POWER SYSTEM RESTRUCTURING

1.How the utility market in different countries are classified?

ANS:
Restructuring or deregulation is a broad term and can have different meanings in different
countries. This is because the changes essential for betterment of power sector depend on the
prevailing conditions in the power sector of respective countries. Further, the word – betterment
can be looked upon subjectively. For example,
well developed, industrialized countries can expect price to go down and these countries can
treat the change in the prices as betterment. On the other hand, the developing countries need to
make radical changes in the policy and regulation such that barrier to entry for private players is
removed. The effective betterment can be looked upon from this perspective for developing
countries. In this section we will see, in brief, the issues that led to restructuring of the power
industry for following regions / countries: US , UK , Nordic Pool and developing countries.
The US
The US electric utilities, from the very beginning were privately owned and worked in a
vertically integrated fashion. The developed countries like US had well functioning and efficient
electricity systems. However for some systems, so long as consumers were concerned, they were
not satisfied with the rising costs of electricity. For some other systems, utility management
found that running the system was not viable due to low tariff. In some systems, pressure from
smaller players to open up the business for competition played a major role. By and large,
deregulation took place in developed countries by pressure to reduce costs while simultaneously
increasing competitiveness in the market. Existence of market power shows the signs of
deviation from the prefect competition. In general, market power is referred to as ability of
market participants to profitably maintain the market price above or below the competitive level
for a significant period of time. To tackle the situation, an the indirect regulatory intervention in
the form of market design rules is needed. Thus, as mentioned earlier, deregulation does not
mean ceasing to have rules. It is the ‘restructuring’ of the power business framework. More
rigorous treatment to these issues is given in further chapters.
The UK
The transformation of the British power sector proceeded along three paths in 1990. First, the
traditional industry was unbundled both vertically and horizontally. High-voltage transmission
assets were 12 transferred to a new National Grid Company (NGC). Coal and oil fired units were
divided among two companies National Power and
Power Gen. Nuclear Electric retained control of all nuclear units. At the outset, National Power
had 52 percent of total generating capacity, Power Gen had 33 percent, and Nuclear Power had
the remaining 15 percent. The second set of changes involved ownership. Both National Power
and Power Gen became private companies in 1991, whereas the difficulties associated with
nuclear power resulted in continued government ownership of all nuclear units. Approximately
30 percent of shares in National Power and Power Gen were sold to the public,an equal amount
to foreign and institutional investors. The remaining 40 percent was held by the government until
1995. The third set of changes sought to open the system to competition, wherever possible,
while continuing necessary regulations. Vertical and horizontal restructuring of power generation
was based on the assumption that generation had become work ably competitive and would
become increasingly so with new market entrants. A report on reform process was floated by the
regulator in 2001 which stated that wholesale electricity prices had not fallen in line with
reductions in generators’ input costs and that a lack of supply side pressure and demand side
participation; and inflexible governance arrangements had prevented reform of the arrangements.
The Nordic Pool
The reforms in Nordic countries were inspired by the electricity market reforms in England and
Wales in 1989, as well as by widely held beliefs that increased competition would raise power
industry efficiency to the benefit of consumers. Norway was first among-st the Nordic countries
to liberalize its electricity market in 1991, but without privatization. The Norwegian electricity
sector remains almost entirely in public hands. Rather than implement national reforms, the other
Nordic countries chose to reform by merging with the existing Norwegian market, Sweden
joining the expanded Nordic pool in 1996, Finland in 1998 and Denmark in 1999.
The Developing Countries
The case of developing countries is different from that of other countries. In these countries, the
electricity supply is treated as a social service rather than a market commodity. The ownership of
the power sector in these countries is directly under the governments of respective countries.
These state owned-controlled systems have led to the promotion of inefficient practices over a
period. The power sectors of these countries are marked by supply shortages. There has been an
inability to add to the generating capacity. The 13 subsidies and high transmission and
distribution losses are the major concerns before these systems. Another consequence of state
control over electric utilities was the high level of over staffing. The inability to raise funds for
capacity addition invited financial support from international financial institutions like World
Bank.
These institutions mandated opening of the power sector for private companies which were
contracted under build, own, operate and transfer (BOOT) scheme.
2.Explain the terms unbundling, wheeling and deregulation?
Unbundling:
According to the World Bank definition, unbundling, also referred to as restructuring in
nascent reform documents, is the act of dis aggregating the total electric service provided by
a power utility into its basic components and offering to sell each service separately with
separate rates for each component.
Wheeling:
Wheeling refers to the transfer of electrical power through transmission and distribution lines
from one utility's service area to another's. Wheeling can occur between two adjacent utilities, or
between utilities in different states. Under existing law, qualifying facilities may only transmit
their output to their local utility.
Advantages:
Wheeling allows utility areas with too much supply to transmit excess power to other utilities
with too much demand. The ultimate goal is to move the least-cost power to where it is needed,
maximizing efficiency.If wheeling is an option, a utility can determine if it is cheaper to build a
new electric generation facility or buy power from another service area. From the QF
perspective, wheeling allows QFs to develop renewable, indigenous resources, such as wind or
hydro, in remote areas that do not need the power, and send it to areas with higher demand.
Deregulation:
Deregulation is about removing control over the prices with introduction of market players in the
sector. However, this is not correct in a strict sense. An overnight change in the power business
framework with provision of entry to competing suppliers and subjecting prices to market
interaction, would not work successfully.There are certain conditions that create a conducive
environment for the competition to work. These conditions need to be satisfied while
deregulating or restructuring a system. Sometimes, the word ‘deregulation’ may sound a
misnomer. ‘Deregulation’ does not mean that the rules won’t exist. The rules will still be there,
however, a framework would be created to operate the power industry. That is why the word
‘deregulation’ finds its substitutes like ‘re regulation’,‘reforms’, ‘restructuring’, etc. The
commonly used word in Europe is ‘liberalization’ of power industry; ‘deregulation’ is a more
popular phrase in US.
Various Entities Involved in Deregulation:
The introduction of deregulation has introduced several new entities in the electricity market
place and has simultaneously redefined the scope of activities of many of the existing players.
Variations exist across market structures over how each entity is particularly defined and over
what role it plays in the system. However, on a broad level, the following entities can be
identified:
1. Genco (Generating Company): Genco is an owner-operator of one or more generators that
runs them and bids the power into the competitive marketplace. Genco sells energy at its sites in
the same manner that a coal mining company might sell coal in bulk at its mine.
2. Transco (Transmission Company): Transco moves power in bulk quantities from where it is
produced to where it is consumed. The Transco owns and maintains the transmission facilities,
and may perform many of the management and engineering functions required to ensure the
smooth running of the system. In some deregulated industries, the Transco owns and maintains
the transmission lines under the monopoly, but does not operate them. That is done by
Independent System Operator (ISO). The Transco is paid for the use of its lines.
3. Discom (Distribution Company): It is the retailer of electric power. Many of these will be
the retail departments of the former vertically integrated utilities. A Resco buys power from
Gencos and sells it directly to the consumers. Resco does not own any electricity network
physical assets.

