presently defined as
Area A, the consumer surplus referred to ps is the triangle the price of the most expensive regulation object on the deficit
jdg'. When the area price pA is calculated, the surplus is side and opposite on the surplus side. The producer surplus
reduced to 'heg'. On the other hand the producer surplus in Area A due to the counter trade is the triangle 'acd'
while
which at ps is 'abj', increases to 'aih'. The reduction in market the triangle a'b'd' in area B represents the reduced profit
player surplus due to congestion (Area A) is the parallelogram margin. The System Operator cost is equal to the square on
bcei' plus the triangle 'ced'. The parallelogram represents each side which means that the cost is approximately twice
the supply added from area B, leaving the triangle 'ecd' as the socio-economic cost ofthe counter trade.
the socio-economic cost of not having enough transfer
capacity. An equivalent reasoning for area B results in the
Area A (deficit) Area B (surplus)
triangle c'd'e'.
PRKA

Price Ps

PRKB

PA AP
e-ecanomic Ps Ps
pacit
P on Fig. 3:Costs in the Buy Back Model

Q.16 Discuss about congestion management

PB importance
and its types.
Ans. Contingency Constraints : Transmission system
operators leave some unused capacity on power lines in case
F Fred Flow an unexpected event (a contingency) occurs somewhere o
Fig. 2: Congested Capacity Cost and Congestion Cost the system. If, for example, a large power line drops out of
The area of the triangles are % (PA-Ps) Fred and service, the power flows will shift to other lines at the speed
(ps-PB) Fred, where Fred is the reduction in
interarea transfer of light. The power system operators job is to ensure that
(MW) compared to the unrestricted market solution. The total none of those power lines overloads. Contingency constraints
cost in areas A and Bas a function of reduced transfer are fundamental element of economy-security control.
Contingency analysis identifies potential emergencies through
capacity (Fred) can be approximated with the area of the
extensive simulations on the power system network. A more
triangle in Figure 2, where the area prices in each area as
conservative estimation of transmission capability will be
function of transfer capacity (F) defines the sides: obtained after considering the post-contingency constraints.
 Restructured Power System
Importance of congestion management different
RPS.29
buyers can pay and sellers receive. In the case that congestion
market structures and market rules lead to different methods occurs the ISO receives supplementary bids for increase and
for congestion management. Basically, a proper approach for decrease of generation. The most expensive supplemental
resolving transmission congestion in competitive electricity bid for increase of generation becomes the price for that
markets should at least have the following importance: zone and the cheapest supplemental bid for decrease of
Each market participant, a consumer or a producer, generation becomes the price for that zone. In this way the
should be treated equally and the price for a specific ISO earns congestion rent over the congested lines. In case
good at a specific place and time should be the same that there is no congestion the zonal prices will be the same.
for everybody. The California market migrated from this CM mechanism to
The method should give incentives to producers, the zonal pricing method.
consumers and the network operator to improve the 3. Re-Scheduling In this method of CM the market is
systems in order to relieve transmission constraints. settled without the constraints ofthe transmission system being
The implementation should be well defined and applied. If congestion occurs the ISO reschedules the
transparent for all participants. generation in such a way that congestion is get rid of. This
will entail the ISO purchasing power from high price areas.
The available resources like information, computer
The generators in the low price areas will be commanded to
systems need to be capable of producing the necessary
regulate downwards. Since the ISO in essence is buying
quantitative results in the time frame available.
power at a high price and selling it at a lower price he incurs
In a real system the surrounding ISOs and their specific a cost. The net cost incurred by the ISO is an indication of
methodologies have to be taken into account. The the congestion charge and is a signal for investment. The
implemented system needs to interact with other ISO directly commands generators to up regulate or down
systems. regulate without the use of the market.
4. Counter Trading : Counter trading is a modified form of
Bids Dispatch
reservations schedules re-dispatching the difference being that up and down
regulation power is obtained from the market. The generators
Detemination Capacity Congestion If required submit bids for up and down regulation on the balancing
ofavailable allocation forecast congestion
transmission alleviation
market. Similar to the re-dispatch the ISO will incur net cost
capacity in the purchase of regulation power since he has to use more
expensive power for up regulation. Sweden uses this form of
Fig.: Sequence of congestion management CM. Counter trading may be viewed as a special type of re-
Types of Congestion Management Methods: The non dispatching. In this thesis we shall use these methods for
market based methods for congestion management do not clearing congestion.
send any signals for investment and have no measure of the 5. Market Splitting : In market splitting the market is
first
value ofthe congested line. Market based methods are based settled without constraints applied. Ifthe resulting schedules
on market mechanisms and hence give an indication of the cause congestion on some line(s) the market is then split and
value of the scarce resource of transmission capacity. These settled separately with the transfer limit applied. The ISo
methods are briefly discussed below: purchases power from the low price area and sells it in the
1. Nodal Pricing : In the nodal pricing scheme every bus in high price area. The ISO thus makes a profit. Norway uses
the grid is treated as a zone. The locational marginal price this CM method.
(LMP) for each bus is determined by the ISO by carrying 6. Auctioning: In auctioning the available capacity of a
out an economic dispatch with the flow limits. The LMP normally constrained path is auctioned by the ISO receiving
becomes the price and payment that buyers pay and the bids from parties willing to use the path. The 103 lowest
generators receive respectively. The market is settled with marginal bid accepted becomes the pricefortransmission on
the network constraints hence congestion does not arise. the path. Two forms of auction ing arein usei.e.implicit and
2. Zonal Pricing: In Zonal pricing system buses with similar explicit.
LMPs are aggregated into zones. The market is first settled 7. Load Curtailment: By managing load, congestion can
constraint free. Each zone will have a price for energy that also be effectively relieved. The benefits result from reduced
 RPS.30 B.Tech. (v Sem.) E.E. Solved Papers
peak demand and reduced pressure on both electricity the power system. Variable series capacitors, phase shifter
generation and distribution systems. The amount ofcurtailed and unified power flow controllers as the most used FACTSs
load should be as small
as possible and the price in the devices can be utilized to change the power flow which resu
congested area should fall as much as possible. While there in many benefits like losses reduced, stability margin increased
are many different kinds ofcurtailment algorithms, a parameter etc. Due to such features of FACTS, integrating it into the
termed as willingness-to-pay-to-avoid-curtailment was congestion management becomes more and more popular
introduced in which is regarded as a highly effective instrument 9. First Come: First served capacity is allocated accordino
in setting the transaction curtailment.
to the order in which the transmission requests have been
8. Facts : Facts are a new technology developed in recent received by the ISO. Starting from the earliest request, all
two decades, and it has been widely put in practice in the requested amounts of capacity are fully granted until the
world. FACTS are defined by the IEEE as a power available capacity is used up. This method encourages
electronic-based system and other static equipment that has participants to make longer forecasts. Thus, it allows better
the ability to enhance controllability, increase power transfer and sooner security assessment for the ISO who knows
capability. Nowadays, power producers and system operators accurately the volume of exchanges in advance. However,
all over the world are faced with increasing demands for this method may not leave enough room for short-term
bulk power transmission, low-cost power delivery and higher trading, which is a requirement to ensure the success of market
reliability, to some extent; such issues are being alleviated by dynamics. This method is well suited for bilateral trades, but
the developing technology of FACTS. FACTS could be fails to provide an efficient priority mechanism for day-ahead
connected either in series or in shunt with the power system or real-time pool transactions.
or even in a combined pattern to provide compensation for
 ANCILLARY SERVICE MANAGEMENT 5
IMPORTANT QUESTIONS

