1. Electricity Restructuring and Deregulation
Chapter 13
Electricity Restructuring and Deregulation
The Path Forward?
Part A

2. Outline
Introduction
Brief Economic History of Electricity Restructuring
Restructuring
Two Paths to Restructuring
Other Examples of Electricity Restructuring
of 16

3. Introduction
Previously we saw that regulation was necessary to improve efficiency
However there is still room for improvement
Recall the AJ effect and regulatory capture
Now we consider partial deregulation as a further step toward efficiency
Also known as restructuring, as even “deregulated” electricity industries are still heavily regulated
of 16

4. Introduction (Cont.)
While deregulation is the more popular term, restructuring is more accurate
The big change is allowing competition in the generation and retail stages
New regulation has been created to manage these new markets
Independent System Operators (ISOs)
Regional Transmission Organizations (RTOs)
of 16

5. U.S. Electricity Markets
Note that Northwest, Southeast, and Southwest are traditional regulated markets.
U.S. Electricity Markets
of 16

6. Brief Economic History of Electricity Deregulation and Restructuring
Ronald Reagan and Margaret Thatcher elected
Conservative governments championed markets and less government intervention
Several other industries undergoing deregulation
Including Telecommunications, Natural Gas
Electricity industry was virtually the same as it had been in the 1930s
Vertically integrated (Generation  Transmission  Distribution)
Little incentive to innovate
PURPA (1978) showed that small-scale, competitive generation was feasible
Particularly solar and natural gas
Created FERC as successor to FPC
Oversee new and more competitive institutions in both electricity and natural gas
of 16

7. Brief Economic History (cont.)
Natural gas industry deregulation demonstrated potential to separate ownership of generation and transmission
Marketers could compete at the retail level
Offer choice of electricity suppliers and differentiated products
Price competition, but also:
Green power
Electricity from non-polluting generating sources
Interruptible rates
Gives the utility the right to interrupt service
Load control
Allows utilities to centrally control appliances to reduce demand at times of tight capacity
Variable rates
Charges the consumer a higher price during peak hours when more costly generation technologies are required and a lower price during off-peak hours
Eventually lease or sell electricity technology
Energy efficiency
Lease or sell solar systems, electricity storage.
of 16

8. Restructuring (1) Energy Policy Act (EPAct) of 1992 – U.S.
Allowed independent power producers (IPPs), beyond those included in PURPA, to sell electricity to utilities
Existing utilities could now sell to other utilities and to emerging wholesale markets
Wholesale markets developed auction mechanisms to identify the lowest-cost suppliers and customers with the highest willingness to pay
Central Electricity Generating Board (CEGB) – Great Britain
Centrally planned electricity system created in the 1950s
Broken up in the 1990s into three regional generating firms and one public national transmission company
of 16

9. Restructuring (2): Natural Gas as a Benchmark
Generation to become fully competitive
Transmission and distribution lines still had economies of scale sufficient to maintain natural monopolies
Regulation would require transmission lines to offer open access
Non-discriminatory practices required so non-utility generators could compete with incumbent utility
Retail stage could also be competitive
Marketers could shop around for lowest-cost suppliers
Consumers could shop around for lowest-cost retailers
May also choose to pay more for renewable power or opt for time-differentiated prices and load control
of 16

10. Restructuring (3): New Regulatory Institutions
Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs)
Help facilitate competitive bidding among generators and reliability in transmission
Distribution System Operators (DSOs)
Coordinate independent generation
Wind, Solar, and Electric Vehicles
of 16

11. Restructuring (4): Distributed Generation
Opposite of centralized generation
Rooftop solar, wind, and small- scale natural gas units
Reduces the need for new transmission lines
Also decreases losses from existing lines
of 16

12. Restructuring (5): Challenges for Electricity Restructuring (1)
Electricity follows the laws of physics above all else
Dispatchers cannot control its path if there is more than one circuit or branch at a particular node
Kirchhoff’s Laws
Dictate how current and power flows
Dependent on impedance (resistance)
Electricity will follow the path of least resistance
Transmission lines have limited capacity
Electricity may be forced to follow alternate paths
No telling who is getting what electricity
Like trying to figure out if one drop of water in a swimming pool came out of a particular nozzle when there are multiple points of injection.
of 16

13. Restructuring (5): Challenges (2) Locational Marginal Pricing (LMP)
The physics of electricity will lead to differences in price by location
Example:
Generators at A & B can generate 5 MW each, Customer at C Demands 5 MW
A has a constant MC = $30/MW, B has a constant MC = $40/MW
(2GA + 1GB )/3
+GA MW
(GA - GB )/3
(1GA + 2GB )/3
-(GA + GB )MW B A C
+GB MW
Assuming no line capacity, what is the equilibrium price?
What if line AC is limited to 3 MW?
of 16

14. Restructuring (6): Challenges (3) Other Challenges
Supply and demand must be equal at all times
Failure to do so will result in catastrophic failures of the system
Blackouts if D>S
Critical overloads if S>D
Demand varies continuously
Deregulated prices will be volatile
May be difficult to recoup the cost of peak generation units
They are the most expensive to operate and may only be in use for a few hours out of the year
of 16

15. Restructuring (7): Challenges (4) ISOs & RSOs
Entrusted to match supply and demand
Use day-ahead, hour-ahead, and real-time prices
There are seven ISO/RTO organizations in the U.S.
California (CAISO), New York (NYISO), and Texas (ERCOT) use state systems
Others operate regionally
ISO-NE, PJM, MISO, and the SPP
Need to provide ancillary services, to maintain grid stability
Spinning reserves run even when not generating power
Used to ramp up generation on short notice
More critical with the increased use of intermittent renewable resources
of 16

16. Restructuring (8): Challenges (5) Transactions Costs
Oliver Williamson (2002) suggested that transactions costs may be greater when transactions take place outside the firm
The holdup problem may become an issue
A generation facility has little value without access to transmission lines
Transmission lines may be able to take advantage of their upper hand
Holdup may also play out in reverse order
Generator threatens to not use transmission line unless it gets a lower price.
Contracting between firms to resolve this problem may result in more costs than are saved from deregulation
Could vertical integration be more efficient?
of 16