ILLINOIS INSTITUTE OF TECHNOLOGY ELECTRIC POWER AND POWER ELCTRONICS CENTER POWER SYSTEM RESTRUCTURING ELECTRICITY MARKET PLANNING AND OPERATION

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ILLINOIS INSTITUTE OF TECHNOLOGY ELECTRIC POWER
AND POWER ELCTRONICS CENTERPOWER SYSTEM
RESTRUCTURING ELECTRICITY MARKET PLANNING AND
OPERATION
Dr. Mohammad Shahidehpour January 2005
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Outline

• Essence of restructured power systems

• SMD for restructuring
• Power system planning issues

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Electric Power Systems

• Electricity blackout that cascaded through the
  Midwest, Canada, and New York was not supposed to
  happen.
• One conclusion is evident Electricity grid is
  highly interconnected and interdependent. What
  happens in Ohio affects New York City and vice
  versa.
• Given this complexity, the electricity system
  requires carefully planned and consistent market
  rules governing the use of existing grid.
• Engineers have long be aware of these issues
• Political, business, and judicial entities are
  wrangling over who should set the rules and how.

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Electricity Facts

• Electricity is a cornerstone of the U.S. economy.
  
• approximately 4 of GDP in the U.S.
• In terms of revenue, it surpasses
  telecommunications, airline, and gas industries.
• 1 trillion total asset value
• 247 billion annual revenue
• Electricity is an essential commodity that has no
  substitute.
• Unlike most commodities, electricity cannot be
  stored easily, so it must be produced at the same
  instant it is consumed.

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Electricity Infrastructure

• Electricity infrastructure has made minute
  provisions to meet the changing needs of the
  economy.

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Issues to be Considered

• A cascading blackout is not a good thing.
  However, it brings a few issues to our attention
  
• Short-term task is to introduce consistent market
  rules for coordinating the use of current
  transmission grid.
• Long-term grid upgrade. Failure to take action to
  mitigate transmission bottlenecks could result in
  further degradation of electricity
  infrastructure.

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Natural Monopoly

• Electricity services has long been considered by
  economists to be a natural monopoly.
• Natural monopoly exists if one service provider
  can serve customers more efficiently than
  competing service providers.
• Rationale of electricity industry as natural
  monopoly
• Capital intensive generating plants,
  transmission network, and distribution network.
• Efficiency the larger the generating capacity,
  the more efficient.
• Public utility commissions regulated customer
  prices.

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Competition

• Good-natured Competition!
• technical competition
• installing the largest power unit of the day
• installing the most efficient generating unit
• cooperation
• Common views on most political and regulatory
  issues dealing with electric power were often
  expressed by a trade association, the Edison
  Electric Institute.
• Creation of an industry-wide RD organization in
  1972, the Electric Power Research Institute,
  which shared its fruits with all members.
• Few secrets existed among utility executives.

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Natural Monopoly No More.

• Emergence of new technologies challenged the
  rationale of natural monopoly
• Generation
• size is not the only determining factor
  (combined-cycle units)
• Transmission and distribution
• distributed generation (locally installed wind,
  photovoltaic)
• Superconductors (massive transmission)

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Competition

• Business Competition!
• slashing payrolls
• cutting costly "social" programs such as energy
  efficiency
• merging with others in attempts to reduce
  administrative costs and create synergies for
  dealing with new rivals
• gas and electric companies form new relationships
• In such a business competitive environment,
  managers may communicate with each other as
  openly as in the 1960s

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New Technologies

• Combined-cycle Units

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New Technologies

• Wind Turbine
• Fastest growing energy source in the world.
• By the end of 2000, total world wind capacity was
  about 17,000 MW, enough to generate about 34
  billion kWh a year.

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New Technologies

• Photovoltaic Systems
• Photovoltaic (PV) systems make use of solar
  energy to produce electricity.

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New Technologies
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Among the new facilities for managing
transmission flows are superconducting and
low-cost DC connections as well as FACTS devices
for improving the control and stability of
transmission grid.
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Vertically Integrated Utilities

• Monopoly
• Manage generation, transmission, and distribution
• Customers in service territories
• Rates (regulated prices) are set by regulatory
  organizations

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Restructuring What Why

• What is restructuring?
• Unbundling of vertically-integrated monopolies
  into separate generation, transmission and
  distribution entities.
• Increased competition through open access.
• What are restructuring goals?
• Reduce energy charges through competition.
• Customer choices of providers by creating open
  access.
• Level of service reliability can be priced for
  customers.
• Business opportunities for new products and
  services.