(xi) Network Stability Services from Generation Sources

PART-A (xii) System Black Start Capability

Q.3 What do you mean by Black Start Service?

Q.1 Define Ancillary Services.
Ans. Black Start Service : It is an ancillary service that is
Ans. Ancillary Services: Ancillary services are defined as paid to certain generating resources that can begin providing
electricity to the grid without first utilizing outside power from
all those activities on the interconnected grid that are
necessary to support the transmission of power while the grid to initially start power generating stations. Black start
maintaining reliable operation and ensuring the required degree is necessary ifthere are large black outs on the power sysiem.
The power output from these resources is utilized to start
of quality and safety. It becomes clear that the ancillary
services may include scheduling and dispatch, frequency other power stations, provide electricity to nuclear stations
and provide critical needs services. The compensation for
regulation, voltage control, generation reserves etc.
resources providing this service is an annual FERC-approved,
cost of service rate. As new black start resources begin
Q.2 What are the functions of ancillary services? operation, or as existing black start resources retire, significant
changes to this charge can occur.
Ans. Functions of Ancillary Services
0 Regulation PART-B
() Load Following
i) Energy Imbalance
(iv) Operating Reserve (Spinning) Q.4 Write detailed note on ancillary services.

(V) Operating Reserve (Supplemental)

an
Ans. The function of electric utility is not limited to power
i) Backup Supply
generation, transmission and its distribution to customers. It
(vii) System Control also has to ensure the required degree of quality and safety,
vii) Dynamic Scheduling undertake preventive measures to ward off contingencies and
(ix) Reactive Power and Voltage Control Support perform several other functions. Ancillary services are
defined as all those activities on the interconnected grid, that
(x)Real Power Transmission Losses
are necessary to support the transmission of power while
 RPS.32 B.Tech. (V Sem.) E.E. Solved
d Papers)
signal. These resources, which are typIcally some type of
maintaining reliable operation and ensuring the required degree
of quality and safety. Ancillary services would thus include, electricity generator, demand response, or sources storino
regulation of frequency and tie-line power flows voltage and and then releasing electricity, may offer this service
reactive power control ensuring system stability, maintenance on constructed formulas. Some of the items impactingseda
of generation and transmission reserves and many others. resource's revenues when providing this type of service are
According to the North American Electric Reliability whether it has the ability to respond quickly or slowly to a
Council (NERC) an ancillary service is an interconnected regulation signal and how well the resource can follow the
operation service that is necessary to effect a transfer of regulation signal. A resource that can follow the regulation
electricity between purchasing and selling entities and which signal better than other resources will receive more revenue
a transmission provider must include in an open access for this service.
transmission tariff. Synchronized Reserve Service : This is an ancillary service
In vertically integrated utility structures where designed to ensure that there is enough headroom" or
unutilized energy on resources to increase output to ensure
responsibility for generation, transmission and distribution is
centralized at one organization, ancillary services are an abrupt changes in electrical supply or demand can be met. A
integral part of the electricity supply and are not separated.demand response resource or aggregate of demand response
However with the deregulation of the power industry, with resources, may provide this service by rapidly reducing
generation and transmission becoming separate businesses, electricity usage. A prime example of why this service is
the system operator often has no direct control over individual
needed is for the sudden loss of generation or a loss of
power stations and has to purchase ancillary services from transmission capability. If a generator stops producing
ancillary service providers. In such an environment, issues electricity due to a sudden operational issue, other resources
pertaining to pricing mechanisms for such services are must respond quickly to provide the "missing" power. For
extremely important for the proper functioning of the system. the most part, this market product clears at zero cost due to
There are several operator activities and seryices, which can adequate supply or "headroom" on the system. When there
come under the purview of ancillary services. The definitions is high demand for electricity, the price associated
with this
of some services and distinctions between some of them are service could increase as the grid operator has to pay
often unclear. resources to be in an operating position to provide
this service.
While the details and definitions of some ancillaryDay Ahead Scheduling Reserve
(DASR) : DASR is
services remain vague, the key concepts and purposes of clear a day prior (day-akcad) to the actual
need of the
these services are now widely understood and appreciated. ancillary service and is utilized to ensure
a sufficient quantity
However, much work remains in defining a set of services of resources, including demand response,
are in the operational
mutually exclusive and exhaustive, in identifying which position ofbeing available to provide 30-minute
reserve service
services can be provided competitively, which must be under in the real time market.
the direct control of the independent system operator (ISO)
There are numerous non market based ancillary
and which can be obtained from outside the local control area.
services; however we will only discuss
two potentially
expensive services. The Federal Energy Regulatory
Commission
Q.5 What are the different classifications
of ancillary markets and (FERC) has oversight of the wholesale electricity
service depending up the service requirement? approves these service related compensation
mechanisms.

