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Fundamentals of Power System Economics
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Fundamentals of Power,System Economics,Fundamentals of Power. System Economics,Daniel Kirschen,Goran Strbac, University of Manchester Institute of Science Technology UMIST UK. Copyright 2004 John Wiley Sons Ltd The Atrium Southern Gate Chichester. West Sussex PO19 8SQ England,Telephone 44 1243 779777. Email for orders and customer service enquiries cs books wiley co uk. Visit our Home Page on www wileyeurope com or www wiley com. All Rights Reserved No part of this publication may be reproduced stored in a retrieval system or. transmitted in any form or by any means electronic mechanical photocopying recording scanning or. otherwise except under the terms of the Copyright Designs and Patents Act 1988 or under the terms of a. licence issued by the Copyright Licensing Agency Ltd 90 Tottenham Court Road London W1T 4LP. UK without the permission in writing of the Publisher Requests to the Publisher should be addressed to. the Permissions Department John Wiley Sons Ltd The Atrium Southern Gate Chichester West. Sussex PO19 8SQ England or emailed to permreq wiley co uk or faxed to 44 1243 770620. This publication is designed to provide accurate and authoritative information in regard to the subject. matter covered It is sold on the understanding that the Publisher is not engaged in rendering professional. services If professional advice or other expert assistance is required the services of a competent. professional should be sought,Other Wiley Editorial Of ces. John Wiley Sons Inc 111 River Street Hoboken NJ 07030 USA. Jossey Bass 989 Market Street San Francisco CA 94103 1741 USA. Wiley VCH Verlag GmbH Boschstr 12 D 69469 Weinheim Germany. John Wiley Sons Australia Ltd 33 Park Road Milton Queensland 4064 Australia. John Wiley Sons Asia Pte Ltd 2 Clementi Loop 02 01 Jin Xing Distripark Singapore 129809. John Wiley Sons Canada Ltd 22 Worcester Road Etobicoke Ontario Canada M9W 1L1. Wiley also publishes its books in a variety of electronic formats Some content that appears. in print may not be available in electronic books,British Library Cataloguing in Publication Data.
A catalogue record for this book is available from the British Library. ISBN 0 470 84572 4, Typeset in 10 12pt Times by Laserwords Private Limited Chennai India. Printed and bound in Great Britain by Antony Rowe Ltd Chippenham Wiltshire. This book is printed on acid free paper responsibly manufactured from sustainable forestry. in which at least two trees are planted for each one used for paper production. For Penny and Philippe,For Dragana Jelena and Anna. PREFACE xi,1 INTRODUCTION 1,1 1 Why Competition 1,1 2 Dramatis Personae 2. 1 3 Models of Competition 4,1 3 1 Model 1 Monopoly 4. 1 3 2 Model 2 Purchasing agency 4,1 3 3 Model 3 Wholesale competition 5.
1 3 4 Model 4 Retail competition 6,1 3 5 Competition and privatization 7. 1 4 Open Questions 7,1 5 Further Reading 8,1 6 Problems 9. 2 BASIC CONCEPTS FROM ECONOMICS 11,2 1 Introduction 11. 2 2 Fundamentals of Markets 11,2 2 1 Modeling the consumers 11. 2 2 2 Modeling the producers 17,2 2 3 Market equilibrium 21.
2 2 4 Pareto ef ciency 22,2 2 5 Global welfare and deadweight loss 24. 2 3 Concepts from the Theory of the Firm 25,2 3 1 Inputs and outputs 25. 2 3 2 Long run and short run 26,2 3 3 Costs 29,2 4 Types of Markets 33. 2 4 1 Spot market 33,2 4 2 Forward contracts and forward markets 34. viii CONTENTS,2 4 3 Future contracts and futures markets 36.
2 4 4 Options 37,2 4 5 Contracts for difference 38. 2 4 6 Managing the price risks 39,2 4 7 Market ef ciency 39. 2 5 Markets with Imperfect Competition 39,2 5 1 Market power 39. 2 5 2 Models of imperfect markets 40,2 5 3 Monopoly 43. 2 6 Further Reading 44,2 7 Problems 45,3 MARKETS FOR ELECTRICAL ENERGY 49.
3 1 Introduction 49, 3 2 What is the Difference Between a Megawatt Hour and a Barrel of Oil 49. 3 3 The Need for a Managed Spot Market 51,3 4 Open Electrical Energy Markets 52. 3 4 1 Bilateral trading 52,3 4 2 Electricity pools 55. 3 4 3 Comparison of pool and bilateral trading 58,3 5 The Managed Spot Market 59. 3 5 1 Obtaining balancing resources 60,3 5 2 Gate closure 61.
