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

Outline SMD for restructuring Power system planning issues Essence of restructured power systems SMD for restructuring Power system planning issues

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.

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.

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

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.

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.

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 R&D organization in 1972, the Electric Power Research Institute, which shared its fruits with all members. Few secrets existed among utility executives.

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)

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

New Technologies Combined-cycle Units

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.

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

New Technologies

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

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.

New Flavor: IPP

Restructuring

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.

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

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.

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

Restructuring Participants

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.

Restructuring Restructured Power Industry

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

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.

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.

California ISO

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.

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.

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.

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

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 Bidding Strategy Arbitrage Market Operation Congestion Management Gaming Transmission Pricing Asset Valuation & Risk Analysis Risk Management Market Power Market Monitoring

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.

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

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.

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.

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.

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.

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 ISO’s 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.

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

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,

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

Power Market Types energy market ancillary services market 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

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.

Ancillary Services Market Ancillary services support the reliable operation of power systems.

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.

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.

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.

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.

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.

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.

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

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.

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.

Outreach and Public Education Transmission owner’s 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

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.

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.

Market Operations in Electric Power Systems Forecasting, Scheduling, and Risk Management

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