Ans. Ancillary services may be line item charges or embedded Black Start Service : Refer to Q.3.
within a total energy charge depending on the utility zone or Voltage Control and Reactive Service: This is a FERC
product plan selected by the retail customer. approved rate that provides basic compensation for a
Regulation Service: This is an ancillary service provided generator to provide incremental voltage or to absorb voltage
on the transmission system. This type
by resources that can respond quickly to the instantaneous of service is local in
nature. In other words, you may have portions of the electrical
change in electrical demand, often represented as a regulation
grid with both normal and abnormal conditions depending on
 Restructured Power System
RPS.33
the configuration of generators, loads and the transmission Black start is the capability of a power plant
to start
system. These charges can grow beyond FERC approved itself independent of the power grid. Some power plants have
charges if the grid operator must turn on or off a generator on site generators that can be used to start the main
turbine
or substantially modify the output of a generating resource to generator spinning. Others actually take electricity from the
provide this service thus inhibiting the resource's ability to power grid for this purpose. Power plants that provide black
participate within the economic energy dispatch of the grid. start capability agree to keep an on site generator or other
grid independent power source ready to operate. In the case
Q.6 What are differences between Reserve and Black of a large blackout, these power plants will start themselves
Start? up using their on site generation and feed power into the grid
so that other plants can start up and restore electricity service.
Ans. Reserves represent capacity that power grid operators
keep as a backup in case of a loss of another power plant or
if demand increases rapidly beyond what is expected. The Q.7 What is meant by Markets for Ancillary Service?
use of reserves may be triggered if, for example, frequeney
regulation alone is notenough to bring system frequency back
Ans. Since electricity cannot be stored in large volumes at
to 60 Hertz and a power grid operator has to trigger tertiary reasonable cost,
part of thejob of the power grid operator is
frequency control.
to make sure that supply and demand balance at every
There are two flavors of reserves: spinning and non
moment. This means that the power grid is making adjustments
spinning reserves. Spinning reserves represents capacity that
every single second as demand changes (actually, much more
is synchronous with the grid (spinning at 60 Hertz) but is not
quickly than one second). Many of these adjustments are
producing any electricity. Spinning reserves are expected to
automated responses. Go ahead and turn the light on and off
be abie to produce power within a specified time of being in
the room you're sitting in. Believe it or not, there is a huge
called on (examples would be 10 minute, 30 minute and 60
network of sensors on the power grid that can tell that
minute spinning reserve). Non-spinning reserves represent
electricity usage is going up and down by some small amount
capacity that has not started up but could start up and be
and making automatic adjusthents to power plant outputs in
ready to produce power within a specified time of being called
response.
on.
Like regulation, reserves are often procured through Ensuring that the power grid is stable and that supply
an auction in areas that have undergone electricity matches demand on a continuous basis requires that decisions
restructuring. Unlike regulation, reserves are only a service be made over a staggering array of time scales as shown in
to increase power output (there is no "reserves down" like the figure below. The day ahead market is used to allow power
there is regulation down). Generators providing reserves operators to have enough supply to meet anticipated
arerid
paid a capability price for those reserves and then paid thedemand 24 hours in advance. The real time market does the
real time energy price if called upon. same thing on an hour ahead time frame.
As an example, let's take our 100 MW generator again resolution of moal rengwables
that is dispatched to produce 50 MWh in the energy market synchro-phasos
AGC signal megration models

t a price of S10/MWh. This generator offers 5 MW of

oynamic and solar
variation
resloraion
e relay Syslem
eralion espons planning lor cerbon
reserves and the capability price is $25/MW. At the beginning high-frequency
switching devices
(stability) emssion goais
TAD planning
some hour the generator is asked to produce 2MW of power Tespon

during the second half of the hour (so this would be like 30 minule

minute reserves). The generator's total revenues for this hour

Fig.: Operational and planning decisionsforelectricpower systemns
would be:
Energy market revenue: 50 MWh x $10/MWh=$500 As the figure shows, there is a lot going on between
Reserve capability: 5 MW x $25/MW=$125 one hour ahead of real time and fractions of a second ahead
Reserve performance: 2 MWx(1/2 Hour) x $10/MWh=$10 of real time. If the grid operator feels that more power is
needed one day or one hour before real time, it can increase
Total revenue: $635
the amount cleared through the day abead or real time markets.
 RPS.34 B.Tech. Sem.) E.E. Solved Papers
(V

by RRAS providers to the pool and fixed charges are

Q.8 DisCuss the various features reimbursed by RRAS providers to the original beneficiaries
of ancillary service in
India. It has been stipulated in the regulations that no
commitment charges would be payable to the RRAS
Ans. Salient Features of Ancillary Services in India: providers. There are penalties for sustained failure to provide
All the Generators, that are Regional Entities and whose tariff RRAS and violation of directions of RLDC.
for the full capacity is determined or adopted by the CERC
have been mandated to provide ancillary services as RRAS
Providers.
PART-C
NLDC, through the RLDCs, has been designated as
the Nodal Agency for Ancillary Services Operations. The
nodal agency prepares the merit order stack based on the Q.9 What is meant by frequency regulation in ancillary
variable cost of generation. service?
The triggering Events for ancillary services dispatch
have been defined in the regulations such as extreme weather/ Ans. Maintaining the frequency throughout the system at
special day, generating unit or transmission line outages,trend something very close to 60 Hertz is critically important. Every
of load met and frequency, any abnormal event such asoutage single generator in a big power grid must be spinning at this
of hydro generating units due to silt, etc. excessive loop flows, same speed or the system itself may become unstable. As an
trend of computed Area Control Error (ACE) at regional level analogy here, imagine a car going in a straight line. All the
and recall by the original beneficiary. wheels have to be turning at the same speed. If one wheel
Avirtual regional entity called "Virtual Ancillary Entity suddenly started to go faster than the others, what would
(VAE" has been created in the respective regional pool for happen? Well, if that one wheel started spinning just a little
scheduling and accounting. The quantum of RRAS instruction, bit faster, then the rest of the car might exert a force on that
by the Nodal Agency, is being directly incorporated in the one wheel to get it to slow back down. The car would keep
schedule of RRAS providers. going straight. If that one wheel started to spin a lot faster,
the car might veer out of control.
The RRAS instruction may be scheduled to the VAE
in any one or more regional grids. The deviation in schedule The same logic applies to power grids. If the system
of the RRAS providers, beyond the revised schedule, is being frequency deviates a little bit from 60 Hertz, then the spinning
settled as per the CERC Deviation Settlement MechanismBenerators will naturally exert more force on one another to
(DSM) regulations. The energy dispatched under RRAS is bring that frequency back to 60 Hertz. If the deviation is
deemed delivered ex-bus. really large, then by itself the grid will become unstable.
Frequency regulation (or just "regulation" for short) is too
Nodal agency directs the RRAS provider to withdraw a
RRAS, on being satisfied, that the circumstances leading to employed by power grid operators in those cases when the
system frequency gets too high or too low.
triggering of RRAS services have been normalized.
The RRAS energy accounting is being done by the To understand how frequency could get too high or
respective Regional Power Committee (RPC) on too low, we'll use yet another analogy that is shown in the
weeklyfigures
basis along with DSM Account, based on interface meters below. Think of a power grid as being kind of like a
data and schedule. A separate RRAS statement is being issued bathtub with a faucet and a drain. The level of water in the
by RPC along with regional DSM Account. bathtub is like the frequency of the power grid. If the faucet
Any post-facto is
revision in rates/charges by RRAS providers is not permitted. much larger than the drain, then the level of water in the
bathtub will rise. Similarly in a powergrid supply all ofa
In case of RRAS Up, fixed and variable charges if
are sudden becomes much larger than demand, then the frequency
ayable to the RRAS providers from the pool. In case of will rise above 60 Hertz. This might happen ifthere is a sudden
RAS Down, 75 percent of the variable charges are payable surge in supply (if the wind suddenly picks up, rapidly
Restructured Pouwer System
increasing wind power output, for example) or
if there is a Primary frequency control is triggered automatically,
RPS.35
sudden drop in demand (such as everyone in the US
turning without any human intervention, right after the under-
their televisions off at the end of the Super Bowl).
frequency event. Generators that are equipped with
frequency sensors will adjust their output automatically.
ener Gmeratioe
Generation
Arresting Period
Period Recovery Period
ebound

