EEN/L-671: Restructured Power Systems Lecture 3 PDF

23-01-2025 © Deep Kiran, IIT Roorkee (2025) 1 EEN/L-671: RESTRUCTURED POWER SYSTEMS LECTURE 3: Introduction 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 2 Brief Concepts of Regulation and Deregulation What is Regulation? What is Deregulation? 23-01-2025...

23-01-2025 © Deep Kiran, IIT Roorkee (2025) 1 EEN/L-671: RESTRUCTURED POWER SYSTEMS LECTURE 3: Introduction 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 2 Brief Concepts of Regulation and Deregulation What is Regulation? What is Deregulation? 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 3 What is Regulation? Regulation means that the Government has set down laws and rules that put limits on and define how a particular industry or company can operate. Regulation Consumer benefit 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 4 What is Deregulation? Deregulation in power industry is restructuring of the rules and economic incentives that government set up to control and drive the electric power industry. Competition New rules Societal benefit 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 5 Brief History 1870s Lamps for street lighting 1882 First electric power system in New York by Edison 1884 Development of DC motor 1888 AC motors, generators, transformers by Tesla 1889 First AC transmission line between Oregon and Portland 1893 3-phase line in California 1900s Commercialization starts across the world 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 6 Original Need for Regulation Risk-free way to finance the creation of electric industry Establishment of local monopoly Assured return on investment Legitimization of electric utility business Recognition and support from local government to utilities 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 7 Characteristics of Regulated Industry Monopoly franchise Obligation to serve Regulatory oversight Regulated rates Assured rate of return 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 8 Structure of Regulated Industry Transmission & Generation Customer Distribution Energy Information Money flow flow flow Vertically Integrated Utility 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 9 Reasons for Deregulation 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 10 Basic Motivation: Change in Power Industry Scenario Technology advancement led to more efficient small turbines and generators Possible to build new power plants near load centers Industrial & commercial users began to build & operate their own plants Shift in Economy of Scale 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 11 Main Reasons for Deregulation Need for regulation changed Privatization Cost is expected to drop Encourages innovation Competition will improve customer focus 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 12 Supplementary Reasons for Deregulation Political and ideological changes Lack of public resources for the further development More demanding environment issues Pressure of financial institutes 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 13 Attendance MS Teams: l6ahq8m Please ensure 75% of attendance for ETE. 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 14 Steps Towards Deregulation The competition Unbundling the system Dis-aggregation of traditionally vertically integrated utility Different entities in deregulated environment Structure of deregulated industry 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 15 Changes that are required Privatization Government-owned organizations become private, for profit companies Competition Remove monopolies Wholesale level: generators compete to sell electrical energy Retail level: consumers choose from whom they buy electricity Unbundling Generation, transmission, distribution and retail functions are separated and performed by different companies Essential to make competition work: open access 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 16 Why introduce competition? Monopolies are inefficient No incentive to operate efficiently Costs are higher than they could be No penalty for mistakes Unnecessary investments Benefits of introducing competition Increase efficiency in the supply of electricity Lower the cost of electricity to consumers Foster economic growth 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 17 The Competition: where? Identify the candidates for competition: Generation Yes Transmission Natural Monopoly Distribution Monopoly in most of the places Retail Side Yes / No ? System Operation Firm No!!! 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 18 The Competition Competitive Competitive Retail Power Market Generation Market Transco & Disco Monopoly Multiple buyers Multiple sellers Franchises (Retailers) COMPETITION REGULATED COMPETITION or MONOPOLY MONOPOLY 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 19 Unbundling the System Electrical Power System (Generation + Transmission + Distribution) Generation Transmission (Competition) & Distribution Transmission Distribution & (Regulated Retail Service Monopoly) (Competition) 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 20 Dis-aggregation of Traditionally Vertically Integrated Utility State Electricity Board Transmission Generation Distribution Authority Resco Genco (Distribution and (Generation Retail Service companies) companies) TATA Power Reliance Others TATA Power Reliance Others 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 21 Consequences of Unbundling Monopoly vertically-integrated utility One organization controls the Single perspective on the system whole system Unbundled competitive electricity market Many actors, each controlling one Different perspectives, different aspect objectives How to make the system work so that all participants are satisfied (i.e. achieve their objectives)? 