The Economics of Electricity Markets
Wiley - IEEE
1. Auflage September 2014
432 Seiten, Hardcover
Wiley & Sons Ltd
Bridges the knowledge gap between engineering and economics in a complex and evolving deregulated electricity industry, enabling readers to understand, operate, plan and design a modern power system
With an accessible and progressive style written in straight-forward language, this book covers everything an engineer or economist needs to know to understand, operate within, plan and design an effective liberalized electricity industry, thus serving as both a useful teaching text and a valuable reference. The book focuses on principles and theory which are independent of any one market design. It outlines where the theory is not implemented in practice, perhaps due to other over-riding concerns. The book covers the basic modelling of electricity markets, including the impact of uncertainty (an integral part of generation investment decisions and transmission cost-benefit analysis). It draws out the parallels to the Nordpool market (an important point of reference for Europe). Written from the perspective of the policy-maker, the first part provides the introductory background knowledge required. This includes an understanding of basic economics concepts such as supply and demand, monopoly, market power and marginal cost. The second part of the book asks how a set of generation, load, and transmission resources should be efficiently operated, and the third part focuses on the generation investment decision. Part 4 addresses the question of the management of risk and Part 5 discusses the question of market power. Any power system must be operated at all times in a manner which can accommodate the next potential contingency. This demands responses by generators and loads on a very short timeframe. Part 6 of the book addresses the question of dispatch in the very short run, introducing the distinction between preventive and corrective actions and why preventive actions are sometimes required. The seventh part deals with pricing issues that arise under a regionally-priced market, such as the Australian NEM. This section introduces the notion of regions and interconnectors and how to formulate constraints for the correct pricing outcomes (the issue of "constraint orientation"). Part 8 addresses the fundamental and difficult issue of efficient transmission investment, and finally Part 9 covers issues that arise in the retail market.
* Bridges the gap between engineering and economics in electricity, covering both the economics and engineering knowledge needed to accurately understand, plan and develop the electricity market
* Comprehensive coverage of all the key topics in the economics of electricity markets
* Covers the latest research and policy issues as well as description of the fundamental concepts and principles that can be applied across all markets globally
* Numerous worked examples and end-of-chapter problems Companion website holding solutions to problems set out in the book, also the relevant simulation (GAMS) codes
Nomenclature xvii
PART I INTRODUCTION TO ECONOMIC CONCEPTS 1
1 Introduction to Micro-economics 3
1.1 Economic Objectives 3
1.2 Introduction to Constrained Optimisation 5
1.3 Demand and Consumers' Surplus 6
1.4 Supply and Producers' Surplus 10
1.5 Achieving Optimal Short-Run Outcomes Using Competitive Markets 14
1.6 Smart Markets 17
1.7 Longer-Run Decisions by Producers and Consumers 20
1.8 Monopoly 22
1.9 Oligopoly 26
1.10 Summary 28
Questions 29
Further Reading 30
PART II INTRODUCTION TO ELECTRICITY NETWORKS AND ELECTRICITY MARKETS 31
2 Introduction to Electric Power Systems 33
2.1 DC Circuit Concepts 33
2.2 AC Circuit Concepts 36
2.3 Reactive Power 38
2.4 The Elements of an Electric Power System 45
2.5 Electricity Generation 46
2.6 Electricity Transmission and Distribution Networks 52
2.7 Physical Limits on Networks 60
2.8 Electricity Consumption 66
2.9 Does it Make Sense to Distinguish Electricity Producers and Consumers? 67
2.10 Summary 70
Questions 71
Further Reading 72
3 Electricity Industry Market Structure and Competition 73
3.1 Tasks Performed in an Efficient Electricity Industry 73
3.2 Electricity Industry Reforms 76
3.3 Approaches to Reform of the Electricity Industry 79
3.4 Other Key Roles in a Market-Orientated Electric Power System 81