3.Explain the various types of ISO and their role and responsibility in implementation of
deregulation of electrical power system?
ANS:
The independent system operator (ISO) is the central entity to have emerged in all deregulated
markets with the responsibility of ensuring system security and reliability, fair and equitable
transmission tariffs and providing for other system services. With differing market structures
evolving in various countries, it has been noticed that based on the responsibilities assigned to
them and their functional differences, ISOs could be placed in two categories. The first and the
most common one is the pool structure in which the ISO is responsible for both market
settlement including scheduling and dispatch, and transmission system management including
transmission pricing, and security aspects. Here, ISO is also known as Poolco Operator. The
other structure is that of open access, one dominated by bilateral contracts. In this system, bulk
of the energy transactions are directly organized between the generator and the customer, and the
ISO has no role in generation scheduling or dispatch and is only responsible for system
operation. The role of ISO is minimal and limited to maintenance of system security and
reliability functions.
In any market structure, the ISO has following basic functions laid out for it:
• System security: Operator must assure that the power system continues to operate
in a stable, economical manner.
• Power Delivery: The operator should provide the power transportation services
requested of it by buyers and sellers.
• Transmission pricing: System operator must determine and post the prices for
transmission usage, offer to reserve or sell usage, track, bill and settle with users,
and pass on revenues to transmission owners.
• Service quality assurance: The system operator must assure the quality of service
it provides.
 • Promotion of Economic efficiency and equity: The overall operations of system
operator should obey economic efficiency and also it should have fairness and
equity in it’s dealing and should not benefit only some players in the system.

There are various models of ISO, the functioning and operation methodologies of which
differ from market to market. In USA itself, there are 6 different models of ISO
available. These are:
California, Pennsylvania-New Jersey-Maryland (PJM) interconnection, New York ISO,
Electric Reliability Council of Texas (ERCOT), New England ISO and Midwest ISO
(MISO). All these models have advantages and shortcomings of their own.

California ISO

The ISO, concerned with the reliability of the grid, balances the operation of grid in real
time. The real time market is operated by the ISO, which uses ancillary services bids
and supplemental energy bids submitted through Power Exchange (PX) and Schedule
Coordinators (SC). The ISO also determines the real time market price after the fact (ex-
post price) based on actual metered data.
The ISO guarantees a non-discriminatory open access to transmission for all
users, manages the reliability of transmission system, acquires ancillary services as
required, approves day-ahead and hour-ahead schedules, maintains the real time
balancing of load and generation, maintains frequency of the system and does the
congestion management. The ISO also stands as the operator of control area operators,
which balances inter-tie schedules with actual flows across inter-ties. The ISO
balances the system demand with the power output of local generating units, plus
purchases from external electric power systems, minus the energy sold to external
systems. Interactions among different entities in California are shown in Figure 4.

