1. 1 International Experiences (UK/USA) By Dr SN Singh Department of Electrical Engineering Indian Institute of Technology Kanpur-India Dept. of IME, IIT Kanpur Short-term Course Challenges and Implementation Issues post Electricity Act 2003 : Regulatory, Policy & Technical Solutions April 10-14, 2004 This document can be downloaded from: www.iitk.ac.in/ime/anoops

2. 2 Deregulation is a re-structuring of the rules and economic incentives that government setup to control and drive the electric supply industry. It is known in different names –Re-regulated market –Open Power Market –Competitive power market –Vertically unbundled power system –Open access –Power system restructuring( Privatization and deregulation) –Reforms

3. 3 Forces behind the deregulation are –High tariffs and over staffing –global economic crisis –regulatory failure –political and ideological changes –managerial inefficiency –lack of public resources for the future development –technological advancement –rise of environmentalism –pressure of Financial institutions –Rise in public awareness

4. 4 Reasons why deregulation is appealing

5. 5 What will be the transformation ? –Vertically integrated => vertically unbundled –Regulated cost-based ==> Unregulated price-based –Monopoly ==> Competition –service ==> commodity –consumer ==> customer –privilege ==> choice –Engineers  Lawyer/Manager

6. 6 A number of questions to be answered –Is a deregulation good for our society? –What are the implications for current industry participants? –What type of new participants will be seen and why ? –What should be structure of market and operation? –What might an electricity transaction of future look like ? –What are the key issues in moving towards the deregulation ? What will be the Potential Problems ? –Congestion and Market power –Obligation to serve –Some suppliers at disadvantages –Price volatility –Environmental problems

7. 7 Deregulation around the world Milestones of Deregulation -1982 Chile -1990 UK -1992 Argentina, Sweden & Norway -1993 Bolivia & Colombia -1994 Australia -1996 New Zeeland -1997 Panama, El Salvador, Guatemala, Nicaragua, Costa Rica and Honduras -1998 California, USA and several others.

8. 8 England & Wales Electricity Market Market started since April 1, 1990 Breakup of Central Electricity Generating Board (CEGB) - National Power, PowerGen & Nuclear plants Privatization of 12 Area Boards (Discos) into 12 regional electricity supply companies (RECs). National Grid became National Grid Company (NGC), initially owned by 12 RECs. But now a public traded corporation. Scotish non-nuclear companies, Electricity de France (EdF) and IPPs became the member of pool. Transmission capacity from Scotland is 1.6 GW and from France 2.0 GW. Max. Cap. available with E &W is 59 (48 GW demand)

9. 9 Four sub industries: Gen., trans., distrib. and retail sector. Retail side two customers: franchise and non- franchise Non-franchise customers (earlier > 1 MW, later > 100 KW and now free) are given the option of choosing their supplier from any RECs, National Power or PowerGen. PowerGen (30 to 20 GW) and National power (19 to 15 GW) reduced their capacities. RECs hedge against pool price volatility using “Contracts for Differences” (CFD). It is financial instrument not contract to deliver electricity.

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11. 11 Market Rules –NGC works as ISO+PX. –48 half-hourly market. –NGC uses GOAL (generation ordering and loading) program to determine the merit order of dispatching generation and reserve capacity. –Generators must submit the bids by 10.00 AM one day ahead of operation. –The “System Marginal Price” (SMP) is the price quoted by the most expensive generator which is accepted for dispatch during each half-hourly time slot when transmission constraints are ignored – simple unconstrained dispatch.

12. 12 Capacity payments –If marginal stations cannot cover their costs, then they will tend to shutdown, thus reducing the margin of capacity. –Every MW of capacity which is declared available in a half-hour receives a capacity payment for that 1/2 hour, whether or not it is schedule to generate. –The probability that demand will exceed capacity (“Loss of Load probability”, or LOLP) is calculated by comparing expected demand with the capacity expected to be available. PPP = SMP+CC (= LOLP*(VOLL-SMP)) CC = LOLP*(VOLL-bid) if not generating

13. 13 –LOLP is calculated by a program based on forecasted demand (& its variance) disappearance ratio (probability that a genset was available at some point in 8-days become unavailable by the 9th day) genset capacity available for last 8 days, –LOLP is extremely sensitive to the level of capacity relative to demand. –Capacity payments have been heavily criticized. –VOLL (value of lost load) was set by Govt. (  2/kWh in 1990 rose to 16.50).

