Dr. Mohammad Shahidehpour January 2005

1. ILLINOIS INSTITUTE OF TECHNOLOGY ELECTRIC POWER AND POWER ELCTRONICS CENTERPOWER SYSTEM RESTRUCTURINGELECTRICITY MARKET PLANNING AND OPERATION Dr. Mohammad Shahidehpour January 2005

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

3. 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.

6. 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.

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

10. 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.

11. 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.

12. 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.

13. 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)

14. 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

15. New Technologies • Combined-cycle Units

16. 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.

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

18. New Technologies

19. 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.

21. on

22. 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.

23. New Flavor: IPP

24. Restructuring

25. Restructuring Participants

26. 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.

27. Restructuring • Restructured Power Industry

28. 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

29. 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.

30. 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.

31. California ISO

32. 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.

33. 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.

35. 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.

36. 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

37. 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

39. 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.

40. 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.

41. 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.

42. 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.

43. 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.

44. 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.

45. 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

46. 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,

47. 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

48. 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

49. 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.

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