Figure 4 The California ISO

New York ISO

The eight members of New York Power Pool (NYPP) decided to break down the pool
and proposed to form a substitute represented by an ISO and other institutions such as
the PX to comply with FERC rules, maintain reliability in the competitive environment
and facilitate a competitive wholesale electricity market. The ISO is responsible for bulk
power system operations, including coordination of maintenance outage schedules and
provision of transmission services on non-discriminatory basis. The ISO will also
administer and maintain an OASIS (Open Access Same time Information System) for
the New York state bulk power system. What distinguishes NYPP is the highly meshed
characteristics and frequent congestion, and what distinguishes this model is its clearing
energy and ancillary service markets at the same time, which is an advantageous feature
over other proposals where separation of markets is implemented. Participants choosing
bilateral contracts are required to submit decremental price bids for congestion purpose.
A real time (balancing) market is operated by the ISO using a centralized five-
minute security constrained optimal dispatch, where buyers and sellers can participate
in this market up to 90 minutes ahead with flexible bids or submit bilateral schedules
for energy as well as some ancillary services.
The NYISO uses a Security Constrained Unit Commitment (SCUC) software
for scheduling day-ahead and hour-ahead to dispatch energy, load, reserves and
regulation taking into account network constraints and schedules outages. The same
software is used for calculation of Locational Based Marginal Prices (LMP).
Interaction of the New York ISO with other entities is shown in Figure 5.

Figure 5 The NY ISO

PJM Interconnection:

The main responsibilities of the PJM ISO are maintaining the

reliability of transmission grid, operating the spot market, transmission
planning, unit commitment, operating real time (balancing) market and
settlement and billing functions.
The PJM ISO scheduling operation and dispatching would include
the day ahead and hourly process. The day ahead scheduling would take
place on the day prior to operating day, and the hourly scheduling would
take place within 60-minute leading to the operating hour. On a least-cost
basis, the ISO would manage to serve the hourly energy and reserve
requirements of the control area.

4. Discuss in detail the different restructuring models in a power system?

ANS:
Modern power industry operation is particularly difficult to understand
because of the dichotomy between electricity’s business and physical
manifestations. From the business perspective, electric power is an
exchangeable commodity that can be traded much like any other commodity
like oil, wheat, etc and for which futures markets and hedging systems do
exist. But, in its physical manifestation, electricity is quite unlike all other
traded commodities. The fundamental difference is that it cannot be stored to
any significant degree. This greatly affects how it must be managed as a
business asset, and greatly constrains its present and future market prices do
or don’t interact, as compared to other commodities. In large part due to its
‘storage-less’ nature, electricity can be transported only on a real-time basis,
and in a manner heavily constrained by myriad physical laws that are
complicated in their interactions but nearly instantaneous in their impact.
The net effect of all of these differences is that modern electricity
trading and wholesale transportation systems are quite different from the
practices existed previously. Restructuring has been accompanied by a
variety of new problems, which have given rise to controversy between
many governmental organizations and private companies. The changing
nature of electricity utility industry has brought many new practices to
power system operation. The philosophy and techniques of planning and
operation well established over past decades have begun to change and it is
needed to recognize and meet these challenges. To create the competition in
power market there may be different ways of restructuring the power
industry. But considering the organizational set-up, financial condition,
control structure and their coordination, different reform models are
categorized.
This topic aims at describing various market models. Various
markets all around the world can be classified on different basis. The
classification can be done in the following manner:
1. Classification based on energy trading
 2. Classification based on contractual models
3. Classification based on operational mechanisms of different ISOs
4. Classification based on ownership of transmission network
There are three different types of electric power markets. These are as follows:
1. Physical Market
2. Financial Market
3. Balancing Market

Physical Market:
Physical market is a market where electrical energy exchange takes place
physically. Energy spot market comes under this market. These markets can
be day ahead hourly, day ahead half-hourly markets. This market is the
core of all markets as major volume of energy is traded on this. In this
market, every customer has to pay the Market Clearing Price (MCP) and
every GENCO gets the MCP (so long as Pay As Bid scheme is not
implemented), provided congestion does not take place. There is a
possibility of high price volatility in this market. So, every participant faces
a risk of losing revenue in a market clearing process. In order to hedge the
risk, there is another market called Financial market where in there are
some financial instruments used to hedge the risk.