3 5 3 Operation of the managed spot market 61, 3 5 4 Interactions between the managed spot market and the other. markets 63,3 6 The Settlement Process 64,3 7 Further Reading 66. 3 8 Problems 67, 4 PARTICIPATING IN MARKETS FOR ELECTRICAL ENERGY 73. 4 1 Introduction 73,4 2 The Consumer s Perspective 73. 4 2 1 Retailers of electrical energy 75,4 3 The Producer s Perspective 79.
4 3 1 Perfect competition 80,4 3 2 The production versus purchase decision 88. 4 3 3 Imperfect competition 90, 4 4 Perspective of Plants with Very Low Marginal Costs 99. 4 5 The Hybrid Participant s Perspective 99,4 6 Further Reading 101. 4 7 Problems 102,CONTENTS ix,5 SYSTEM SECURITY AND ANCILLARY SERVICES 105. 5 1 Introduction 105,5 2 Describing the Needs 107,5 2 1 Balancing issues 107.
5 2 2 Network issues 111,5 2 3 System restoration 117. 5 3 Obtaining Ancillary Services 117, 5 3 1 Compulsory provision of ancillary services 118. 5 3 2 Market for ancillary services 119, 5 3 3 Demand side provision of ancillary services 119. 5 4 Buying Ancillary Services 120,5 4 1 Quantifying the needs 120. 5 4 2 Co optimization of energy and reserve in a centralized. electricity market 121,5 4 3 Allocating the costs 129.
5 5 Selling Ancillary Services 130,5 6 Further Reading 136. 5 7 Problems 137,6 TRANSMISSION NETWORKS AND ELECTRICITY. MARKETS 141,6 1 Introduction 141, 6 2 Decentralized Trading Over a Transmission Network 141. 6 2 1 Physical transmission rights 142, 6 2 2 Problems with physical transmission rights 143. 6 3 Centralized Trading Over a Transmission Network 148. 6 3 1 Centralized trading in a two bus system 148, 6 3 2 Centralized trading in a three bus system 155.
6 3 3 Losses in transmission networks 175, 6 3 4 Mathematical formulation of nodal pricing 181. 6 3 5 Managing transmission risks in a centralized trading system 190. 6 4 Further Reading 199,6 5 Problems 200,7 INVESTING IN GENERATION 205. 7 1 Introduction 205, 7 2 Generation Capacity from an Investor s Perspective 205. 7 2 1 Building new generation capacity 205,7 2 2 Retiring generation capacity 212. 7 2 3 Effect of a cyclical demand 213, 7 3 Generation Capacity from the Customers Perspective 217.
7 3 1 Expansion driven by the market for electrical energy 217. x CONTENTS,7 3 2 Capacity payments 220,7 3 3 Capacity market 221. 7 3 4 Reliability contracts 222,7 4 Further Reading 223. 7 5 Problems 224,8 INVESTING IN TRANSMISSION 227,8 1 Introduction 227. 8 2 The Nature of the Transmission Business 228,8 3 Cost based Transmission Expansion 230. 8 3 1 Setting the level of investment in transmission capacity 230. 8 3 2 Allocating the cost of transmission 231,8 4 Value based Transmission Expansion 233.
8 4 1 Quantifying the value of transmission 233,8 4 2 The transmission demand function 236. 8 4 3 The transmission supply function 237,8 4 4 Optimal transmission capacity 238. 8 4 5 Balancing the cost of constraints and the cost of investments 240. 8 4 6 Effect of load uctuations 241, 8 4 7 Revenue recovery for suboptimal transmission capacity 246. 8 4 8 Effect of economies of scale 248,8 4 9 A three bus example 251. 8 4 10 Concept of reference network 256,8 4 11 Generalization 257.