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 22 Different Entities in Restructured Environment Regulator Generator Companies Independent (Gencos) System Operator (ISO) Transmission Companies Market (Transcos) Operator (MO) Distribution Companies (Discom) Retail Energy Service Companies (Resco) Customer 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 23 Generating Company (Genco) Produces and sells electrical energy in bulk Owns and operates generating plants Single plant Portfolio of plants with different technologies Often called as Independent Power Producer (IPP) when coexisting with a vertically integrated utility Objective: Maximize the profit it makes from the sale of energy and other services 23-01-2025 © Deep Kiran, IIT Roorkee (2025) 24 Distribution Company (Discom) Owns and operates distribution network Traditional environment: Monopoly for the sale of electricity to consumers in a given geographical area Competitive environment: Network operation and development function separated from sale of electrical energy Remains a regulated monopoly Objective: Maximize regulated profit 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 2 Retailer (Resco) Buys electrical energy on wholesale market Resells this energy to consumers All its customers do not have to be connected to the same part of the distribution network Does not own large physical assets Occasionally a subsidiary of a DISCOM Objective: Maximize profit from the difference between wholesale and retail prices 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 3 Market Operator (MO) Runs the computer system that 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 Forward markets often run by private companies Objective: Run an efficient market to encourage trading 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 4 Independent System Operator (ISO) Maintains the security of the system Should be independent from other participants to ensure the fairness of the market Usually runs the market of last resort Balance the generation and load in real time Owns only computing and communication assets A Transmission System Operator (TSO) is an ISO that also owns the transmission network Objectives: Ensure the security of the system Maximize the use that other participants can make of the system 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 5 Regulator Government body Determines or approves market rules Investigates suspected abuses of market power Sets the prices for products and services provided by monopolies Objectives: Make sure that the electricity sector operates in an economically efficient manner Make sure that the quality of the supply is appropriate 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 6 Small Consumer Buys electricity from a retailer Leases a connection from the local DISCOM Participation in markets is usually limited to choice of retailer Objectives: Pay as little as possible for electrical energy Obtain a satisfactory quality of supply 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 7 Large Consumer Often participates actively in electricity market Buys electrical energy directly from wholesale market Sometimes connected directly to the transmission network May offer load control ability to the ISO to help control the system Objectives: Pay as little as possible for electrical energy Obtain a satisfactory quality of supply  27-01-2025 © Deep Kiran, IIT Roorkee (2025) 8 Structure of Deregulated Industry Generation Transmission & Customer Distribution Independent System Retailer Operator Energy Information Money flow flow flow A common representative structure…there are many others… 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 9 Wholesale Competition Model GENCO GENCO GENCO GENCO GENCO Wholesale Market Place Transmission Network DISCO Big Consumer DISCO DISCO Customer Customer Customer Customer 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 10 Fully Restructured Power System GENCO GENCO GENCO GENCO GENCO Wholesale Market Place Transmission Network Retailer DISCO Retailer DISCO Retail Market Place Distribution Network Customer Customer Customer Customer 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 11 The Power Marketplace The Marketplace Mechanisms Energy Auction & Competitive Bidding 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 12 The Marketplace Mechanisms Bilateral Exchange Power Exchange Multi-buyer, Multi-seller system Multi-buyer, Multi-seller system Generators and Loads bid into PX. Contract Price is mutually decided Market settles as per MCP. Long Term or Short Term Contracts 24 hour, day ahead market A Combination of two!  27-01-2025 © Deep Kiran, IIT Roorkee (2025) 13 Energy Auction, Competitive Bidding & Market Clearing Price (MCP) Price Demand curve Supply curve (Rs/MWh) Market clearing Point of price (MCP) intersection Quantity cleared Supply and demand (MWh) 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 14 Fundamental underlying assumption Treat electricity as a commodity Examples of commodities: A ton of rice A litre of petrol A dozen of oranges Is electricity same as these commodities? 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 15 How do we define the unit for electricity as a commodity? A volt / ampere / MW / MWh of electricity? None defines it completely! Complexity is added because of: Time Location Security 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 16 Effect of Lack of Storage in Bulk Quantity Electrical energy cannot be stored economically Electrical energy must be produced when it is consumed Demand for electrical energy is cyclical Cost of producing electrical energy changes with the load Value of a MWh is not constant over the course of a day A MWh at peak time is not the same as a MWh at off-peak time Commodity should be MWh at a given time 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 17 Effect of Laws of Physics You can’t give electricity an injection and drawal point and ask it to follow a path decided by you! Flow of electricity is obeyed by laws of physics May result in market inefficiency! 