Financial Market:
This is the market in which actual energy is not traded, but contracts between
two parties are traded such that both the parties share the risk. Derivatives
like Forwards, Futures, Options, and Swaps are used as risk hedging
instruments. These are discussed in details later.
Balancing Market:
Even though there is a physical market for the energy transaction, the
physical market is a day ahead market in which all calculations are done
based on forecasted load. In the real time operation, there is a mismatch
between forecasted and actual load. Hence there is a need for balancing
market which takes care of load/ generation mismatch. Balancing market
refers to ancillary service management. In most of the power markets there is
a separate provision for creating balancing market. The generators have to
submit separate bids in this market, apart from physical spot market.

2. Models based on Energy Trading

This type of classification is based on the level of competition, i.e.
the on which side the competition exists, wholesale level or retail level.

2.1 Monopoly Model

In this model, a single entity is taking care of all the business such as
generation, transmission and distribution of electric power to the end users.
Usually (but not necessarily), in this kind of model, the monopoly lies with
the Government. It is quite natural that this kind of model should have strict
regulation in order to protect end consumers against monopoly. Most of the
electric power systems obeyed this model prior to deregulation.
 2.2 Single Purchasing Agent Model

In this model, as shown in Figure 1, there is a competition in the wholesale sector,

i.e. generation. Here, Independent Power Producers (IPPs) are permitted. All
generators sell their power to the central pool or power purchasing agency, which is
turn sells, it to state distribution utilities or distribution companies in the service area.
All power generated by generating companies (GENCOs) must be sold only to a
purchasing agency and not to any other agency. Distribution companies (DISCOs) are
only able to purchase from the purchasing agency. They do not have a choice of
choosing their power supplier.

Gencos Gencos IPP IPP

Inter-state
Power Pool S.T.U.
Tie-line

Discos Discos Discos

C C C C C C

Figure 1: Pool as Purchasing Agent Model

In this model, sales from power pool to retailers take place at a pre-set tariff price.
Efficiency considerations suggest that this tariff should follow the marginal cost
of the system while at the same time covering the total costs to the purchasing
agency. This tariff should then be modified appropriately from time to time.
Retail tariffs, in a competitive retail market, would inevitably tend to follow the
cost of purchasing at the purchasing agency, wholesale tariff. This model can
accommodate the social obligation policies to be implemented by the government.
In this model, Transmission and distribution network can be owned and operated
by State and Regional transmission utilities. Inter-state tie line should be
sufficient to maintain a loose regional power pool.
2.3 Wholesale Competition Model

This model, as shown in Figure 2, provides the choice of supplier for DISCOs
together with competition in generation. DISCOs can purchase energy for their
customers from any competing generator. These distribution companies maintain a
monopoly over energy sales to the final consumers and each of them has a franchise to
serve a given set of customers. It requires “open access” to the transmission network,
and the development of a spot market. The purchasing agency concept has come to the
low-voltage level rather than at the high voltage level but now it is not a single buyer
model. Generators may sell directly to any distribution company but open access to
low-voltage wires is not permitted.

Figure 2: Wholesale Competition Model

Since this model permits open access to the transmission wires, it gives the IPPs
to choose an alternative buyer. However, customers within a service area still have no
choice of supplier. These will be served by a DISCO in their area. With this model the
“obligation to supply” will move to the DISCOs, which still have a monopoly over the
customers. They own and operate the distribution wires.
The transmission network can be owned and maintained by government and
private transmission companies. System operators should manage the operation and
control.

2.4 Retail Competition Model

In this model as shown in Figure 3 all customers have access to competing

generators either directly or through their choice of retailer. This would have complete
separation of both generation and retailing from the transport business at both
transmission and distribution levels. The transmission and distribution wires provide
open access. There may be free entry to generation markets and free exit. This means
there should be no regulation over “need for new plants” and no requirement to
maintain capacity in production when it has passed its economic life. There would also
be free entry for retailers. Retailing is a function in this model, which does not require
the ownership of the distribution wires although the owner of distribution wires can
also compete as a retailer.
This model is not a single buyer model and the power pool in this model is not like
purchasing agency, it is like auctioneer. They never own the power, they do not take
the market risk, and they cannot discriminate the price. It should behave like a single
transporter, moving power to facilitate bilateral trading. All the trading of power will
be done through an integrated network of wires. The operator of wire should measure
and account for the power trades. In this pooling arrangement, there should be
provision for bidding into a spot market to facilitate merit order dispatch. The
pool will match the supply and demand and determine the spot price for each hour of
the day. It collects money from purchasers and distributes it to producers.
 The advantage of this model over monopoly utilities is that competition is
introduced in both wholesale and retail areas of the system. This model is a kind of
truly deregulated power market model.
In Wholesale Competition Model, with relatively few customers, all of them
regulated DISCOs, a spot market can be preferable but not essential. However, in
Retail Competition Model, spot markets will become essential, since contractual
arrangements between customers and producers are carried out over a network owned
by a third party. The network owner must ensure that there are commercial
arrangements that allow for the settlement of imbalances between contracted amounts
and actual flows. If different parts of the network are operated separately, inter-area
payment schemes will also have to be devised.
In Retail Competition Model, metering becomes a major problem. Metering by
time of use is no longer merely a useful way of promoting efficient usage but it is a
commercial necessity. Each customer needs to be metered on hourly basis, if this is the
settlement period. Since the price may change every hour, it is necessary to know how
much the customers of each competing retailer used in each settlement period, in order
to bill the right customers and to settle accounts properly. If the customers have
adequate metering, there will be no problems. But if the numbers of customers are
increasing and metering capability for all the customers is not sufficient, it may create
logistical problem and provoke disputes.
3. Models Based on Contractual Arrangements
3.1 Pool Model
The Pool model is comprised of competitive power providers as obligatory
members of an independently owned regional power pool, vertically integrated
distribution companies, vertically integrated transmission companies and a single and
separate entity responsible for: establishing bidding procedures, scheduling and
dispatching generation resources, acquiring necessary ancillary services to assure
system reliability, administering the settlements process and ensuring non-
discriminatory access to the transmission grid. The Pool operator does not own any
generation or transmission components and centrally dispatches all generating units
within the service jurisdiction of the pool. PoolCo controls the maintenance of
transmission grid and encourages an efficient operation by assessing non-
discriminatory fees to generators and distributors to cover its operating cost.