14. 14 –This additional expense is passed on to consumers. On the other hand, some uneconomic generators who are not selected in the day-ahead market but are called upon to generate due to transmission constraints or other reasons, are paid their 'bid' price, which is higher than the prevailing PPP. This is, effectively, a payment for out of merit generator operation. –Constrained-off costs, out of merit payments and several additional expenses such as transmission fixed charges, transmission losses, startup costs, and ancillary services charges are passed on to consumers in the uplift

15. 15 The customer side of the market is simpler: all energy is purchased at the pool selling price (PSP). All of the extra costs of energy above the PPP are simply lumped together in “uplift” and spread over all kWh taken by customers through the calculation of a single half-hourly consumer price, the PSP. PSP=PPP+uplift Problems –Pool rules –Market power –Metering –Customer choice –Price votality

16. 16 Spot prices

17. 17 New Electricity Trading Arrangement (NETA) in UK Before the March 2001, any generator exporting more than 50 MW on to the system is required to hold a generation licence and to trade its output via an open commodity market, the Electricity Pool. Essentially, each generating unit had to declare by 10.00 hours each day its availability to the market, together with the price at which it is prepared to generate, for each and every half hour of the following day CfDs are essentially financial instruments, the main purpose of which is to hedge risk

18. 18 After March 2001, New wholesale electricity trading arrangements (NETA) was introduced. In the NETA design the old day- ahead pool based on a coordinated - spot market with a market- clearing price was replaced by a three- and- a half- hour ahead balancing system with a complex pricing scheme that features pay- as- bid mechanism with rules intended to penalise imbalances. The governance arrangements that supported NETA include the establishment of a Balancing and Settlement Code (BSC) Panel, to oversee the Code and to to provide or procure a range of operational and administrative services, both directly and through contracts with service providers.

19. 19 ELEXON is the Balancing and Settlement Code Company (BSC Co) defined and created by the Balancing and Settlement Code. All licensed electricity companies are obliged to sign the Code. The Code places obligations on ELEXON. ELEXON procures, manages and operates services and systems, which enable the balancing and imbalance settlement of the wholesale electricity market and retail competition in electricity supply. New trading arrangements designed to be more efficient and to provide greater choice to market participants, while maintaining the operation of a secure and reliable electricity system.

20. 20 The new arrangements include: –Forward and futures markets –a Balancing Mechanism in which the NGC, as system operator, accepts offers of and bids for electricity close to real time to enable it to balance the system; –a Settlement Process for charging participants whose contracted positions do not match their metered volumes of electricity, for the settlement of accepted Balancing Mechanism offers and bids and for clearing costs of balancing the system.

21. 21 California Deregulation Process Electricity costs in California were claimed to be about 50% higher than the national average and this was seen as necessary to change. Competition has been seen as the answer to reduce high costs. Public and political pressures have resulted in ending the regulated monopolies Deregulation in the US proceed with the Public Utility Regulating Policies Act approved in 1978 and the Energy Policy Act (EPAct) in 1992. Dramatic changes were put in place when the Federal Energy Regulatory Commission (FERC) issued a notice of proposed rulemaking (Mega-NOPR) in 1995 to promote non-discriminatory open access to transmission services.

22. 22 The three investor-owned utilities (IOUs) in California (Pacific Gas & Electric or PG&E, Southern California Edison and San Diego Gas Electric) file with FERC on April 29, 1996, outlining the proposed California Model. On March 31, 1998 California became the first sate to offer all customers a choice of electric service providers. There are three significant characteristics in California Model, though this model is still in the process of design. -A Zonal approach is applied to simplify the transmission pricing scheme, including nodal and congestion charge assessing. -Multiple separate energy forward markets, each with a supply and demand portfolio managed by a Scheduling coordinator (SC) or PX, have been introduced.

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24. 24 -An adjustment bid approach is adopted to perform inter-zonal congestion management. -A total separation of the wholesale power exchange and the market participants from ISO. -PX: -The power exchange is an independent entity that manages bid for energy on a day ahead basis for each half-hour which will be basis for ISO dispatch decision. -The use of PX will be mandatory for utility generation and procurement by the IOUs, but will be voluntary for all other market participants. -The PX will set the prices based on bidding by the utilities’ fossil plants, as well as, participating municipal, out-of-sate, and IPP generation.

25. 25 -It will provide a forward competitive spot market for electric power, conduct day-ahead and hour-ahead auctions of generation and demand, ensure non- discriminatory, transparent bidding interface and protocols. -The PX will also develop load generation balance schedule for transmittal to the ISO, notify to bidders of accepted schedules, provide for settlement of day- ahead and hour-ahead schedule and finally, bill PX customers and administer payments to PX suppliers. -ISO: -The ISO will control the power dispatch and the transmission system. It will own no transmission, generation, or distribution facilities and will have no financial interest in the Power Exchange or in any generation or load.

26. 26 -The ISO will meet all North American Electricity Reliability Council (NERC) and Western System Coordinating Council (WSSC) reliability standards and will coordinate the information exchange in an open market. -The ISO will post non-confidential information such as pricing, availability, status, transmission constraints, load distribution and line losses. -The ISO will procure ancillary services and will coordinate day-ahead scheduling and balancing for all users of the transmission grid. This will make the California ISO the fourth largest single control area in the world.