60.00
g59.98
LoRC
In-flow equals out-low, Load
Out-flow less than in-flow,
frequency stable at 60 Hz In-flow less than out-low
frequency rises above 60 Hz frequency falls below 60 Hz

Fig
59.90
Power system frequency is like water flowing in
and 0 20
out the bathtub. For the water level to stay constant,
of Seconds Minutes
inflows
must exactly equal outflows. MW
Primary Frequency Contrtol Secondary Frequency Control Tertiary Frequency Control
Govemor response Generators on Aulomatic
Deviations from the 60 Hz frequency can lead (and frequency-responsve Generation Control)
Generalors thougn
to demand response)]
pealor ospalch)

corrective actions that may threaten the reliability

of the power
grid.

If the drain is larger than the faucet, then the reverse

happens the level of the water in the bathtub will fall. In the 0 20 30 10 30
Seconds Minutes
power grid, if demand starts to exceed supply then the system
frequency will fall below 60 Hertz. This happens most often Fig
if there is a sudden drop, in supply, like a large generator Secondary frequency control is triggered within tens
becoming suddenly disconnected from the grid. of seconds, also automatically, if the under-frequency event
does not correct itself. Secondary frequency regulation is
Typically, over-frequency events are easier for grid
operators to handle than under-frequency events. If frequency
sometimes called Automatic Generation Control (AGC).
starts to exceed 60 Hertz, this typically happens slowly and Tertiary frequency control is triggered within a few
grid operators can respond by reducing output from some minutes if the under-frequency event does not correct itself
generators. Under-frequency events, however, can be more through primary or secondary frequency control mechanisms
serious because they are often unexpected and involve the Tertiary frequency control typically involves the power grid
loss of a large source of electricity. When this happens, operator manually adjusting the dispatch of some power plants.
recovery of the system frequency to 60 Hertz involves three A sudden drop in system frequency triggers automated
phases,which are collectively known as "frequency control." response to correct the frequency, followed by manual
These three phases are illustrated in the figure below and interventions from power system operators. Ancillary services
can be summarized as follows: provide these responses.
The service that we call "frequency regulation" is
Generation
Frequency Range During
VE Frequency Range Followino
typically triggered a few minutes after a frequency deviation
Normal Operaton 6 the Sudden Loss of Generation
event, after secondary frequency regulation has kicked in. In
60.02
Frequency
Control
Acttons
areas that have restructured the utility sector and established
59.90
Frequ
59.85equency competitive markets, frequency regulation is typically procured
Control
59.80 Actions
59.75 by system operators through an auction process similar to
59.70 Under-Frequency
Load Shedding
the day ahead and real time energy market. The market
Load Under-Frequency operator (like PJM) announces how much frequency regulation
Generation Inpping
capacity is needed and generators submit offers to be able to
Fig. iit z provide that frequency regulation. This establishes a separate
price for frequency regulation.
 (RPS.36 B.Tech. (V Sem.) E.E. Solved Papers
In most electricity markets, offering frequency Primary and Secondary frequency control
regulation to the grid operator means that the generator is Primary and Secondary power reserve
willing to increase or decrease output (known as "regulation
Prompt reserve
up" and "regulation down") by some amount. (The ERCOT
market in Texas works a little differently, where there are Reactive power support
separate markets for regulation up and regulation down). This Black start
means that the generator is, at the same time, removing Special Protection System (SPS)
capacity from the day-ahead/real-time energy market and is
committing to being able to produce some amount of power. These services are provided mainly by Generation
For example, let's say that a generator with a capacity of Agents and reimbursed through the Ancillary Services
100 MW offered 5 MW ofcapacity to the regulation market. Agreement (ASA).
This means that the generator stands ready to reduce output These contracts refund the Agents fixed costs and
by 5 MW ifneeded and to increase output by 5 MW ifneeded. variable costs (O&M) for extending the provision of such
Thus, the generator could not offer more than 95 MW ofits Ancillary Services.
capacity to the day-ahead/real-time energy market and would 2. Australia: The various ancillary services in the Australian
need to make sure that at least 5 MW was cleared in the National Electricity Market are:
day-ahead/real-time energy market.
Frequency Control Ancillary Services (FCAS):
The payment for regulation has two componen': irst,
Regulation Raise and Lower Services correct the
generators are paid for the capacity that they dedicate to
supply and demand balance in response to minor
providing regulation. This is sometimes called the "capability"
deviations in demand or generation. Contingency
price and takes units of $ per MW of capacity. Second, when
frequency control services are provided for correcting
a generator is called on to increase or decrease output in
the supply demand balance following a major imbalance
response to a frequency deviation event, it is paid for the
event, such as the failure of a generating unit or
energy that is produced or not produced. This is sometimes
transmission line.
called the "performance" payment and is often set equal to
the real time price energy (so takes units of S per MWh). Network Control Ancillary Services (NCAS): There
Fo example, let's take our same generator providing are two types voltage control (usually through
generators with automatic voltage regulators (AVC)
5MW of regulation. The regulation capability price is $5 per
MW. The generator is dispatched to produce 50 MWh of and synchronous condensers) and network loading
control.
energy through the real time market at a price of $10 per
MWh. Because ofa frequency deviation event, the generator System Restart Ancillary Services (SRAS).
is asked to produce an extra 2 MWof power for 10 minutes. 3. United Kingdom : Ancillary and "Other Services" are
The generator's total revenues for this hour would be: part ofthe Balancing Mechanism and are procured from both
Energy market revenue: 50 MWh x $10/MWh =$500 authorized electricity operators (AEOs), who own and
Regulation capability: 5 MW x $5/MW =$25 operate generators and other commercial entities, generally
Regulation perfomance: 2MWx (1/6 Hour) x $10/MWh=$3.33 load customers or aggregators with backup generators and
nand response resources. Size eligibility requirement1
Total revenue: $528.33
3 MW or more for any individual load. Customer loads are
only eligible to provide frequency response and reserve
Q.10 Discuss the International practices of Ancillary services, either as a direct customer or as part of a load
Service. block aggregated by a retail provider.
National Grid Company (NGC)-whenever possible
Ans. 1. Brazil: The types of Ancillary Services that are seeks competitive procurement of ancillary services. NGC
regulated by-AgênciaNacional de EnergiaElétrica (ANEEL)
(the Brazilian Electric Energy Agency), and provided in the
sei cts the lowest cost bid meeting the contract requirements.
NGC negotiates bilateral contract with individual service
Brazilian Interconnected Power System are:
providers for services with insufficient competition.
eirssc
Gegtructured Power System
farnia
Califo ISO-United States of America(USA): RPS.37
ingcongestion and allocatingtransmission, After Non-spinning reserves are offline but are fully available
the California within ten minutes.
onducts a day-ahead market for four
ancillary services,
lation, spinr
inning reserves, non-spinning Replacement reserve is capacity that can be delivered
reserves reserves and
cplacement as energy within one hour.
The ISO procures regulation services Suppliers submit bids for these four markets with their
from generators
that are equipped to respond to its automatic day-ahead energy schedules, offering both a capacity and an
generation
control (AGC) signals. These
signals direct generators energy bid. Winning bidders are chosen solely on the basis of
to increase or reduce generation on a minute-to-minute their capacity bids; the energy bids are used to determine
basis so that system frequency
is maintained within a whether the plant will be run in the real-time spot market.
range dictated by reliability considerations. The ISO resolves the four ancillary service markets in
Spinning reserves are on-line and sequence, procuring regulation first and replacement reserves
synchronized with
the system so that they can begin producing last. Thus, suppliers do not needto decide in advance which
power as
soon as they are called upon. ancillary servicethey would like to offer. Ancillary services
costs are allocated pro-rata based on the scheduling
coordinator's load and resource mix.
 PRICING OF TRANSMISSION NETWORK
USAGE AND MARKET PowER 6
IMPORTANT QUESTIONS