3.2 Bilateral Contracts Model

Bilateral contracts model has two characteristics that would distinguish it from
the Pool model. These are: The ISO’s role is more limited; and buyers and sellers could
negotiate directly in the marketplace.
This model permits direct contracts between customers and generators without
entering into pooling arrangements. By establishing non-discriminatory access and
pricing rules for transmission and distribution systems, direct sales of power over a
utility’s transmission and distribution systems are guaranteed. Wholesale suppliers
would pay transmission charges to a transmission company to acuire access to the
 transmission grid and pays similar charges to a distribution company to acquire access
to the local distribution grid. In this model, a distribution company may function as an
aggregator for a large number of retail customers in supplying a long-term capacity.
Also, the generation portion of a former integrated utility may function as a supplier or
other independent generating companies, and transmission system would serve as a
common carrier to contracted parties that would permit mutual benefits and customers
choice. Any two contratced parties would agree on contract terms such as price,
quantity and locations, and generation providers would inform the ISO on how its
hourly generators would be dispatched.
The ISO would make sure that sufficient resources are available to finalize the
transactions and maintain the system reliability. If there is no violation of static and
dynamic security, the ISO simply dispatches all requested transactions and charges for
the service.
In a Pool model, sellers and buyers submit their bids to inject their power into and out of
the Pool. Sellers compete for the right to inject power into the grid, not for specific
customers. If a power provider bids too high, it may not be able to sell its power, as his
bid may not get selected. On the other hand, buyers compete for buying power and if
their bids are too low, they may not be getting any power. In this arrangement, low cost
generators would essentially be rewarded. Power pools would implement the Optimal
Power Flow (OPF) and produce a single (spot) price for electricity, giving participants a
clear signal for consumption and investment decisions. Winning bidders are paid the
spot price that is equal to the highest bid of the winners. Since the spot price may exceed
the actual running of selected bidders, bidders are encouraged to expand their market
share, which will force high cost generators to exit the market. Market dynamics will
drive the spot price to a competitive level that is equal to the marginal cost of most
efficient firms.
Pool model is practiced in Chile, by the National Grid Company (NGC) in
England and Wales till 2000, and in Argentina and stands at the core of all deregulated
systems so far.
5.Describe the competitive market structure of England and wale electricity pools?
ANS:
The organization of this ISO is composed of two major areas:
System Operations and Reliability: responsible for daily dispatch of resources assuring
the reliability of the system and the administration of the open access transmission tariff,
short-term and long-term demand forecasting and reliability planning.
Market Operations: directs wholesale electricity marketplace to ensure fairness to all
market participants and full competition that could lead to the lowest price for
electricity, provides customer services and training support and performs the settlement
function in the marketplace by ensuring that sellers in the spot market are paid by
purchasers, and tracks bilateral contracts between market participants.
The New England ISO proposed seven markets to be run under the ISO directions.
These markets are one energy market, four ancillary service markets and two capacity
markets. The ancillary service markets are:
• Ten minute spinning reserve (TMSR) market
• Ten minute non-spinning reserve (TMNSR) market
• Ten minute operating reserve (TMOR) market
• Automatic generation control (AGC)
market The capacity markets are:
• Operable capability market
• Installed capability market