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28. 28 The California Energy Commission(CEC) is the state's primary energy policy and planning agency, charged with ensuring a reliable and affordable energy supply. The Commission has five major responsibilities: Forecasting future energy needs and keeping historical energy data; Siting and licensing power plants; Promoting energy efficiency through appliance and building standards; Developing energy technologies and supporting renewable energy; Planning for and directing state response to energy emergencies. California Energy Oversight Board (EOB) –Formed by the California Legislature to perform three functions: To oversee the Independent System Operator and the Power Exchange; To determine the composition and terms of service and to appoint the members of the governing boards of the Independent System Operator and the Power Exchange; To serve as an appeal board for majority decisions of the Independent System Operator governing board. California Public Utilities Commission (CPUC) –The CPUC regulates privately owned telecommunications, electric, natural gas, water, railroad, rail transit, and passenger transportation companies. The CPUC is responsible for assuring California utility customers have safe, reliable utility service at reasonable rates, protecting utility customers from fraud, and promoting the health of California’s economy.

29. 29 California Air Resources Board (ARB) –The California Air Resources Board (ARB) mission is to promote and protect public health, welfare and ecological resources through the effective and efficient reduction of air pollutants while recognizing and considering the effects on the economy of the state. Federal Energy Regulatory Commission (FERC) FERC is an independent regulatory agency within the Department of Energy that: regulates the transmission and sale for resale of natural gas in interstate commerce; regulates the transmission of oil by pipeline in interstate commerce; regulates the transmission and wholesale sales of electricity in interstate commerce; licenses and inspects private, municipal and state hydroelectric projects; oversees related environmental matters; and administers accounting and financial reporting regulations and conducts of jurisdictional companies. U.S. Department of Energy (DOE) "The Department of Energy's mission is to foster a secure and reliable energy system that is environmentally and economically sustainable...". The FERC which regulates the California ISO is part of the DOE. North American Electric Reliability Council (NERC) – Since its formation, NERC has operated as a voluntary organization - one dependent on reciprocity and mutual self-interest of all those involved.

30. 30 Western Systems Coordinating Council (WSCC) –The California ISO is a member of the WSCC. WSCC is committed to being the regional forum for actively promoting regional electric service reliability through: development of planning and operating reliability criteria and policies; the monitoring of compliance with these criteria and policies; the facilitation of a regional transmission planning process; and, the coordination of system operation through security centers.

31. 31 -Main Features of Market -WEPEX (Western electric power exchange) allow only short-term( real time-, hour- and day- ahead) trading -California rules don’t prohibit other PX from operating simultaneously. American PX operates. -Bilateral trading over short or long period is not only allowed but encouraged. -Operation of transmission system in an open access manner. -Open customer access at retail level. -postage stamp pricing on a zonal basis. The fee covers -certain stranded asset cost to be recovered under the agreements between utilities and the state government. -All capital cost recovery involved in the transmission system -all equipment operating, maintenance, taxes, personal etc. -all capital and fixed costs of the ISO.

32. 32 -Congestion management through adjustment of zonal prices. -Inter-zonal -Intrazonal

33. 33 -Nuclear and renewable power are traded differently. -Nuclear power do not bid. They are contracted ahead of time as must run. The schedule and price are calculated and disclosed publicly. -Renewable (solar and wind) must be bought as and when available. -Request for power transmission are called “portfolios” -Only balanced portfolios are allowed. -requested day-ahead -portfolios may include complicated network service combinations -PX also submits portfolios. -Schedulers must identify the output of each generator point and demand at each delivery pint explicitly. -Increment and decrement schedules can also be submitted.

34. 34 -Full competition at retail level. All customers could have a choice of electric suppliers. -Mandated a 10 % roll back in prices for residential and small commercial customers (~ 5 cents/kWh). -Large customers free to play at wholesale level. Small customers (industrial, commercial and residential) have three options: -They can buy from their existing provider (vertically integrated) -They can buy from spot market though distribution company. -They can decide to buy from another competitive retail provider.

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37. 37 California Crisis During May 2000 to April 2001, pricing shoots up. Causes Draught condition that reduced hydroelectric power generation (particularly in north-west region) and corresponding low power-import levels. Growing economy that fueled more demand for power. Higher and volatile natural gas prices (from $4/MMBtu to $60 /MMBtu). Increase in NOx prices (from $4/lb in May02 to $45/lb in Dec02) Lack of sufficient generation in California Inadequate transmission infrastructure Lack of demand elasticity Lack of forward contracting Over-reliance on spot price (forward scheduling). Price Cap at retail level.

38. 38 California Crisis ACTION Creating a power purchase portfolio to reduce the dependence on spot market and provide price stability and certainty. Expediting construction of new power plants. Implementing an aggressive conservation and demand management program. Optimizing use of existing transmission and expanding the transmission grid. Optimizing and coordinating use of state hydroelectric resources. Promoting small distributed plants. Augmenting small natural gas supplies, pipelines and storage facilities.