Ans. This method is also called postage stamp method. In

this method, transmission prices are charged equally on per
PART-A MW basis of transaction., irrespective of the distance of the
power to be transmitted. It is calculated different for different
time of the day. In this scheme, a customer drawing a same
Q.1 What are the different types of imperfect market? amount of power as another one but located farthest from
the source point is charged same transmission price, whereas
its use of transmission network is more.
Ans. There are four types of imperfect markets
1. Monopoly (only one seller)
Q.4 Explain transmission pricing.
2. Oligopoly (few sellers of goods)
3. Monopolistic competition (many sellers with highly Ans. The transmission pricing methodology describes:
differentiated product)
Connection charges, which recover part of
4. Monopsony (only one buyer of a product) Transpower's alternating current (AC) revenue this -

is a forecast of the revenue required to recover

Transpower's costs of providing alternating current
Q.2 Define Market power.
transmission services during the pricing year by
reference to the cost of providing connection assets
Ans. Market power refers to a firm's relative ability to Interconnection charges, which recover the
manipulate the price of an item in the marketplace by remainder of Transpower's alternating current revenue
manipulating the level ofsupply, demand or both.
High voltage direct current (HVDC) charges,
A firm with substantial market power has the abilityto which recover Transpower's high voltage direct current
manipulate the market price and thereby control its profit revenue.
margin, and possibly the ability to increase obstacles to
potential new entrants into the market. Firms that have market
power are often described as "price makers" becausethey PART-B
can establish or adjust the marketplace price of an item without
relinquishing market share.
9.5 What is meant by transmission pricing? Discuss
different transmission pricing methods.
Q.3 Explain Rolled-in transmission pricing paradigm.
Restructured Power System
RPS.39
Ans. In the restructured power system the transmission interconnection charges, which recover the
pricingis considered as one ofthe most complex issue because s
remainder of Transpower alternating current revenue
he nature of the power flows in the power system and the
need to satisfy the demand and the supply. The monopolistic high voltage direct current (HVDC) charges,
which recover Transpower's high voltage direct current
nature in the transmission sector prevented the introduction
revenue
ofthe competition in the transmission sector. So there is always
a demand of efficient transmission pricing which will recover how the costs oftransmission alternatives services are
the transmission cost by properly allocating the cost among charged and recovered, if and when transmission
the several transmission service users. alternatives services are provided and/or funded by
The allocation of the transmission charges for different Transpower
transmission services to all the customers should be on practical ways to facilitate greater transparency in
nondiscriminatory basis and should be simple and transparent. relation to Transpower's prudent discount policy, which
The transmission tari ff structure should be such that it should helps to ensure that the transmission pricing
reflect the embedded cost, future expansion cost and the methodology does not provide incentives for inefficient
operating cost. The embedded costs in the transmission are by-pass of the existing grid.
huge as compared to the other operating cost so the pricing
Transmission pricing methods are the overall processes
structure should be very efficient to recover the cost from all
of translating transmission costs into overall transmission
its users. The basic concepts and issues regarding the
charges. These methods are shown in Figure2
transmission pricing in the vertically integrated unit and have
shown that the transmission pricing has been one of the most Transmission
pricing
critical and vital issue in the power system. The cost methods
associated with the transmission services are shown in the
Fig.
Incremental Embedded Composite embedded
Operating cost transmission transmission incremental transmission
pricing method pricing method pricing method

Embedded
cost H Components of
Transmission pricing
Opportunity
cost
Fig. 2:Different transmission pricing methods

Incremental costs are two types. They are short run

and long run incremental costs. "Short-Run Incremental Cost
Reinforcement
cost refers to operating cost and opportunity cost, "Long-Run
Incremental Cost" refers to operating cost, opportunity cost
Fig. 1: Components oftransmissionpricing
and reinforcement cost.
The main objective ofany transmission pricing method
is to recover the transmission system cost plus some profit.
Embedded Transmission Pricing method accounts for
Embedded Cost or Existing System Cost.
The transmission pricing methodology describes:
A combination of these two methods leads to proper pricing
connection charges, which recover part of structure for any
market.
Transpower's alternating current (AC) revenue - this
is a forecast of the revenue required to recover1ncremental Transmission Pricing: These pricing
Transpower's costs of providing alternating current methods allocate the incremental cost (i.e., variable cost) of
transmission services during the pricing year by the transmission transaction. Figure 3 shows different types
reference to the cost of providing connection assets of incremental pricing methods.
 B.Tech. (v Sem.) E.E. Solved Papers
RPS.40
In this connection Mrs. Joan Robinson has said
Incremental
transmission Perfect Competition prevails when the demand for the outni
tput
pricing
of each producer is perfectly elastic."
According to Boulding- "A Perfect Competition
market may be defined as a large number of buyers and sellers
Short-run Long-run Long-run
incremental costincremental cost
Short-run
marginal cost marginal cost all engaged in the purchase and sale of identically similar
pricing (SRIC) pricing (LRIC) pricing (SRMC)pricing (LRMC) commodities, who are in close contact with one another and
who buy and sell freely among themselves."
Fig. 3: Types of incremental transmission pricing methods