6. Explain the different auction mechanism employed in competitive electricity markets?

ANS:
Power market auction designs have been developed to fit unique regional circumstances.
Circumstances that shaped the design of the existing regional power markets have included the
vestiges of vertical integration (e.g., native load priority for transmission capacity), close
regulatory oversight of retail market prices that insulated customers from wholesale price
volatility, continued obligations for distribution utilities as providers of last resort and standard
offer service, vested interests in revenue neutrality (i.e., revenue preservation), and concerns
about cost shifting and generator market power, especially in regions of the country subject to a
transition to competition at the retail level. These issues helped shape the auction designs for
particular product markets such as real-time balancing, forward energy, or ancillary services.
Designs also vary because the process that produces them is highly politicized. The process
attempts to balance the disparate interests of various groups of market participants. At the
wholesale level, this is partly a consequence of the insistence in Order No. 2000 on RTO
governance structures that are independent of market participants. However, market participants
still have a voice in market design by their participation on stakeholder committees that offer
advice to the governing boards of the regional system operators.8 This form of governance
structure, generally sanctioned by FERC, complicates the decision making for design because
the outcome often reflects a compromise that makes stakeholders happy but sacrifices design
features that would make the auction or the market more efficient. The ISOs’ real-time market
auction designs are similar: bid and offer schedules are obtained in a day-ahead, double-sided
auction used for scheduling and determining unit commitments for the next day. For balancing,
bids and offers are submitted as incremental and decremental adjustments to scheduled
quantities, with conditions on how long such adjustments can be sustained before restoration to
original levels. Settlements are based on a uniform market-clearing price computed from either
real-time locational marginal prices.

Bilateral Markets vs. Auction Markets:

Compared to mediated market types, the most salient distinction of bilateral energy markets is
the continual process of trading with prices unique to each transaction. Mediated energy markets
(power pools and power exchanges), in contrast, are typified by a uniform price that all buyers
pay and all sellers receive, with an auction run at regular times to set the market price in advance
of physical delivery.
The experimental and empirical evidence indicates that, in general, bilateral markets are neither
more nor less competitive or efficient than exchanges or pools. Among bilateral markets with
market makers, further distinctions are the “product differentiation” represented by the variety of
contracts and terms tailored to individual customers and the maintenance of some degree of price
continuity. However, bilateral energy markets encounter a fundamental problem maintaining
efficiency in related markets for transmission service. The demand for transmission service is
derived from the interests of spatially separated buyers and sellers to reap the gains from trade
between them, which can only be consummated through use of the transmission system. The
maximum value of transmission service to fulfill a particular commodity contract is the sum of
the gains from trade of the derived demands for the transmission system to fulfill the commodity
contracts. In the aggregate, the sum of the demand values inaccurately reflects the actual demand
value of transmission because it does not take into account the scarcity of the transmission
capacity.
When transmission is scarce or expensive, as in the case of power transmission, market makers
are challenged to use transmission facilities efficiently. They might accomplish this by
aggregating transmission demands, or by brokering transmission services, but taking account of
the inherent externalities in transmission of electricity, such as loop flows and thermal energy
losses, there is no viable theory that assures the outcome of decentralized trading will be fully
efficient. Thus, on matters of efficiency in transmission, faith in purely bilateral markets requires
confidence in the ingenuity of market makers.

7 .Explain the reform motivation and fundamentals of deregulated market?

ANS:
In order for a deregulated power industry to work well, apart from the entities discussed
earlier, two additional entities or functions must be created: Power Market: There must
be some way for power producers to sell their power, and for buyers to buy the power.
System Operation: The transmission system can move power from sellers’ site to the
buyer’s locations, but it must be kept under proper control on a real time basis. Both of
these functions must be accomplished in one form or another in every deregulated
electric power industry.
Both require objectivity and equality of operation towards all competitors. None of the
competitive companies involved (Gencos, Rescos) can possibly serve either of these
roles. System operation can be accomplished by Transcos and Discos, under some types
of deregulated structure, but the power market is a concept that was completely
unfamiliar to the power industry prior to deregulation. For this reason, deregulation
usually requires that one or more new entities be created in one form or another.
The marketplace mechanisms
Under deregulation, some system must be put in place where competitive sellers of
electricity can offer their product (i.e. power) and transact sale .
There are three basic ways in which it can be done: Poolco, Bilateral Trading and Power
Exchange. Often these are combined in different ways to form a composite mechanism.

 Poolco
There is only one buyer in this system. The Poolco is a governmental or quasi-
governmental agency that buys for everyone, taking bids from all sellers and
buying enough power to meet the total need, taking the lowest cost bidders.
The Poolco operator also has responsibility for running the power system, and
is thus a combined buyer-system operator.

 Bilateral Exchange
In this type of multi-seller/ multi-buyer system, individual buyers and sellers
make a deal to exchange a power at prices and under the conditions they agree
to, privately.