3.5 An Overview of Liberalised Electricity Markets 82
3.6 An Overview of the Australian National Electricity Market 85
3.7 The Pros and Cons of Electricity Market Reform 88
3.8 Summary 89
Questions 90
Further Reading 90
PART III OPTIMAL DISPATCH: THE EFFICIENT USE OF GENERATION, CONSUMPTION AND NETWORK RESOURCES 91
4 Efficient Short-Term Operation of an Electricity Industry with no Network Constraints 93
4.1 The Cost of Generation 93
4.2 Simple Stylised Representation of a Generator 96
4.3 Optimal Dispatch of Generation with Inelastic Demand 97
4.4 Optimal Dispatch of Both Generation and Load Assets 102
4.5 Symmetry in the Treatment of Generation and Load 104
4.6 The Benefit Function 105
4.7 Nonconvexities in Production: Minimum Operating Levels 106
4.8 Efficient Dispatch of Energy-Limited Resources 108
4.9 Efficient Dispatch in the Presence of Ramp-Rate Constraints 110
4.10 Startup Costs and the Unit-Commitment Decision 113
4.11 Summary 115
Questions 116
Further Reading 117
5 Achieving Efficient Use of Generation and Load Resources using a Market Mechanism in an Industry with no Network Constraints 119
5.1 Decentralisation, Competition and Market Mechanisms 119
5.2 Achieving Optimal Dispatch Through Competitive Bidding 121
5.3 Variation in Wholesale Market Design 123
5.4 Day-Ahead Versus Real-Time Markets 126
5.5 Price Controls and Rationing 129
5.6 Time-Varying Demand, the Load-Duration Curve and the Price-Duration Curve 133
5.7 Summary 135
Questions 137
Further Reading 137
6 Representing Network Constraints 139
6.1 Representing Networks Mathematically 139
6.2 Net Injections, Power Flows and the DC Load Flow Model 141
6.3 The Matrix of Power Transfer Distribution Factors 145
6.4 Distribution Factors for Radial Networks 146
6.5 Constraint Equations and the Set of Feasible Injections 147
6.6 Summary 151
Questions 152
7 Efficient Dispatch of Generation and Consumption Resources in the Presence of Network Congestion 153
7.1 Optimal Dispatch with Network Constraints 153
7.2 Optimal Dispatch in a Radial Network 156
7.3 Optimal Dispatch in a Two-Node Network 157
7.4 Optimal Dispatch in a Three-Node Meshed Network 159
7.5 Optimal Dispatch in a Four-Node Network 161
7.6 Properties of Nodal Prices with a Single Binding Constraint 162
7.7 How Many Independent Nodal Prices Exist? 163
7.8 The Merchandising Surplus, Settlement Residues and the Congestion Rents 163
7.9 Network Losses 166
7.10 Summary 169
Questions 170
Further Reading 170
8 Efficient Network Operation 171
8.1 Efficient Operation of DC Interconnectors 171
8.2 Optimal Network Switching 173
8.3 Summary 177
Questions 178
Further Reading 178
PART IV EFFICIENT INVESTMENT IN GENERATION AND CONSUMPTION ASSETS 179
9 Efficient Investment in Generation and Consumption Assets 181
9.1 The Optimal Generation Investment Problem 181
9.2 The Optimal Level of Generation Capacity with Downward Sloping Demand 183
9.3 The Optimal Mix of Generation Capacity with Downward Sloping Demand 186
9.4 The Optimal Mix of Generation with Inelastic Demand 189
9.5 Screening Curve Analysis 191
9.6 Buyer-Side Investment 193
9.7 Summary 195
Questions 196
Further Reading 197
10 Market-Based Investment in Electricity Generation 199
10.1 Decentralised Generation Investment Decisions 199
10.2 Can We Trust Competitive Markets to Deliver an Efficient Level of Investment in Generation? 201
10.3 Price Caps, Reserve Margins and Capacity Payments 203
10.4 Time-Averaging of Network Charges and Generation Investment 206
10.5 Summary 207
Questions 207
PART V HANDLING CONTINGENCIES: EFFICIENT DISPATCH IN THE VERY SHORT RUN 209
11 Efficient Operation of the Power System in the Very Short-Run 211
11.1 Introduction to Contingencies 211
11.2 Efficient Handling of Contingencies 212
11.3 Preventive and Corrective Actions 213
11.4 Satisfactory and Secure Operating States 215
11.5 Optimal Dispatch in the Very Short Run 216
11.6 Operating the Power System Ex Ante as though Certain Contingencies have Already Happened 218
11.7 Examples of Optimal Short-Run Dispatch 219
11.8 Optimal Short-Run Dispatch Using a Competitive Market 223
11.9 Summary 229
Questions 230
Further Reading 230
12 Frequency-Based Dispatch of Balancing Services 231
12.1 The Intradispatch Interval Dispatch Mechanism 231
12.2 Frequency-Based Dispatch of Balancing Services 232