Embedded Transmission Pricing: These pricing methods

nethodeCharacteristics of Perfect Competition: The following
characteristics are essential for the existence of Perfect
allocate the embedded system costs i.e., fixed cost among
Competition:
transmission system users. Embedded pricing methods can
be categorized as in Figure 4. 1. Large Number of Buyers and Sellers: The first
condition is that the number of buyers and sellers must
Embedded be so large that none of them individually is in a position
transmission
pricing method to influence the price and output of the industry as a
a
whole. In the market the position of purchaser ora
seller is just like a drop of water in an ocean.
Network Flow
based based 2. Homogeneity of the Product : Each firm should
method method produce and sell a homogeneous product so that no
buyer has any preference for the product of any
individual seller over others. If goods will be
Distribution Bicek Kinchen
Postage Contract MW MVA-
factor tracing tracing
homogeneous then price will also be uniform
stamp path Mile Mile
method method method method
method method method everywhere.
3. Free Entry and Exit of Firms : The firm should be
Fig. 4: Types of embedded transmission pricing methods
free to enter or leave the firm. Ifthere is hope of profit
the firm will enter in business and ifthere is profitability
Q.6 What are the different attributes of loss, the firm will leave the business.
of a perfectly
competitive market? 4. Perfect Knowledge of the Market Buyers and
sellers must possess complete knowledge about the
prices at which goods are being bought and sold and
Ans. Meaning and Definition of Perfect Competition
of the prices at which others are prepared to buy and
A Perfect Competition market is that type of market in which
sell. This will help in having uniformity in prices.
the number of buyers and sellers is very large, all are engaged
in buying and selling a homogeneous product without any 5. Perfect Mobility of the Factors of Production and
artificial restrictions and possessing perfect knowledge ofthe Goods: There should be perfect mobility of goods
market at a time. and factors between industries. Goods should be free
to move to those places where they can fetch the
In other words it can besaid-"A market is said to be highest price.
perfect when all the potential buyers and sellers are promptly
aware of the prices at which the transaction take 6. Absence of Price Control: There should De
place. Under
such conditions the price of the commodity will tend to be
complete openness in buying and selling of goods. Here
prices are liable to change freely in response to demand
qual everywhere."
and supply conditions.
 Restructured Power System)
7 Perfect Competition among Buyers and Sellers: system operation; it is likely to send incorrect
RPS.41
purchasers economic signal
In this and sellers have got complete to transmission customers.
freedom for bargaining, no restrictions in charging more
demanding less, competition feeling must be Distance Based MW-Mile Method : This method
present
allocates the transmission charges based on
there. the magnitude
of transacted power and the geographical distance
Absence of Transport Cost: There must be absence between
8. the delivery point and the receipt point i.e., it is
the product of
oftransport cost. In having less or negligible transport power due to a transaction times the distance this
cost will help complete market in maintaining uniformity power
travels in the network. This method is DC power flow
in price. based
method.
9. One Price of the Commodity: There is always one
price of the commodity available in the market.
2CLMW
10. Independent Relationship between Buyers and TC-TCx5TCLMW,
Sellers: There should not be any attachment between
t=Tk=K
sellers and purchasers in the market. Here, the
seller
should not show prick and choose method in
accepting TC,= cost allocated to transaction t
the price of the commodity. If we will see from
the TC total cost of all lines in $
close we will find that in real life "Perfect
Competition is a pure myth." L= length ofline k in mile
C, cost per MW per unit length of linek
Q.7 What is meant by postage stamp & MW-Mile in MW, flow in line k, due to transaction t
transmission pricing? T set of transactions
K set of lines
Ans. Postage Stamp Method: Postage-stamp rate method
is traditionally used by electric utilities to
allocate the fixed
transmission cost among the users of firm transmission Q.8 Write short note on:
service. This method is an embedded cost method, which is
)Imperfect Market Competition
also called the rolled-in embedded method. This method does
not require power flow caleulations and is independentofthe
(ii) Lerner Index