 Power Exchange (PX)

The Government sets up, or causes the power industry to establish, a trading
exchange for electric power, which operates much like a stock exchange. The buyers and
sellers enter their needs into the power exchange. For example, a buyer would say, “I need up
to 200 MW at l600 hours IST. I would pay Rs. 3.5/ kWhr”, whereas, the seller would enter his
demand as, “I have 400 MW and would like to sell it at Rs.4/ kWhr”.

8. What is Meant by congestion in power system? Explain the concept of

Congestion management?
ANS:
Congestion management in a multi-buyer/ multi-seller system is one of the most involved tasks
if it has to have a market based solution with economic efficiency. In a vertically integrated
utility structure, activities such as generation, transmission and distribution are within direct
control of a central agency or a single utility. Generation is dispatched in order to achieve the
system least cost operation. Along with this, the optimal dispatch solution using security
constrained economic dispatch eliminates the possible occurrence of congestion. This effectively
means that generations are dispatched such that the power flow limits on the transmission lines
are not exceeded.
There are two broad paradigms that may be employed for congestion management. These are the
cost-free means and the not-cost-free means. The former include actions like outaging of
congested lines or operation of transformer taps, phase shifters, or FACTS devices. These means
are termed as cost-free only because the marginal costs (and not the capital costs) involved in
their usage are nominal. The not-cost-free means include:
(1) Rescheduling generation.
This leads to generation operation at an equilibrium point away from the one determined by
equal incremental costs. Mathematical models of pricing tools may be incorporated in the
dispatch framework and the corresponding cost signals obtained. These cost signals may be used
for congestion pricing and as indicators to the market participants to rearrange their power
injections/extractions such that congestion is avoided.
(2) Prioritization and curtailment of loads/transactions.
This can be an effective instrument in setting the transaction curtailment strategies which may
then be incorporated in the optimal power flow framework.
9. Compare and contrast inter and intra Zonal Congestion?
ANS:

10. With the neat diagram Explain the constituents of generation rescheduling in congestion
management?
ANS:
congestion management problem is considered with generation rescheduling combined with
installed FACTS devices with load shedding. The system considered is loaded for different
loading conditions and congestion is relieved by generation rescheduling alone up to a certain
loading condition, beyond which it is not possible to relieve congestion in the system. In such
scenarios installed FACTS devices like Thyristor Controlled series Compensator (TCSC) are
considered. The congestion is relieved by combined operation of FACTS devices and generation
rescheduling to certain extent of loading. Beyond that load, the load shedding as a last option is
considered to relieve the congestion.
FACTS devices have the ability to allow power systems to operate in a more flexible, secure,
economic, and sophisticated way. With the increased presence of independent GENCOS in the
deregulated environment, the operation of power systems would require more sophisticated
means of power control which can be achieved by using FACTS devices.
An integrated approach to incorporate the line flow control methods of FACTS in the Optimal
Power Flow (OPF) problem for alleviating congestion is discussed. The FACTS device
considered in this research work is Thyristor Controlled Series Compensator (TCSC).
An integrated approach to incorporate the line flow control methods of FACTS in the Optimal
Power Flow (OPF) problem for alleviating congestion is discussed. The FACTS device
considered in this research work is Thyristor Controlled Series Compensator (TCSC).
11. Describe the cost recovery method involving in transmission pricing Services?
ANS:

PRINCIPLES OF TRANSMISSION PRICING

To operate the power system under the regime of transmission open access, a trade-off has to be
solved: Economic marketing of energy has to be given importance while at the same time; it
should be ensured that the whole system operates in a reliable and secure manner. The main
purpose of any transmission pricing scheme is not limited to recovery of the sunk costs
involved in bringing up the transmission infrastructure. The transmission pricing scheme should
do much more than that. In line with the above, following principles should be followed while
designing the transmission pricing schemes [3]:

1. The transmission prices should be devised so as to promote the efficiency of day-to-day

operation of bulk power market.
2. The transmission prices should signal locational advantages for investment in generation
and demand.
3. They should signal the need for investment in the transmission system.
4. The transmission prices should recover the costs of existing transmission assets.
5. Transmission pricing mechanism should be simple and transparent.

6. The mechanism should be politically implementable.

Out of these, the first three objectives are concerned with derivation of appropriate economic
signals to either utility or the consumer. However, the fifth objective states that the signals
should not be so complicated that one can not decipher the same and react to it. Fourth and
sixth objectives are associated with the allocation strategy of the pricing mechanism. Briefly
speaking, the first objective speaks about the short term efficiency, numbers 2-4 with long term
efficiency and 5, 6 with implementation.