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New Flavor IPP
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Restructuring
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Generating Companies (GENCOs)

• GENCO is an entity that operates and maintains
  existing generating plants.
• Objective of a GENCO is to maximize profits.
• take part in various markets
• energy market
• ancillary services markets
• competitive actions
• arbitraging
• gaming
• Responsible for any possible risks.

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Transmission Companies (TRANSCOs)

• TRANSCO transmits electricity using a bulk
  transmission system.
• The use of TRANSCO assets will be under the
  control of the regional ISO, although the
  ownership continues to be held by original owners
  in the vertically integrated structure.
• TRANSCO has the role of building, owning,
  maintaining, and operating the transmission
  system in a certain geographical region to
  provide services for maintaining the overall
  reliability of the electrical system.
• Recovery of investment and operating costs
• access charges (usually paid by every user within
  the area)
• transmission usage charges (based on line flows
  contributions)
• congestion charges

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Distribution Companies (DISTCOs)

• A DISTCO is an entity that distributes the
  electricity, through its facilities, to customers
  in a certain geographical region.
• DISTCOs are responsible for building and
  operating its electric system to maintain a
  certain degree of reliability and availability.
• DISTCOs have the responsibility of responding to
  distribution network outages and power quality
  concerns.

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Other Participants

• Aggregator
• an entity that combines customers into a buying
  group for buying large blocks of electric power
  and other services with a cheaper price
• Marketer
• an entity that buys and re-sells electric power
  but does not own generating facilities
• Customer
• end-user of electricity with certain facilities
• connected to distribution system, in the case of
  small customers
• connected to transmission system, in the case of
  bulk customers

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Restructuring Participants
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Restructuring is not Deregulation

• Restructuring is not synonymous with
  deregulation.
• On the one hand, electricity restructuring means
  deregulation in terms of prices and the entry of
  market competitors.
• On the other hand, government intervention is
  likely to continue to ensure the maintenance of
  socially desirable functions.

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Restructuring

• Restructured Power Industry

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Restructuring Milestone

• Public Utility Regulatory Policy Act (PURPA)
  (1978)
• buying power from non-utility independent power
  producer (IPP)
• promoting renewable energy
• Energy Policy Act (1992)
• open access to transmission lines
• FERC Rule 888 (1996)
• utilities to unbundle wholesale generation and
  transmission services
• Transmission companies file open access
  non-discriminatory tariffs
• FERC Rule 889 (1997)
• Open Access Same-Time Information System (OASIS)
  electronic communication system
• New classes of entities such as the ISO, IPPs,
  retailers, users, and those who do not own any
  power facilities

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Evolution of Electricity Markets

• FERC has struggled with electricity restructuring
  since the Energy Policy Act of 1992 which
  required open access to the grid.
• In 1996, with great deference to state
  preferences, the Commission approved the
  framework for California market.

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• California Market
• California was the first state in 1996 to offer
  competitive generation market.
• The California ISO was the second largest control
  area in the U.S. and the fifth largest in the
  world (54 GW).
• California restructuring required investor-owned
  utilities to sell their generating assets
• Generating companies were required to trade
  electricity solely with California PX
• Experience showed that the California market
  design was fundamentally flawed.

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California ISO
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• Lessons from California Restructuring
• Minimize reform failures due to missing pieces in
  the proposed legislation, unreasonable time
  schedules, possible political interference.
• Encourage the participation of private sector.
• Reduce bureaucracies at the government level to
  make it an easy entry for new generating
  companies.
• Allow bilateral agreements between generators and
  distributors to increase competitive pressures on
  generators and distributors.

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Electricity Markets

• To fix the dilemma, the Commission let a thousand
  flowers bloom. Electricity regions could choose
  their own designs for grid management to support
  wholesale electricity markets.
• Anticipated flowers proved to be expensive weeds.
  
• A seemingly endless delay was exploited by those
  who opposed transmission open access.

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Electricity Markets

• There have been notable successes, as in Eastern
  ISOs, as well as notable failures in the West.
• Following a false start, the basic electricity
  market design embraced in the Mid-Atlantic states
  (PJM, New York, New England) and planned for the
  Midwest and Canada showed the need for consistent
  and standard rules.
• Standardization is important for reducing "seams"
  between markets to support non-discriminatory
  open access.
• Standardization by itself is not sufficient for a
  successful energy market. But we know from both
  theory and experience that it is necessary.

