Class 1 Economic systems for electric power planning Professors Jim McCalley and Yonghong Chen

Instructors: Yonghong Chen James McCalley

We will use Blackboard, found at top of main ISU web pages. Use standard netid and pw to get in. Pay attention to the following folders under “All Course Content” Administrative: schedule, objectives, structure Homework/Assignments: (and solutions) Class Notes: everything else, including: PPT slides or other documents used in class Additional readings The additional readings for a particular set of class material will be just before or just after the material that references it.

Assignments for this week 1.Read Paper on website linked by the name of “California Crisis Explained.” Complete HW1 (also on JDM website) to turn in on Wednesday 9/3. 2.Read notes on JDM website called “Overview of Electricity Markets.” 3.Read chapter 1 in Textbook. 4.Read “Notes on cost curves” from JDM website.

What this course is about The electric industry and …. Its characteristics before, but mainly its characteristics after Before, and after what?

What happened? Deregulation Privatization Vertical disaggregation Functional unbundling Introduced markets Brought competition

When did this happen? Well, sort of, actually, it all started much earlier…

What was it before? A monopolistic, and regulated, industry  In any given region, there is only one organization from which to buy.  Other organizations are blocked.  Reasons for giving monopoly status can vary, but in the electric industry, the main reason was… Economies of scale… when average cost of production, $/MWhr, decreases as generation plant gets larger.

Economies of scale And this drove all thinking in the electric industry from 1900 until the early 1960’s. And then what happened?

Four things 1.Concerns over gold-plating (Averch-Johnson, 1962) 2.Contrary to economy of scales, smaller plants began to look more economic (and so anyone almost could build one). Why ? a)Large plants take years to build, often must be located far away, and can have severe impact when they outage. Smaller plants are built more quickly and their construction costs are consequently subject to less economic uncertainty; can be located more closely to load centers, an attribute that avoids transmission, decreases system losses, & is advantageous for system security; are generally more reliable, and less consequential when they do outage. b)Combined cycle units, attractive because of high efficiency, have to account for design complexities due to coupling between CTs & HRSGs driven by waste heat from the CTs, and so tend to be lower in rating. c)Cogeneration facilities, attractive because of high efficiency, typically have lower ratings as a result of their interdependency with the industrial steam processes supported by them. d)Plants fueled by renewable energy sources (biomass, wind, solar, and independent hydro), attractive because of their low operating expenses and environmental appeal, also tend to have lower ratings.

Four things 3.Reaganomics – and public approval of less tax, less government, less regulation, more competition (lower prices). 4.Fred Schweppe: F. Schweppe, “Power Systems 2000,” IEEE Spectrum, Vol. 15, No. 7, July F. Schweppe, R. Tabors, J. Kirtley, H. Outhred, F. Pickel, and A. Cox, “Homeostatic Utility Control,” IEEE Trans. Pwr. App. And Sys., Vol. PAS-99, No. 3, May/June M. Caramanis, R. Bohn, and F. Schweppe, Optimal spot pricing: practice & theory, IEEE Transactions on Power Apparatus and Systems, Vol. PAS-101, No. 9 September F. Schweppe, M. Caramanis, R. Tabors, R. Bohn, “Spot Pricing of Electricity,” Kluwer, 1988.

And this is what it looks like today… Advanced Metering Infrastructure

Given that the industry was monopolistic and is now competitive, what change must have occurred organizationally? Vertical disaggregation (functional unbundling)

? GGG G G G GG Transmission and System Operator Vertically Integrated Utility

? G G G G G G G G Transmission Owner Independent System Operator Transmission Owner Transmission Owner Today GGG G G G GG Transmission and System Operator Vertically Integrated Utility

And the ISO runs the electricity markets None of them existed in their present form previous to ~1996. They own no generation or transmission. They are central to the three most important power system functions today:  market operations, grid operations, and grid planning.

This was not without its ups and downs  HW1…

Which leads to the course objectives Objective 1: Identify the basic microeconomic principles on which electricity markets are based. Objective 2: Articulate the basic principle of the simplex method for solving linear programs. Objective 3: Formulate and solve a linear program using Matlab, Excel, or CPLEX. Objective 4: Articulate principles of branch & bound algorithm for solving integer programs Objective 5: Formulate and solve an integer program using Matlab, Excel, or CPLEX. Objective 6: Identify the main design attributes of an electricity market system. Objective 7: Set up and solve for the social optimum and locational marginal prices of a network with agents having elastic supply and demand functions, using linear programming. Objective 8: Identify how security constrained economic dispatch and the security constrained unit commitment are used in electricity markets. Objective 9: Identify motivation for & approach used in markets for financial transmission rights. Objective 10: Identify the motivation for and approach used in markets for resource capacity. ELECTRICITY MARKETS MICROECONOMICSOPTIMIZATIONPOWER SYSTEM ENGR

A question Are electricity markets new? A commodity market is a market where agents trade (buy and sell) primary products such as wheat, coffee, cocoa and sugar; and gold, rubber and oil. Commodity markets in a crude early form are believed to have originated in Sumer (Iraq) between 4500 BC and 4000 BC. Sumerians first used clay tokens sealed in a clay vessel, then clay writing tablets to represent the amount—for example, the number of goats, to be delivered. These promises of time and date of delivery resemble futures contract. In 1864, in the United States, wheat, corn, cattle, and pigs were widely traded using standard instruments began trading on the Chicago Board of Trade (CBOT), the world's oldest futures and options exchange. Other food commodities were added to the Commodity Exchange Act and traded through CBOT in the 1930s and 1940s, expanding the list from grains to include rice, mill feeds, butter, eggs, Irish potatoes and soybeans.

A question Internet System B1 B2 B3 S1 S2 Sellers submit offers to sell in terms of Price ($/MWhr) Quantity (MWhr) Buyers submit bids to buy in terms of Price ($/MWhr) Quantity (MWhr)