There are different transmission pricing mechanisms prevailing in different parts of the world.
They differ on a lot of parameters like: whether they use incremental methods to price the
transactions or they go for rolled-in cost methods; whether generator pays the wheeling charge
or the consumer pays for it, or both pay a part of it in some proportion, etc. It is expected that
while designing a transmission pricing mechanism, following cost components for providing
transmission service should be taken into account.
1. Operating Cost: This includes the cost mainly due to generator rescheduling,
maintaining system voltage, reactive power support and line flow limits.
2. Opportunity Cost: It is the cost which a transmission company (Transco) has to forgo
due to operating constraints that are caused by the transmission transaction.
3. Reinforcement Cost: This cost is charged to only firm transactions and includes capital
cost of new facilities required to meet the transaction.

4. Existing System Cost: The investment cost of existing transmission facilities used by the
transmission transaction.

12. Write a detailed notes on buying and selling ancillary services?

Ans:

A large number of activities on the interconnected grid can be termed as ancillary services. During
the process of defining the ancillary services, some proposals tried to define 60 different ancillary
services! In order to remove this large discrepancy, the North American Electric Reliability
Council (NREC) along with Electric Power Research Institute (EPRI) has identified 12 functions
as ancillary services. These are:

1. Regulation: The use of generation or load to maintain minute-to-minute generation-load

balance within the control area.
2. Load Following: This service refers to load-generation balance towards end of a
scheduling period.
3. Energy Imbalance: The use of generation to meet the hour-to-hour and daily variations in
load.
4. Operating Reserve (Spinning): The provision of unloaded generating capacity that is
synchronized to the grid and can immediately respond to correct for generation-load
imbalances, caused by generation and /or transmission outages and that is fully available
for several minutes.
5. Operating Reserve (Supplemental): The provision of generating capacity and curtailable
load to correct for generation-load imbalances, caused by generation and /or transmission
outages, and that is fully available for several minutes. However, unlike spinning reserves,
supplemental reserve is not required to respond immediately.
6. Backup Supply: This service consists of supply guarantee contracted by generators with
other generators or with electrical systems, to ensure they are able to supply their
consumers in case of scheduled or unscheduled unavailability.
7. System Control: This activity can be compared with the functions of the brain in the
human body. System control is all about control area operator functions that schedule
 generation and transactions and control generation in real time to maintain generation load
balance.
8. Dynamic Scheduling: It includes real-time metering, tele-metering along with computer
software and hardware to virtually transfer some or all of generator’s output or a
customer’s load from one control area to another.
9. Reactive Power and Voltage Control Support: The injection or absorption of reactive
power from generators or capacitors to maintain system voltages within required ranges.
10. Real Power Transmission Losses: This service is necessary to compensate for the
difference existing between energy supplied to the network by the generator and the energy
taken from the network by the consumer.
11. Network Stability Services from Generation Sources: Maintenance and use of special
equipment (e.g., PSS, dynamic braking resistances) to maintain secure transmission
system.
12. System Black Start Capability: The ability of generating unit to proceed from a
shutdown condition to an operating condition without assistance from the grid and then to
energize the grid to help other units start after a blackout occurs.

13. Explain the transmission pricing in open access system and Explain any two pricing
method?
ANS:
Almost all existing and proposed transmission pricing models are cost based. That means,
they allocate all or part of the existing and new transmission systems to wheeling customers.
Based on this, transmission pricing paradigms can be defined which convert the transmission
costs into transmission charges. Three basic paradigms are:
 Rolled-in (embedded) transmission pricing
 Marginal transmission Pricing
 Composite transmission pricing

We have seen that the power markets throughout the world are classified based on two
dispatch philosophies: centralized dispatch and decentralized dispatch . The decentralized
dispatch markets are the ones in which rolled-in paradigm of transmission pricing is
commonly employed. On the other hand, the centralized dispatch markets employ the
marginal or the composite pricing paradigm.
An alternative way of classifying transmission pricing schemes is based on when they are
calculated, i.e., ex-ante or ex-post . In the ex-ante schemes, the entities taking part into the
power market activities know the transmission prices a priori. While, in ex-post schemes, the
transmission charges are calculated only after the real time has elapsed and power flow snap-
shot is available. These schemes can further be categorized into transaction based and non-
transaction based. The transaction based schemes essentially should have a defined source
point and a sink point (bilateral transaction). On the other hand, non-transaction based
schemes refer to the power exchange (PX) trades, where it is not possible to identify source-
sink pair. Figure 7.1 shows the broad categorization of various transmission pricing schemes.
In the above figure, the transmission pricing schemes are classified on the basis of whether
they are calculated ex-ante or ex-post. Generally, the ex-ante schemes are made up of pricing
methods under rolled-in paradigm. As mentioned earlier, the total costs to be recovered are
known a-priori and then they are transformed into transmission prices. The ex-post schemes,
on the other hand, rely upon the incremental or marginal pricing mechanism. Moreover, the
incremental schemes lack the property of recovering transmission sunk costs and hence rely
upon schemes under the domain of rolled-in paradigm to overcome this lacuna. This gives
rise to the composite paradigm.