Energy Transport and Conversion

Organization of the electricity supply industry 2012 D. Kirschen & University of Washington0OutlineTraditional organizationReasons for changeActors in a deregulated environmentModels of competitionTraditional electric utility modelMonopolyOnly supplier of electricity in a given region (service territory)Consumer does not have a choice of supplier

Vertically integratedA single organisation performs all the technical and business functionsGenerationTransmissionDistributionRetail 2012 D. Kirschen & University of Washington2Consumer 2008 D. Kirschen & The University of Manchester2Variants on vertical integrationDistribution + retailMany municipal utilitiesRural electricity cooperativesGeneration + transmissionBonneville Power AdministrationGenerationTransmissionDistributionRetail 2012 D. Kirschen & University of Washington3Consumer 2008 D. Kirschen & The University of Manchester3Why monopolies?Building a power system is expensiveBuilding competing transmission and distribution networks does not make senseUntil recently having several companies share a power system was too complicatedMonopoly can be:Private (investor-owned utility)Public (municipal, utility district, national)Size of service territories varies

2012 D. Kirschen & University of Washington4 2008 D. Kirschen & The University of Manchester4RegulationA private monopoly could abuse its positionIt must be regulated by the governmentGovernment-owned utilities operate for the public goodNo need for outside regulationElect new representatives if we are not satisfied 2012 D. Kirschen & University of Washington5 2008 D. Kirschen & The University of Manchester5The Regulatory CompactAgreement between an Investor Owned Utility (IOU) and a governmentIOU receives the right to be the monopoly supplier over a certain territoryIOU accepts that its rates (i.e. what it can charge consumers) will be determined by a regulator Example: Washington Utilities and Transportation Commission 2012 D. Kirschen & University of Washington6Rate of return regulationRegulator sets the rates so that the IOU can:Recover its operating cost (fuel, personnel, etc)Recover its investments costs (plants, lines, etc)Pay a fair rate of return to its investorsA monopoly utility is a low risk investmentNo competitionA bankrupt utility is in nobodys interestThe rate of return can therefore be low compared to other investments 2012 D. Kirschen & University of Washington7Problems with Private MonopoliesMonopolies are inefficientNo competitionNo need to be efficient to surviveNo incentive to be efficient:Utility earns more if it invests moreNo penalty for building white elephantsHigh costs passed on to consumers as high prices of electricityA bankrupt utility is in nobodys interestRates are higher than they should be 2012 D. Kirschen & University of Washington8 2008 D. Kirschen & The University of Manchester8Could the regulators do better?Regulation is difficultLittle basis for comparisonEach regulator oversees a small number of utilitiesEach utility has a territory with different characteristicsDifficult to evaluate the utilities decisionsRegulator does not have as much staff as the utilityInformation imbalance 2012 D. Kirschen & University of Washington9 2008 D. Kirschen & The University of Manchester9Problems with Public MonopoliesA good government will run its utilities in an efficient and far-sighted mannerThis is not always the caseGovernment bodies are not always efficient eitherConflicts can arise between the objectives of the government and the objectives of the utility 2012 D. Kirschen & University of Washington10 2008 D. Kirschen & The University of Manchester10Things bad governments doKeep rates low to please the votersUtility does not have enough money for investmentsKeep rates high and use the surplus money for other programsInefficient taxationDiscourage consumption of electricityForce the utility to make unnecessary investments to create jobs 2012 D. Kirschen & University of Washington11The new electricity supply modelPrivatization of public utilitiesNot in the USPrimarily in Europe and South AmericaUnbundlingSeparate the different functions of the utilityIntroduce competitionTreat electrical energy (MWh) as a commodityCreate markets for trading this commodityEnergy transmission and distribution remain services provided by monopoly companies 2012 D. Kirschen & University of Washington12Expected benefits of privatizationUtility can focus on its missionIf properly regulated:Utility gets the revenues it needsPrice of electricity reflects its true costOptimal allocation of economic resourcesAccess to private sector capitalImportant in developing countries when government is short of money for investmentsRevenue from the sale of privatized assets

2012 D. Kirschen & University of Washington13Expected benefits of unbundlingSeparation between the parts where competition is possible and those where a monopoly is needed:Competition between generatorsMonopoly for transmission and distributionMore transparency in the the systemEssential to create a fair marketAn independent system operator will not favor one generator over another 2012 D. Kirschen & University of Washington14Expected benefits of competition 2012 D. Kirschen & University of Washington15Introduce competitionGenerators become more efficientProduction cost decreasesCompetitive marketPrice to consumers decreasesEconomy benefits 2008 D. Kirschen & The University of Manchester15(who are the characters in the play)Dramatis Personae 2012 D. Kirschen & University of Washington16The old model

