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Chapter 1: Introduction

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1 Chapter 1: Introduction
Daniel Kirschen © 2008 D. Kirschen & The University of Manchester

2 Money © 2018 D. Kirschen & University of Washington

3 What about money? Minimizing costs Maximizing profits
Operating costs Fuel, personnel, maintenance Investment costs Generators, lines, transformers, switching devices, … Maximizing profits Competitive electricity markets Maximizing utility or benefits Consumer’s perspective © 2018 D. Kirschen & University of Washington

4 Reliability © 2018 D. Kirschen & University of Washington

5 What about reliability?
Operational reliability Withstand faults, failures, forecasting errors and other regular operational problems Operate with a security margin Resilience Withstand natural disasters Build a more robust system Reliability © 2018 D. Kirschen & University of Washington

6 Cost of reliability Providing a security margin costs money
Run additional generating units to have some operating reserve Limit production of some generating units to avoid problems in case of a sudden outage Build additional generators and transmission lines to improve resilience © 2018 D. Kirschen & University of Washington

7 Value of reliability Loss of revenue Loss of comfort
Measured using surveys Estimate of cost of latest outages or Willingness to pay extra to avoid outages Value of Lost Load (VoLL) Average value of a MWh not delivered Estimates range from $2,400 to $20,000 per MWh ~ 100 times larger than the cost of energy © 2018 D. Kirschen & University of Washington

8 Balancing the greed and the fear
© 2018 D. Kirschen & University of Washington

9 How do we model this balance?
Mathematical optimization problem Cost minimization or profit maximization Reliability introduced through constraints Explicit costing of reliability is still controversial © 2018 D. Kirschen & University of Washington

10 Environmental impact © 2018 D. Kirschen & University of Washington

11 © 2018 D. Kirschen & University of Washington

12 Three-way balancing More complex optimization problems
Some environmental effects can be monetized Operating cost of renewable generation is essentially zero Carbon tax or carbon trading to reflect the effect of CO2 emissions Others cannot be monetized Effect of hydro generation on salmon Modeled using additional operating constraints © 2018 D. Kirschen & University of Washington

13 Government energy policy
Not “pure” economics Markets and companies take a short term view Monopolies  need for regulation Long term or strategic considerations Reduce dependence on imports Introduction of competitive electricity markets Choice of primary energy sources Promotion of wind and photovoltaic in Germany Nuclear power in France Energy conservation in the Pacific Northwest © 2018 D. Kirschen & University of Washington

14 Organization of the electricity supply industry
© 2018 D. Kirschen & University of Washington

15 Traditional electric utility model
Generation Transmission Distribution Retail Monopoly Only supplier of electricity in a given region (“service territory”) Consumer does not have a choice of supplier Vertically integrated A single organization performs all the technical and business functions Consumer © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

16 Why vertical integration?
Generation Transmission Distribution Retail Used to be considered more efficient Issues: Lack of transparency Poor internal communication in very large organizations Consumer © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

17 Why vertical integration?
Generation Transmission Distribution Retail Possible variants: Distribution + retail Many municipal utilities Rural electricity cooperatives Generation + transmission Bonneville Power Administration Consumer © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

18 Why monopolies? Building a power system is expensive
Building competing transmission and distribution networks does not make sense “Natural Monopoly” Until recently having several companies “share” a power system was too complicated Monopoly can be: Private (investor-owned utility) Public (municipal, utility district, national) Size of service territories varies © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

19 Example 1: Puget Sound Energy
Investor-owned utility Private monopoly © 2018 D. Kirschen & University of Washington

20 Example 2: Seattle City Light
Owned by the City of Seattle Public monopoly © 2018 D. Kirschen & University of Washington

21 Example 3: BC Hydro Owned by the Province of British Columbia
Public monopoly © 2018 D. Kirschen & University of Washington

22 Types of utilities in the United States
Number Investor Owned Companies 265 Municipal Systems 1,818 Public Power Districts 75 State 68 County Systems 5 Rural Electric Co-Ops 922 U.S. Government 37 © 2018 D. Kirschen & University of Washington