12.3 Implications of Ignoring Network Constraints when Handling Contingencies 233
12.4 Procurement of Frequency-Based Balancing Services 238
12.5 Summary 241
Questions 242
Further Reading 242
PART VI MANAGING RISK 243
13 Managing Intertemporal Price Risks 245
13.1 Introduction to Forward Markets and Standard Hedge Contracts 245
13.2 The Construction of a Perfect Hedge: The Theory 249
13.3 The Construction of a Perfect Hedge: Specific Cases 252
13.4 Hedging by Customers 256
13.5 The Role of the Trader 259
13.6 Intertemporal Hedging and Generation Investment 263
13.7 Summary 264
Questions 265
14 Managing Interlocational Price Risk 267
14.1 The Role of the Merchandising Surplus in Facilitating Interlocational Hedging 267
14.2 Interlocational Transmission Rights: CapFTRs 269
14.3 Interlocational Transmission Rights: Fixed-Volume FTRs 271
14.4 Interlocational Hedging and Transmission Investment 273
14.5 Summary 276
Questions 277
Further Reading 277
PART VII MARKET POWER 279
15 Market Power in Electricity Markets 281
15.1 An Introduction to Market Power in Electricity Markets 281
15.2 How Do Generators Exercise Market Power? Theory 284
15.3 How do Generators Exercise Market Power? Practice 289
15.4 The Incentive to Exercise Market Power: The Importance of the Residual Demand Curve 292
15.5 The Incentive to Exercise Market Power: The Impact of the Hedge Position of a Generator 295
15.6 The Exercise of Market Power by Loads and Vertical Integration 298
15.7 Is the Exercise of Market Power Necessary to Stimulate Generation Investment? 300
15.8 The Consequences of the Exercise of Market Power 301
15.9 Summary 304
Questions 306
Further Reading 306
16 Market Power and Network Congestion 307
16.1 The Exercise of Market Power by a Single Generator in a Radial Network 307
16.2 The Exercise of Market Power by a Single Generator in a Meshed Network 311
16.3 The Exercise of Market Power by a Portfolio of Generators 313
16.4 The Effect of Transmission Rights on Market Power 314
16.5 Summary 315
Questions 315
Further Reading 315
17 Detecting, Modelling and Mitigating Market Power 317
17.1 Approaches to Assessing Market Power 317
17.2 Detecting the Exercise of Market Power Through the Examination of Market Outcomes in the Past 318
17.3 Simple Indicators of Market Power 322
17.4 Modelling of Market Power 330
17.5 Policies to Reduce Market Power 332
17.6 Summary 333
Questions 334
Further Reading 334
PART VIII NETWORK REGULATION AND INVESTMENT 335
18 Efficient Investment in Network Assets 337
18.1 Efficient AC Network Investment 337
18.2 Financial Implications of Network Investment 338
18.3 Efficient Investment in a Radial Network 342
18.4 Efficient Investment in a Two-Node Network 344
18.5 Coordination of Generation and Network Investment in Practice 348
18.6 Summary 350
Questions 351
Further Reading 351
PART IX CONTEMPORARY ISSUES 353
19 Regional Pricing and Its Problems 355
19.1 An Introduction to Regional Pricing 355
19.2 Regional Pricing Without Constrained-on and Constrained-off Payments 357
19.3 Regional Pricing with Constrained-on and Constrained-off Payments 364
19.4 Nodal Pricing for Generators/Regional Pricing for Consumers 367
19.5 Summary 369
Questions 370
Further Reading 370
20 The Smart Grid and Efficient Pricing of Distribution Networks 371
20.1 Efficient Pricing of Distribution Networks 371
20.2 Decentralisation of the Dispatch Task 374
20.3 Retail Tariff Structures and the Incentive to Misrepresent Local Production and Consumption 377
20.4 Incentives for Investment in Controllable Embedded Generation 380
20.5 Retail Tariff Structures 388
20.6 Declining Demand for Network Services and Increasing Returns to Scale 390
20.7 Summary 393
Questions 395
References 397
Index 399
Dr Hesamzadeh is assistant professor in electric power systems division of the school of electrical engineering at KTH Royal Institute of Technology in Stockholm, Sweden. Dr Hesamzadeh is a world leader in the modelling of market power in wholesale electricity markets, particularly in the context of transmission planning. His special fields of interests include Power Systems Planning and Design, Economics of Wholesale Electricity Markets, and Mathematical Modelling and Computing. Hesamzadeh is currently working towards his Docent degree in Electricity Markets at KTH.