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 18 Effect of Location 1000 MW @ 1000 MW @ 5000 ₹/MWh 10000 ₹/MWh Max flow 100 MW G2 G1 200 MW Price of Electricity at A = 5000 ₹/MWh Price of Electricity at B = 10000 ₹/MWh Price differential due to transmission constraints Commodity should be MWh at a given time and given location 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 19 Effect of Security of Supply 1000 MW @ 1000 MW @ 5000 ₹/MWh 10000 ₹/MWh Max flow 100 MW G2 G1 200 MW Consumers expect reliable supply What if lines connecting A-B is opened due to fault? Arrangement necessary to tackle contingent situation Commodity should be MWh at a given time and a given location, with a given security of supply 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 21 Fundamentals of Market What is a market? Meeting place of suppliers and consumers in order to strike a deal Consumers want the price to be lesser than the marginal utility Suppliers want the price to be higher than the marginal cost 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 22 Consumer Behaviour 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 23 Consumer Behaviour 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 24 Concept of Total and Marginal Utility No. of Marginal Total Lamp Lamps utility utility L1 M1 L2 - 0 - 0 C 1 10 10 M1 2 9 19 M2 C M3 M2 3 8 27 M3 4 7 34 L3 M4 L4 M4 5 6 40 L1 6 5 45 L2 7 4 49 L3 8 3 52 L4 9 2 54 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 25 Law of diminishing marginal utility Law: After consuming a certain amount of good or service, the marginal utility from it diminishes as more and more is consumed Effect: The consumer is not ready to spend the same amount of money for the next increment of the commodity as it did in the last unit consumed 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 26 Consumer Equilibrium The person in the room is indifferent if electricity is for free! The person has to make judicious choice by balancing the price of electricity and the utility it obtains by putting ON the lamps Let 1 unit of utility ≡ ₹1 Let every lamp be of 100 W rating Let price of electricity be ₹5 for every 100 Wh Moot Question: “how many lamps should the person put on?” 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 27 Consumer Equilibrium No. of Marginal Total Total Surplus Lamp Lamps utility (₹) utility (₹) expenditure (₹) (₹) - 0 - 0 0 0 C 1 10 10 5 5 M1 2 9 19 10 9 M2 3 8 27 15 12 M3 4 7 34 20 14 M4 5 6 40 25 15 L1 6 5 45 30 15 L2 7 4 49 35 14 L3 8 3 52 40 12 L4 9 2 54 45 9 For 6th lamp, marginal utility is same as price of electricity! 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 28 Consumer Equilibrium and Consumer Surplus 10 9 Utility converted into ₹ 8 7 Net consumer surplus 6 5 4 Gross consumer 3 surplus 2 1 2 3 4 5 6 7 8 9 No. of Lamps Consumer’s equilibrium with respect to the purchase of one good is attained when the difference between total utility in terms of money and the total expenditure on it is maximized! 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 29 Example The inverse demand function of a group of consumers for a given type of widgets is given by the following expression: 𝜋 = −10𝑞 + 2000 [₹] where q is the demand and π is the unit price for this product Determine the maximum consumption of these consumers Determine the price that no consumer is prepared to pay for this product Determine the maximum consumers’ surplus. Explain why the consumers will not be able to realize this surplus For a price π of 1000 ₹/unit, calculate the consumption, the consumers’ gross surplus, the revenue collected by the producers and the consumers’ net surplus. If the price π increases by 20%, calculate the change in consumption and the change in the revenue collected by the producers. 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 30 Market demand function Price Quantity Relation between marginal demand utility and the quantity 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 31 Price elasticity of demand Downward sloping demand curve can be interpreted alternately: A small increase in price of commodity will decrease its demand Elasticity quantifies this sensitivity Can be posed as a ratio of relative change in demand to relative change in price 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 32 Price elasticity of demand High elasticity Price Non-essential goods Easy substitution Quantity Low elasticity Essential goods Price No substitution Quantity 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 33 Price elasticity of demand 𝑑𝑞ൗ 𝑞 𝜋 𝑑𝑞 𝜀= = 𝑑𝜋ൗ 𝜋 𝑞 𝑑𝜋 Definition: A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price. 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 34 Price elasticity of demand S. No. Elasticity range Type of elasticity 1 𝜀=0 Perfectly inelastic 2 −1 < 𝜀 < 0 Inelastic 3 𝜀 = −1 Unit elastic 4 −∞ < 𝜀 < −1 Elastic 5 𝜀 = −∞ Perfectly elastic 𝑑𝑞ൗ 𝑞 𝜋 𝑑𝑞 𝜀= = 𝑑𝜋ൗ 𝜋 𝑞 𝑑𝜋 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 35 Example The inverse demand function of a group of consumers for a given type of widgets is given by the following expression: 𝜋 = −10𝑞 + 2000 [₹] where q is the demand and π is the unit price for this product What is the price elasticity of demand for this product and this group of consumers when the price π is 1000 ₹/unit. Derive an expression for the gross consumers’ surplus and the net consumers’ surplus as a function of the demand. Check these expressions using the results of previous example. Derive an expression for the net consumers’ surplus and the gross consumers’ surplus as a function of the price. Check these expressions using the results of previous example. 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 36 Supplier Behaviour  27-01-2025 © Deep Kiran, IIT Roorkee (2025) 37 Law of diminishing marginal product q (quantity) π (Price) x (factor of production) q (quantity) 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 38 Market equilibrium and supplier surplus π (Price) Market price Net supplier surplus Gross supplier surplus q (quantity) q (quantity) 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 39 Price elasticity of supply Upward sloping supply function tells that an increase in the price encourages supplier to produce more Price elasticity of demand quantifies this sensitivity Upward sloping supply function suggest this to be a positive number Can be posed as a ratio of relative change in supply to relative change in price 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 40 Price elasticity of supply 𝑑𝑞ൗ 𝑞 𝜋 𝑑𝑞 𝜀= = 𝑑𝜋ൗ 𝜋 𝑞 𝑑𝜋 Definition: a measure of how much the quantity produced of a good responds to a change in the price of that good, computed as the percentage change in quantity produced divided by the percentage change in price. 27-01-2025 © Deep Kiran, IIT Roorkee (2025) 41 Price elasticity of supply S. No. Elasticity range Type of elasticity 1 𝜀=0 Perfectly inelastic 2 0