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Millennium Order and SMD

• Order 2000 (December 1999)
• Transmission companies with interstate commerce
  participate in RTO.
• RTOs promote efficiency in electricity markets to
  ensure that electricity consumers pay the lowest
  price possible for highly reliable service.
• Standard Market Design (July 2002)
• Congestion management
• Location-based pricing
• Financial Transmission Rights
• Multi-settlement for Energy
• Day-Ahead Market
• Real-Time Market

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Operation of Electricity Markets
ISO
Load Forecasting
Market Forecasting
GENCOs
Load Forecasting
Price Forecasting
Forecasting
Price Forecasting
Forward Market SCUC
Markets Energy A/S Transmission
PBUC
Ancillary Services Auction
Arbitrage
Bidding Strategy
Market Operation
Congestion Management
Gaming
Asset Valuation Risk Analysis
Transmission Pricing
Risk Management
Market Monitoring
Market Power
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Electricity Market Facts

• SMD is the framework for a bid-based, security
  constrained unit commitment and dispatch based on
  LMPs.
• LMP provides a market stimulus for generation
  investments.
• Creation of financial transmission rights
  provides further incentives for transmission
  expansion.
• The first market design in PJM was not SMD which
  failed abruptly.
• Market suspended on first hot day in June 1997.
• SMD was implemented in April 1998.

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Current Situation

• U.S. electric industry restructuring (as of
  February 2003)

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Market Operation Objective

• Two objectives
• ensuring a secure operation
• facilitating an economical operation
• Security! Security! Security!
• Security is of utmost importance in all aspects
  of power system operation.
• In a regulated environment, security is ensured
  by centrally dispatching various committed
  resources.
• In a restructured environment, security could be
  facilitated by utilizing various services
  available to the market.

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Electricity Market Models

• PoolCo Model
• PoolCo in a centralized marketplace clears the
  market for buyers and sellers.
• ISO produces a single market price
• Provides participants with a clear signal (spot
  price) for consumption and investment decisions.
• Market dynamics drive the spot price to a
  competitive level.

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Electricity Market Models

• Bilateral Contracts Model
• Bilateral contracts are agreements between two
  traders
• set contract terms independent of ISO.
• The ISO would verify that a sufficient
  transmission capacity exists to complete
  transactions and maintain transmission security.
• The bilateral contract model is very flexible as
  trading parties specify their desired contract
  terms.
• Disadvantages high cost of negotiating and
  writing contracts, and risk of credit worthiness
  of counter-parties.

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Electricity Market Models

• Hybrid Model
• Combines features of the previous two models.
• Utilization of a PoolCo is not obligatory.
• Customer are allowed to negotiate energy trade
  agreements directly with suppliers
• Choose to accept power at the spot market price.

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Independent System Operator (ISO)

• A competitive electricity market requires an
  impartial "traffic cop"
• Operate the grid at real-time
• Enforce grid reliability.
• A False Goal Minimize the ISOs footprint there
  is an argument that ISO functions should be
  restricted to reliability and separated from the
  operation of a wholesale market.
• This is a mistake, the separation fallacy.
• Lack of an efficient pricing scheme could drive
  the ISO to intervene ever more, but without the
  tools of the market.
• ISO ends up large and intrusive and the market
  could fail.

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ISO Structures MinISO

• Focus
• transmission security
• Basis
• coordinated multilateral trade model
• Example
• the original California ISO
• no jurisdiction over forward energy markets
• very limited control over actual generating unit
  scheduling

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Electricity Market Facts

• Recognize the minimum requirements of an ISO
• There are certain functions that only the ISO can
  perform, and these should be done efficiently to
  support a competitive market.
• A well designed ISO, could provide market
  services for handling the grid complexity
• operating a spot market,
• providing price signals,
• supporting transmission hedges,

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ISO Structures MaxISO

• Focus
• Transmission security as well as market clearing
• PX is an independent, non-government and
  non-profit entity which provides a competitive
  marketplace by running an auction for trading
  electricity.
• Basis
• optimal commitment and power flow model
• requires extensive data from market participants
• Example
• PJM ISO, NY ISO, CA ISO, NGC in the UK

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Power Market Types

• Market types based on traded commodities,
• energy market
• ancillary services market
• transmission market
• Market types based on time scales,
• forward market
• day-ahead
• hour-ahead
• real-time market

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Energy Market

• Energy market creates a centralized mechanism for
  competitive trading of electricity.
• ISO or PX operates the energy market.
• ISO (or PX) accepts demand and generation bids (a
  price and quantity pair) from market participants
  and determines MCP at which energy is traded.

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Ancillary Services Market

• Ancillary services support the reliable operation
  of power systems.

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Ancillary Services Auction

• Ancillary services are cleared sequentially or
  simultaneously.
• Sequential approach
• Market is cleared for the highest quality service
  first.
• In each round, market participants rebid their
  unfulfilled resources.
• Participant could modify bids in each new round.
• Simultaneous approach
• Participants submit all ancillary services bids
  at once
• ISO (or PX) clears the ancillary services market
  simultaneously for minimizing social costs,
  minimizing procurement costs, etc.