Image: Salvatore Vuono / FreeDigitalPhotos.netThe RegulatorThe Utility

The Customer(silent part) 2012 D. Kirschen & University of Washington17Customer (old model)18

Data from National Grid (UK) 2012 D. Kirschen & University of WashingtonActors after full unbundlingGenerating companiesElectricity retailersConsumersSystem operatorTransmission ownerDistribution companyMarket operatorRegulatorNote: Some of these functions are often combined

2012 D. Kirschen & University of Washington19Generating companiesOwn and operate power generating plantsCompete against each other to sell energyCompetitive advantagesMore efficient plantsCheaper fuelHigher plant availability 2012 D. Kirschen & University of Washington20 2008 D. Kirschen & The University of Manchester20RetailersBuy electrical energy from the generatorsSell electrical energy to consumersDo not own large physical assetsOften owned by a generator or a distribution companyCompetitive advantagesNegotiate good price with generatorsIdentification of good customersEfficient billing system 2012 D. Kirschen & University of Washington21 2008 D. Kirschen & The University of Manchester21ConsumersSmall consumersResidential or commercial consumersBuy electricity from a retailerBuy electricity on a tariff (i.e. fixed price)Large consumersIndustrial or large commercial consumersMay buy directly from the electricity marketMay buy electricity at time-varying pricesExpected to become increasingly active 2012 D. Kirschen & University of Washington22 2008 D. Kirschen & The University of Manchester22Independent System OperatorOperates the power systemMaintain load/generation balanceMaintain network securityMust be independent from other participants to ensure fairness of marketOwns only computing and communication assets 2012 D. Kirschen & University of Washington23 2008 D. Kirschen & The University of Manchester23Transmission Network OwnersOwn and maintain transmission assetsLinesSubstationsDC linesUsually a regulated businessRevenues determined by the regulator based on the value of the assets 2012 D. Kirschen & University of Washington24Distribution Network CompaniesOwn and operate the distribution networksRegulated businessRevenues determined by the regulator based on the value of the assets 2012 D. Kirschen & University of Washington25 2008 D. Kirschen & The University of Manchester25Market OperatorFacilitate trading of electricityMatches bids and offers submitted by buyers and sellers of electrical energyRuns the market settlement systemMonitors delivery of energyForwards payments from buyers to sellersRequirements:Fairness, independenceEfficient technology to support tradingEfficient settlement of trades 2012 D. Kirschen & University of Washington26 2008 D. Kirschen & The University of Manchester26RegulatorOversees the operation of the electricity marketDetermines the allowed revenues of the monopolies (wire companies, i.e. transmission and distribution owners)Check that the wire companies maintain the quality of serviceGovernment body 2012 D. Kirschen & University of Washington27 2008 D. Kirschen & The University of Manchester27New actors?Storage system operatorsAggregators of demand responseExample: charging of electric vehicles?

2012 D. Kirschen & University of Washington28The Four Models of Competition 2012 D. Kirschen & University of Washington29The four models of competitionMonopolyPurchasing agencyWholesale competitionRetail competition 2012 D. Kirschen & University of Washington30 2008 D. Kirschen & The University of Manchester30Monopoly 2012 D. Kirschen & University of Washington31GenerationTransmissionDistributionRetailConsumer 2008 D. Kirschen & The University of Manchester31Purchasing AgentOwn GeneratorsIPPDistributionCustomerWholesale Purchasing AgentIPPIPP: Independent Power Producer 2012 D. Kirschen & University of Washington32 2008 D. Kirschen & The University of Manchester32Wholesale CompetitionGencoGencoCustomerDiscoCustomerDiscoCustomerDiscoCustomerDiscoGencoGencoGencoWholesale Market and Transmission Wires 2012 D. Kirschen & University of Washington33 2008 D. Kirschen & The University of Manchester33Retail CompetitionCustomerCustomerCustomerCustomerRetailerRetailerRetailerGencoGencoGencoGencoGencoWholesale Market and Transmission WiresRetail Market and Distribution Wires 2012 D. Kirschen & University of Washington34 2008 D. Kirschen & The University of Manchester34Typical re-bundlingDistribution + retailGeneration + transmission network ownerGeneration + retailSystem operator + market operatorTransmission owner + distribution owner 2012 D. Kirschen & University of Washington35