23 Regulation A private monopoly could abuse its position
It must be regulated by the government Government-owned utilities operate for the public good No need for outside regulation Elect new representatives if we are not satisfied © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

24 The “Regulatory Compact”
Agreement between an Investor Owned Utility (IOU) and a government IOU receives the right to be the monopoly supplier over a certain territory IOU accepts that its rates (i.e. what it can charge consumers) will be determined by a regulator Example: Washington Utilities and Transportation Commission © 2018 D. Kirschen & University of Washington

25 Rate of return regulation
Regulator sets the rates so that the IOU can: Recover its operating cost (fuel, personnel, etc…) Recover its investment costs (plants, lines, etc…) Pay a fair rate of return to its investors A monopoly utility is a low risk investment No competition A bankrupt utility is in nobody’s interest The rate of return can therefore be low compared to other investments © 2018 D. Kirschen & University of Washington

26 Problems with Private Monopolies
Monopolies are inefficient No competition No need to be efficient to survive No incentive to be efficient: Utility earns more if it invests more No penalty for building “white elephants” High costs passed on to consumers as high prices of electricity A bankrupt utility is in nobody’s interest Rates are “higher than they should be” © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

27 Could the regulators do better?
Regulation is difficult Little basis for comparison Each regulator oversees a small number of utilities Each utility has a territory with different characteristics Difficult to evaluate the utilities’ decisions Regulator does not have as much staff as the utility “Information imbalance” © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

28 Problems with Public Monopolies
A good government will run its utilities in an efficient and far-sighted manner This is not always the case Conflicts can arise between the objectives of the government and the objectives of the utility Government monopolies are inefficient too! © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

29 Things bad governments do…
Keep rates low to please the voters Utility does not have enough money for investments Keep rates high and use the surplus money for other programs Inefficient taxation Discourage consumption of electricity Force the utility to make unnecessary investments to create jobs © 2018 D. Kirschen & University of Washington

30 The “new” electricity supply model
Privatization of public utilities Not in the US Primarily in Europe and South America “Unbundling” Separate the different functions of the utility Introduce competition Treat electrical energy (MWh) as a commodity Create markets for trading this commodity Energy transmission and distribution remain services provided by monopoly companies © 2018 D. Kirschen & University of Washington

31 Expected benefits of privatization
Utility can focus on its mission If markets function properly: Utility gets the revenues it needs Price of electricity reflects its true cost Optimal allocation of economic resources Access to private sector capital Important in developing countries when government is short of money for investments Revenue from the sale of privatized assets Short term only © 2018 D. Kirschen & University of Washington

32 Expected benefits of unbundling
Separation between the parts where competition is possible and those where a monopoly is needed: Competition between generators Monopoly for transmission and distribution More transparency in the the system Essential to create a fair market An independent system operator will not favor one generator over another © 2018 D. Kirschen & University of Washington

33 Expected benefits of competition
Introduce competition Generators become more efficient Production cost decreases Economy benefits Competitive market Price to consumers decreases © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

34 North American Electricity Markets
© 2018 D. Kirschen & University of Washington

35 Market Structures Vertically integrated utility Purchasing agency
Wholesale competition Retail competition © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

36 Vertically Integrated Utility
Generation Transmission Distribution Consumer Figure 1.1: Traditional model of electricity supply Electricity sale Electricity flow within a company © 2018 D. Kirschen & University of Washington

37 Vertically Integrated Generation and Transmission
Disco Disco Consumer Consumer Consumer Consumer Figure 1.2: Variant on the traditional model of electricity supply Electricity sale Electricity flow within a company © 2018 D. Kirschen & University of Washington

38 Vertically Integrated Utility
Generation Transmission Consumer Distribution IPP IPP Figure 1.3: Incumbent vertically integrated utility with IPPs Electricity sale Electricity flow within a company © 2018 D. Kirschen & University of Washington

39 Figure 1.4: Wholesale electricity market structure
Genco Wholesale Market ISO, TSO, MO Large Consumers Disco Disco Disco Consumers Consumers Consumers Figure 1.4: Wholesale electricity market structure © 2018 D. Kirschen & University of Washington