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Transmission Market

• Transmission network is the key mechanism for
  competition.
• Commodity traded in transmission market is
  transmission rights,
• rights for transferring power through the network
  (flowgates)
• rights to inject power into the network
• rights to extract power from the network
• Holder of a transmission right can
• physically exercise the right (flowgates)
• be compensated financially for transferring the
  right to others
• Transmission rights are critical for managing
  transmission congestion.
• participants could hedge congestion charges
  through congestion credits.

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Forward and Real-time Market

• Forward Market
• Day-ahead market for hourly scheduling of
  resources for following day.
• Hour-ahead market is for deviations in the
  day-ahead schedule.
• Energy and ancillary services are traded in
  forward markets.
• Real-time Market
• Real-time market is established to meet balancing
  requirements.
• Real-time load, generation, and transmission
  could differ from forward market schedules.
• Real-time market is usually operated by the ISO.

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Key Components in Market Operation

• GENCO
• The objective is maximize profit.
• Firstly, load forecast.
• Secondly, good bidding strategy.
• Thirdly, financial and physical risks must be
  hedged.

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Key Components in Market Operation

• ISO
• First, ISO forecasts hourly system loads to
  guarantee there are enough energy to satisfy
  loads and ancillary service to ensure
  reliability.
• Second, operation responsibilities of the ISO
  include energy market, ancillary service market,
  and transmission market.
• ISO must be equipped with powerful tools such as
  security constrained unit commitment and
  ancillary services auction.
• Third, ISO must be equipped to monitor market
  power and protect market participants right to
  compete.

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Infrastructure Investment

• Recent blackouts in the United States and the
  Europe proved
• Social cost of transmission under-investment
  could exceed transmission over-investment cost.
• Substantial increase in consumer costs incurred
  from transmission capacity shortages.
• Under-investment in transmission has negative
  consequences
• increased energy losses,
• higher congestion costs,
• higher transmission system maintenance costs,
• more frequent transmission-related service
  interruptions,
• increased opportunities for the exercise of
  market power.

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Reasons for Under-Investment

• Transmission costs one tenth of generation.
• why not build enough transmission to mitigate
  congestion?
• Extended periods of uncertainty over energy
  policies and transmission ownership and operation
• Market participants have focused on business
  opportunities in merchant generation and
  transmission and energy marketing
• Cap on retail energy rates
• transmission companies may not recover their
  investment
• Transmission investments are difficult to justify
  to state regulators
• much of the benefits are to accrue over a wide
  region
• customers of the local utility will be paying the
  costs

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Market-based Planning

• Market-based planning provide signals to
  investors on where to locate new generation and
  transmission
• Market-based planning could help planners,
  regulators, and local authorities comprehend the
  benefits.
• Market-based planning could neglect the public
  value of providing adequate reliability.

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Market-based Planning Bottlenecks

• Traditional integrated planning met the primary
  objective of balancing generation with load.
• Did not address the secondary objective of
  facilitating competitive electricity markets.
• New transmission lines vs. generation expansion
• New generation has a small geographic footprint
  and can be located in areas of minimal
  opposition.
• Transmission rights of way are limited by
  existing system configuration, prior contacts,
  environmental and land use issues.
• A political jurisdiction along the planned route
  can veto the plan which would effectively block
  the planning initiative.

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Outreach and Public Education

• Transmission owners good performance in building
  and operating transmission lines could streamline
  public understanding.
• Increase understanding of those among public and
  government sectors who do not see any direct
  benefits from enhancing transmission grid.
• Open discussion on transmission project
• Transmission benefits and drawbacks

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Who Should be Responsible?

• Which governments -- state or federal -- should
  set the rules?
• Policies at the state level are not the answer.
  This is a federal issue.
• A Compromise between Merchant and Regulated
  Investment
• Regulated transmission investment will be limited
  to inherently large cases relative to the size of
  the market where the reasonable implementation
  will be a single project like a tunnel under a
  river.
• Everything else will be left to the market.

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Final Notes

• At great expense, the United States has gone
  through multiple experimentations with
  electricity market designs. It is time to
  standardize the market design for the benefit of
  the grid.
• 2003 blackout emerged broad support for the
  implementation of changes.
• Intensive transmission enhancement and planning
  over the next two decades could reduce outage
  costs.
• Any transmission investment has the potential of
  yielding benefits far outweighing investment
  costs.
• Public support for better electricity services is
  there
• Societal savings achieved from more efficient
  energy use will considerably outweigh additional
  costs of new technologies.

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• Market Operations in Electric Power
  SystemsForecasting, Scheduling, and Risk
  Management

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Thank you!