1. Power System Economics Daniel Kirschen

2. Money © 2012 D. Kirschen & University of Washington1

3. Minimizing costs – Operating costs Fuel, personnel, maintenance – Investment costs Generators, lines, transformers, switching devices, … Maximizing profits – Competitive electricity markets Maximizing utility or benefits – Consumer’s perspective © 2012 D. Kirschen & University of Washington 2 What about money?

4. Reliability © 2012 D. Kirschen & University of Washington3

5. Operational reliability – Withstand faults, failures, forecasting errors and other common operational problems – Operate with a security margin Planning reliability – Ability to handle long term problems Units on long-term maintenance Droughts – Build enough spare capacity Reliability © 2012 D. Kirschen & University of Washington 4 What about reliability?

6. Providing a security margin and spare capacity 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 long term reliability Cost of reliability © 2012 D. Kirschen & University of Washington 5

7. Value of reliability Poor reliability cause consumer outages Outages cause a loss of revenue or 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 ~ 100 times larger than the cost of energy © 2012 D. Kirschen & University of Washington 6

8. Balancing the greed and the fear © 2012 D. Kirschen & University of Washington7

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 © 2012 D. Kirschen & University of Washington 8

10. Environmental impact © 2012 D. Kirschen & University of Washington9

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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 CO 2 emissions Others cannot be monetized – Effect of hydro generation on salmons – Modeled using additional operating constraints © 2012 D. Kirschen & University of Washington 11

13. Government energy policy Not “pure” economics – Markets and companies take a short term view 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 © 2012 D. Kirschen & University of Washington 12

14. Course outline (1) Organization of the electricity supply industry – What are the major economic functions? – Who does what? Introduction to optimization – Optimization with continuous variables – Optimization with discrete variables Traditional power system economics problems – Economic dispatch – Unit commitment – Optimal power flow © 2012 D. Kirschen & University of Washington 13

15. Course outline (2) Basic concepts from economics Organization of electricity markets Participating in electricity markets System security and ancillary services Effect of transmission networks on markets © 2012 D. Kirschen & University of Washington 14

16. Textbook © 2012 D. Kirschen & University of Washington15 A. Wood and B. Wollenberg, “Power Generation, Operation and Control”, Second Edition, Wiley-Interscience, 1996 D. Kirschen and G. Strbac, “Fundamentals of Power System Economics”, Wiley, 2004