40 Figure 1.5: Market with retail competition
Genco Wholesale Market ISO, TSO, MO Large Consumers Retailer Retailer Retailer Retail Market Discos Consumer Consumer Consumer Consumer Figure 1.5: Market with retail competition © 2018 D. Kirschen & University of Washington

41 (who are the characters in the play)
Dramatis Personae (who are the characters in the play) © 2018 D. Kirschen & University of Washington

42 The old model The Utility The Regulator The Customer (silent part)
Image: Salvatore Vuono / FreeDigitalPhotos.net The Utility The Regulator The Customer (silent part) © 2018 D. Kirschen & University of Washington

43 Customer (old model) Data from National Grid (UK)
© 2018 D. Kirschen & University of Washington

44 Vertically-Integrated Monopoly Utility
Owns and operates all the assets: Generating plants Transmission network Distribution network Control centers Monopoly over a given area © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

45 Actors after full unbundling
Generating companies (GENCO) Distribution companies (DISCO) Electricity retailers Market Operators (MO) Independent System Operator (ISO) Transmission Companies (TRANSCO) Consumers Regulator © 2018 D. Kirschen & University of Washington

46 Generating companies Own and operate power generating plants
Compete against each other to sell energy Competitive advantages: More efficient plants Cheaper fuel Higher plant availability © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

47 Distribution Companies
Own and operate the distribution networks Regulated business Revenues determined by the regulator based on the value of the assets Monopoly for the sale of electricity in their territory when there is NO retail market © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

48 Retailers Buy electrical energy from generators
Sell electrical energy to consumers Do not own large physical assets Often owned by a generator or a distribution company Competitive advantages: Negotiate good price with generators Identification of “good” customers Efficient billing system © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

49 Market Operator Facilitate trading of electricity Requirements:
Matches bids and offers submitted by buyers and sellers of electrical energy Runs the market settlement system Monitors delivery of energy Forwards payments from buyers to sellers Requirements: Fairness, independence Efficient technology to support trading Efficient settlement of trades © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

50 Independent System Operator
Operates the power system Maintain load/generation balance Responsible for operational reliability Operates the market of last resort Must be independent from other participants to ensure fairness of market Owns only computing and communication assets Also known as Regional Transmission Organizations (RTO) © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

51 Transmission Companies
Own and maintain transmission assets Lines Substations DC lines Operate these assets as instructed by the ISO Regulated business Revenues determined by the regulator based on the value of the assets © 2018 D. Kirschen & University of Washington

52 Transmission System Operator
Combines the functions of Independent System Operator Transmission Company Europe has TSOs North America has ISOs or RTOs © 2018 D. Kirschen & University of Washington

53 Large Consumers Industrial or large commercial consumers
May buy directly from the electricity market May buy electricity at time-varying prices Can sell “demand response” Reduce or shift load in response to price or an incentive © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

54 Small Consumers Residential or commercial consumers
Buy electricity from a retailer or a distribution company Buy electricity at a fixed price Too small to sell services directly in electricity market Sell demand response through an aggregator © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

55 Regulator Commercial regulation Technical regulation
© 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

56 Commercial Regulation
Oversees the operation of the electricity market Determines the allowed revenues of the monopolies (“wire companies”, i.e. transmission and distribution owners) Government body: Examples: Federal Energy Regulatory Commission (FERC) Wholesale markets & transmission Washington Utilities and Transportation Commission (WUTC) Retail market & distribution © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

57 Technical Regulation Sets the standards for power system reliability and power quality Enforces these standards Specialist body: North American Reliability Corporation (NERC) ENTSO-E (Europe) © 2018 D. Kirschen & University of Washington © 2008 D. Kirschen & The University of Manchester

58 Typical re-bundling Distribution + retail
Generation + transmission network owner Generation + retail System operator + market operator Transmission owner + distribution owner © 2018 D. Kirschen & University of Washington

59 Perspectives Old model New model
Point of view of the vertically integrated utility is the only one that matters New model Each actor has a different perspective because its motivation is different How does it make money? Different ways of looking at the same problem © 2018 D. Kirschen & University of Washington

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