transmission distance and network configuration. The

magnitude of the transacted power for a particular Ans. () Imperfect Market Competition
transmission transaction is usually measured at
thetime or Definition: Imperfect competition is a competitive market
system peak load condition:
situation where there are many sellers, but they are selling
RT TC*PPpea heterogeneous (dissimilar) goods as opposed to the perfect
Where RT is the transmission price for transaction t, competitive market scenario. As the name suggests,
TC is the total transmission charges and P, and Ppeak are competitive markets that are imperfect in nature.
transaction t load and the entire system load at the time of
Description: Imperfect competition is the real world
system peak load condition.
competition. Today some of the industries and sellers follow
The main purpose of using this methodology is the entire it to earn surplus profits, In this market scenario, the seller
System is considered as a centrally
operated integrated system. enjoys the luxury of influencing the price in order to earn
This method is simpler. Since this method ignores the actual more profits.
 RPS.42} B.Tech. Sem.) E.E. Solved Paper
(V
ers
regulatory control of prices serv
Ifa seller is selling a non identical good in the market, sufficient so that and ervice
then he can raise the prices and earn profits. High profits quality is no longer useful?
attract other sellers to enter the market and sellers, who are A sound approach therefore needs to be eveloped
in
incurring losses, can very easily exit the market. order to assess dominance and measure competition. Secto
There are four types of imperfect markets: regulators (and competition authorities) can rely on several
1. Monopoly (only one seller) tools and types of indicators to identify evidence of markes
dominance, as set out below:
2. Oligopoly (few sellers of goods)
Price level observations: A regulator should look for a
3. Monopolistic competition (many sellers with highly
sustained increase in price level. An increase in price level
differentiated product)
alone is not a sign of market power, however: it could be
4 Monopsony (only one buyer of a product) related to an increase towards cost-recovery tariffs.
Ans. (ii) Lerner Index : Lerner index, in economics, a
Market share observations: Market shares are often used
measure of the market power of a firm. Formalized by the
as a proxy for market power. Although a high market share
Russian-British economist Abba P Lerner in 1934, the Lerner
alone is not sufficient to establish the possession of significant
index is expressed in the following formula:
market power, it is unlikely that a firm without a significant
Lerner index = P MC/P share would be in a dominant position. Regulators or
where P represents the price of the good set by the firm and competition authorities then set different thresholds to
MC represents the firm's marginal cost. Essentially, the index determine when a market share should raise concerns about
measures the percentage markup that a firm is able to charge market power issues. The European Commission, forinstance
over its marginal cost. The index ranges from a low value of sets the following criteria to assess dominance: a firm with a
Oto a high of1. The higher the value ofthe Lerner index, the market share of no more than 25% is not likely to enjoy a
more the firm is able to charge over its marginal cost, hence dominant position; a firm with market shares of over 40%
the greater its monopoly power. raises concerns, and over 50% is said to have a dominant
The Lerner index provides a concise measure of position if its market share has remained stable for a long
monopoly power. However, its use is largely restricted to time. With regards to methods used for measuring market
theoretical studies because of the difficulty of accurately shares, volume sales, value sales, production capacities or
measuring costs in practice. Other measures, such as the mputs (such as labor and capital) provide useful information
Herfindahl-Hirschman index, are more commonly used to The criteria to be used will depend on the characteristics of
gauge monopoly power using real industry data. the relevant market and the availability of information.
Collusive activities: The regulator should watch whether
fims collude to limit competition, by fixing prices and dividing
Q.9 What are the key factors to identify the market
markets.
power?
Analysis of the firm's strengths: The European
Commission, for example, takes into account additional factors
Ans. Market power exercised by a dominant firm, that it
to measure the extent to which a firm acts independently of
raises prices above competitive levels, may stifle consumer
its competitors and customers. These factors include the
demand, generate efficiency losses and harm the public
overall size of the firm, control of the infrastructure that 15
interest. In addition, firms with significant market power or
not easily duplicated, technological advantages, absenceoof
dominance may implement strategies to further reduce
buying power, privileged access to capital markets/financial
competition and enhance their position in the market. 1ncresources,
product diversification, economies of scale
importance of assessing market power is also related to the
economies of scope, vertical integration, a highly developed
future of regulation: at what point are competitive forces
Restructured Power System RPS.43)
distribution network, absence of potential competition and Ans. A perfectly competitive firm's supply curve is that
barriers to expansion. portion ofits marginal cost curve that lies above the minimum
Analysis of barriers to entry: Market dominance also of the average variable cost curve. A perfectly competitive
firm maximizes profit by producing the quantity of output that
depends on the assessment of ease of market entry. Barriers
equates price and marginal cost. As such, the firm moves
to entry are costs that new entrants incur but that an
along its positively-sloped marginal cost curve in response to
incumbent firm avoids. This cost asymmetry may reveal
changing prices.
dominance, as it may prevent new entrants from competing
with the incumbent. Barriers to entry may arise due to high A perfectly competitive firm maximizes profit by

fixed or sunk costs (costs that a new entrant must absorb,

producing the quantity of output that equates marginal revenue

while the incumbent operator does not incur the same risks
and marginal cost. In that price equals marginal revenue for
a perfectly competitive firm, price is also equal to marginal
and costs), or restricted access to essential facilities (a new
cost. In other words, the firm produces by moving up and
entrant must incur the costs of purchasing access to a
down along its marginal cost curve. The marginal cost curve
network, costs that the firm who owns the facility does not
is thus the perfectly competitive firm's supply curve.
have).
Because the marginal cost curve is positively sloped
Quantitative measures of market dominance Several due to the law of diminishing marginal returns, so too is the
quantitative measures exist that can help assess whether a
firm's supply curve. And because all firm's in a perfectly
firm may have market power, such as the Herfindahl- competitive industry have positively-sloped marginal cost
Hirschman Index (HHI), which is an index of the number of curves, the market supply curve for the entire industry is also
firms in the market and their market shares, and the Lerner positively sloped. This offers a prime explanation for the law
Index that measures the degree to which prices exceed of supply.
marginal cost. Such concentration measures are rather
Insight into supply: The analysis of the short-run
imperfect measures of potential market power and an production decisions for a perfectly competitive firm has direct
overreliance on them could lead to biased policy decisions, implications for the market supply curve and the law of supply.
as this happened in the energy sector in the United States in The primary conclusion is that a perfectly competitive firm's
the 1990s. Yet, the guidelines on mergers used by the US short-run supply curve is that segment of its marginal cost
(and now EU) competition authorities contain explicit curve that lies above the average variable cost curve.
thresholds defined in terms of the HHI. A market with an
A perfectly competitive firm produces the quantity of
HHI ofbelow 1000 is regarded as 'unconcentrated', a market
output that equates marginal revenue, which is equal to price,
with an HHI of between 1000 and 1800 is regarded as and marginal cost, as long as price exceeds average variable
'moderately concentrated' whilst a market with an HHl of cost. The profit-maximizing choices of output at alternative
above 1800 is regarded as 'highly concentrated' (in which prices generates the perfectly competitive firm's short-run
case a merger will be subject to further scrutiny). supply curve.
Consider three key points:
PART-C A profit-maximizing fim produces the quantity of output
that equates marginal revenue and marginal cost (MR
MC).
Q.10 How firm's supply decision takes place under A perfectly competitive firm is characterized by the
perfect competition? Explain with a suitable equality between price and marginal revenue (P=MR).
example. The law of diminishing marginal returns gives the
marginal cost curve a positive slope.
 B.Tech. (V Sem.) E.E. Solved Papers
RPS.44- As a profit-maximizing zucchini producer, Phil produeee
Combining all three points means that a profit-
maximizing perfectly competitive firm produces the quantity the quantity of zucchin is that equates the going market price
of output that equates price and marginal cost (P = MC). with marginal cost. Phil's supply response to changing prices
rices
can be observed by... well.. by changing prices then notine
ing
An increase in the price moves the profit-maximizing
Phil's supply response.
quantity to a higher point on the positively-sloped marginal
cost curve, and a larger production quantity. One place to begin is with a price of say $4. It reveals
that Phil maximizes profit by producing 7 pounds of zucchinis
A decrease in the price moves the profit-maximizing
quantity to a lower point on the positively-sloped marginal The quantity supplied by Phil ata $4 price is thus 7 pounds
zucchinis. This price/quantity supplied combination is one point
cost curve, and a smaller production quantity.
on Phil's zucchini supply curve. What might Phil do if he
Working a Graph: To illustrate, consider the production
faces different prices.
and supply decision made by Phil the zucchini grower, a
hypothetical firm. Because Phil is one of gadzillions ofzucchini Consider a higher price of say [$6] that reveals that
producers, each producing identical products and each with Phil maximizes profit in this case by producing almost 8 pounds
a relatively small part ofthe overall market, he has no market of zucchinis. This higher price induces Phil to increase his
control. As such, Phil is a price taker. He must react to the quantity supplied from 7 to almost 8. How about an $8 price?
price determined by the interaction of market demand and It reveals that Phil maximizes profit by producing about 8.5
market supply, making adjustments in his own production to pounds of zucchinis. Once again, a higher price motivates
accommodate higher or lower market prices. Phil to increase his quantity supplied. Bumping the price up
Short-Run Supply to $10, seen with a click of the [S10] button results in an even
greater quantity supplied, 9 pounds of zucchinis.
MC
12 Does Phil reduce the quantity supplied if the price
11 declines? Up to a point. That point being the minimum of the
10 average variable cost curve, about $2.75. If the price falls
below this level, then Phil shuts down production in the short
run, incurring a lost equal to total fixed cost.
The conclusion from this analysis is that the marginal
cost curve that lies above the average variable cost is Phil's
ATC short-run supply curve.