8 5 Further Reading 262,8 6 Problems 263,APPENDIX ANSWERS TO SELECTED PROBLEMS 265. ABBREVIATIONS AND ACRONYMS 275, For about a hundred years the electricity supply industry was in the hands of verti. cally integrated monopoly utilities During that time engineers treated the management. of this industry as a set of challenging optimization problems Over the years these. optimization problems grew in size complexity and scope New algorithms were devel. oped and ever more powerful computers were deployed to re ne the planning and the. operation of the power systems With the introduction of competition in the electric. ity supply industry a single organization is no longer in charge Multiple actors with. divergent or competing interests must interact to deliver electrical energy and keep the. lights on Conventional optimization problems are often no longer relevant Instead. dozens of new questions are being asked about a physical system that has not changed. To deliver the promised bene ts of competition old issues must be addressed in radi. cally new ways To stay in business new companies must maximize the value of the. service they provide Understanding the physics of the system is no longer enough We. must understand how the economics affect the physics and how the physics constrain. the economics, An environment with many independent participants evolves very rapidly Over the. last two decades hundreds of technical papers thousands of reports and a few books. have been written to discuss these new issues and to propose solutions The objective. of this book is not to summarize or repeat what is in these documents Instead we have. chosen to concentrate on delivering a clear and in depth explanation of the fundamental. issues Our aim is to give the readers a solid understanding of the basics and help. them develop innovative solutions to problems that vary in subtle ways from country. to country from market to market and from company to company Therefore we do. not discuss the organization of speci c markets Neither do we attempt to describe all. the solution techniques that have been proposed, The plan of this book is simple After introducing the participants in a restructured. electricity supply industry we discuss the concepts from microeconomics that are. essential for the understanding of electricity markets We then move on to the analysis. of the operation of power systems in a competitive environment To keep matters. simple we begin by ignoring the transmission network and we consider the operation. of pure energy markets We then discuss power system security and the effects that. networks have on electricity prices Finally in the last two chapters we address the. issue of investments in power generation and transmission equipment in a competitive. environment,xii PREFACE, The typical reader we had in mind while writing this book was a rst year gradu.
ate student or a nal year undergraduate student specializing in power engineering We. have assumed that these students know the physical structure of power systems under. stand the purpose and principles of a power ow calculation and are familiar with basic. optimization theory We believe that this book will also be valuable to engineers who. are working on deregulation or competition issues and who want to acquire a broader. perspective on these questions Finally this book might also be useful to economists. and other professionals who want to understand the engineering perspective on these. multidisciplinary issues, Except when a speci c source is cited we have made no attempt to use or produce. realistic numbers in the problems and examples We have used as a unit for money. because it is probably the best known symbol for a currency We could have used. or instead without any change in meaning, Some of our examples refer to the ctitious countries of Syldavia and Borduria. which are the product of the fertile imagination of the Belgian cartoonist Herge creator. of the character Tintin, This book stems from our research and teaching activities in power system eco. nomics at UMIST We are grateful to our colleagues Ron Allan and Nick Jenkins for. fostering an environment in which this work was able to ourish We also thank Fiona. Woolf for fascinating interdisciplinary discussions on transmission expansion. A few of our students spent considerable time proofreading drafts of this book. and checking answers to the problems In particular we thank Tan Yun Tiam Miguel. Ortega Vazquez Su Chua Liang Mmeli Fipaza Irene Charalambous Li Zhang Jaime. Maldonado Moniet Danny Pudjianto and Joseph Mutale Any remaining errors are our. sole responsibility,Introduction,1 1 Why Competition. For most of the twentieth century when consumers wanted to buy electrical energy. they had no choice They had to buy it from the utility that held the monopoly for the. supply of electricity in the area where these consumers were located Some of these util. ities were vertically integrated which means that they generated the electrical energy. transmitted it from the power plants to the load centers and distributed it to individual. consumers In other cases the utility from which consumers purchased electricity was. responsible only for its sale and distribution in a local area This distribution utility in. turn had to purchase electrical energy from a generation and transmission utility that. had a monopoly over a wider geographical area In some parts of the world these. utilities were regulated private companies while in others they were public companies. or government agencies Irrespective of ownership and the level of vertical integration. geographical monopolies were the norm, Electric utilities operating under this model made truly remarkable contributions to.
economic activity and quality of life Most people living in the industrialized world. have access to an electricity distribution network For several decades the amount of. energy delivered by these networks doubled about every eight years At the same time. advances in engineering improved the reliability of the electricity supply to the point. that in many parts of the world the average consumer is deprived of electricity for less. than two minutes per year These achievements were made possible by ceaseless tech. nological advances Among these let us mention only the development and erection of. transmission lines operating at over 1 000 000 V and spanning thousands of kilometers. the construction of power plants capable of generating more than 1000 MW and the. online control of the networks connecting these plants to the consumers through these. lines Some readers will undoubtedly feel that on the basis of this record it may have. been premature to write the rst paragraph of this book in the past tense. In the 1980s some economists started arguing that this model had run its course. They said that the monopoly status of the electric utilities removed the incentive to. operate ef ciently and encouraged unnecessary investments They also argued that. the cost of the mistakes that private utilities made should not be passed on to the. consumers Public utilities on the other hand were often too closely linked to the. government Politics could then interfere with good economics For example some. Fundamentals of Power System Economics Daniel Kirschen and Goran Strbac.


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