AVC Only Perfect Competition This short-run cu rve

explanation relies on Phil being a perfectly competitive price
taker. The marginal cost curve is a supply curve only because
a perfectly competitive firm equates price with marginal cost.
This happens only because price is equal to marginal revenue
Quantity for a perfectly competitive firm. Should price and marginal
revenue NOT be equal, then a profit-maximizing firm does
Fig.
NOT equate price to marginal cost. As such, the marginal
This graph displays Phil's U-shaped cost curves cost curve is NOT the firm's supply curve.
representing his zucchini production. Note that all three
curves (average total cost, average variable cost, and imarginal Because perfect competition does not exist in the real
cost) are U-shaped. The marginal cost curve is U-shaped as world, most real world firms do not have equality between
a direct consequence of increasing, then decreasing marginal price and marginal revenue, and thus do not equate price to
marginal cost. In fact, real world firms with varying degrees
returns.
Restructured Power System
RPS.45
of market power do not have supply curves comparable to highly concentrated markets raise antitrust concerns, as they
that ofan idealistic perfectly competitive fim. This recognition are assumed to enhance market power under the section 5.3
is a major stumbling block in the explanation of the law of| of the Horizontal Merger Guidelines jointly issued by the
supply and the role that the law ofsupply is plays in market department and the Federal Trade Commission (FTC).
analysis.
The primary advantage of the Herfindahl-Hirschman
Index (HHI) is the simplicity of the calculation necessary to
Q.11 Explain HHI Index in detail. What are the determine it and the small amount of data required for the
limitations of HHI index. calculation. The primary disadvantage ofthe HHI stems from
the fact that it is such a simple measure that it fails to take
into account the complexities of various markets in a way
Ans. The Herfindahl-Hirschman Index (HHI) is a commnon that allows for a genuinely accurate assessment of
measure of market concentration and is used to determine competitive or monopolistic market conditions.
market competitiveness, often pre- and post-M&A
Key Takeaways
transactions.
The Herfindahl-Hirschman Index (HH) is a commonly The Herfindahl-Hirschman Index (HHI) is a common
accepted measure of market concentration. It is calculated measure of market concentration and is used to
determine market competitiveness, often pre- and post-
by squaring the market share of each firm competing in a
M&A transactions.
market and then summing the resulting numbers. It can range
fromclose to zero to 10,000. The U.S. Department ofJustice A market with an HHI of less than 1,500 is considered
uses the HHI for evaluating potential mergers issues. to be a competitive marketplace, an HHI of 1,500 to
The formula for the Herfindahl-Hirschman Index is 2,500 to be a moderately concentrated marketplace,
and an HHI of 2,500 or greater to be a highly
HHI s+s +st+ concentrated marketplace.

Where The primary disadvantage of the HHl stems from the

fact that it is such a simple measure that it fails totake
market share percentage of firm n expressed
s is the
into account the complexities of various markets.
as a whole number, not a decimal.
An Example of Herfindahl-Hirschman Index
Working of HHI: The closer a market is to a monopoly,
Calculations: The HHI is calculated by taking the market
the higherthe market's concentration (and the lower its
share of each firm in the industry, squaring them, and summing
competition). If, for example, there were only one firm in an
the result, as depicted in the equation above.
industry, that firm would have 100% market share, and the
Herfindahl-Hirschman Tndex (HHI) would equal 10,000, Consider the following hypothetical industry with four
indicating a monopoly. If there were thousands of firms total firms:
competing, each would have nearly 0% market share, and Firm one market share= 40%
the HHI would be close to zero, indicating nearly perfect
competition. Firm two markèt share = 30%

The U.S. Department of Justice considers a market Firm three market share = 15%
with an HHl of less than 1,500 to be a competitive Firm four market share= 15%
marketplace, an HHI of 1,500 to 2,500 to be a moderately
The HHI is calculateda
concentrated marketplace, and an HHI of 2,500 or greater
to be a highly concentrated marketplace. As a general rule, HHI =402 +302+152 +152
mergers that increase the HHI by more than 200 points in = 1,600+900+225 +225 2,950
 RPS.46 B. Tech. (V Sem.) E.E. Solved Papers

This HHI value is considered a highly concentrated to have 10 active companies, and each company has about a
ndustry, as expected since there are only four firms. But the 10% market share. Using the basic HHI calculation, the
number of firms in an industry does not necessarily indicate industry would appear highly competitive.
anything about market concentration, which is why calculating However, within the marketplace, one company might
the HHI is important. have as much as 80% to 90% of the business for a specific
For example, assume an industry has 20 firms. Firm segment of the market, such as the sale of one specific item
one has a market share of 48.59% and each of the 19 That firm would thus have nearly a total monopoly for the
remaning firms has a market share of2.71% each. The HHI production and sale of that product.
would exactly 2,500, indicating a highly concentrated market. Another problem in defining a market and considering
If firm number one had a market share of 35.82% and each market share can arise from geographic factors. This problem
of the remaining firms had a 3.38% market share, the HHI can occur when there are companies within an industry that
would be exactly 1,500, indicating a competitive marketplace. have roughly equal market share, but they each operate only
Limitations of the HHI Index : The basic simplicity ofthe in specific areas of the country, so that each firm, in effect,
HHI carries some inherent disadvantages, primarily in terms has a monopoly within the specific marketplace in which it
of failing to define the specific market that is being examined does business. For these reasons, for the HHI to be properly
in a proper, realistic manner. For example, consider a situation used, other factors must be taken into consideration and
in which the HHI is used to evaluate an industry determined markets must be very clearly defined.