Introduction to Electricity Economics: generators, transmission and regulation.

1. International business
The electricity industry
Silvester van Koten
PAHX
CERGE-EI
Florence School of Regulation

8. Transmission
Principles of Transmission, applied
to the EU transmission network
1. Line limits
2. Principles of dispatch
3. Role of frequency in ac lines and stability
requirements
4. Transmission shortage, the internal market
and the 2050 carbon targets

14. Power plants

15. Distributors

16. Transmission

17. Industrial
consumers
Transmission Other countries
Distributors
Power Plants
Residential consumers:
Households

18. 1. Power plants

19. Hydro-plant

20. Baseload
Large coal plants

21. Baseload
Nuclear plants

22. Peaker
Oil burning plants

23. Wind turbines
Solar panels
Renewable energies

24. Renewable energies
Concentrated solar power

25. Peaker
Gas burning plants
OCGT
CCGT
http://iea-etsap.org/web/Highlights%20PDF/E02-gas_fired_power-GS-AD-gct%201.pdf

27. Multitude of generation types
• Trade-off:
– Economics of scale Baseload power plants
• High fixed cost
• Low variable costs
– Flexibility
• Low fixed costs Peaker power plants
• High variable costs

28. Fixed cost per Variable cost
MWh per MWh
Baseload 40 0
Peaker 10 50

29. Peaker
60
40
Baseload
10
0
Capacity factor
60% 100% (=8760 hours/year)
Fixed cost per Variable cost
MWh per MWh
Baseload 40 0
Peaker 10 50

30. Peaker
60
40
Baseload
10
0
Capacity factor
60% 100%
Use peakers Use baseload
when capacity when capacity
factor < 60% factor > 60%

31. PEAKER
BASELOAD

32. Very expensive to built a
plant for only 87 hours!
Cost?
$1050/MWH (=100*10+50)
0 1% =87 hours

33. Price spike

34. Can price-spikes be avoided?
- Cap the price, eg at $1000/MWH

35. Cost is $1050/MWH
>
price cap
0 1% =87 hours
?

36. BLACKOUT

37. Cost is $1050/MWH
>
price cap
0 1% =87 hours
?

38. Can price-spikes be avoided?
- Cap the price, eg at $1000/MWH
- Capacity market
- Pay power plants for being prepared to generate,
even if they are not called upon

39. Income of a power plant:
- Price of electricity
- Capacity payments (reserve)

40. Setting of the wholesale
electricity Price

41. Uniform price auction
$/MWH
Baseload plants Peaker plants
(MC=0)
D S=MC
80
PROFITS!

42. Uniform price auction
$/MWH
Baseload plants Peaker plants
(MC=0)
D S
80

43. Uniform price auction
$/MWH
Baseload plants Peaker plants
(MC=0)
D S
80

44. Uniform price auction
$/MWH
Baseload plants Peaker plants
(MC=0)
D S
80
60

45. Renewables

46. Wind turbines
Solar panels
Renewable energies

47. Greenhouse gasses heat up the earth
Abate CO2

48. 2020 Targets: 20% decarbonization
2050 Targets: 80% decarbonization

49. Wind turbines
Solar panels
Renewable energies

51. Retire 1 coal or CCGT plant
=(500 MW conventional)
Install over 1000 wind turbines
=(3000-5000 MW wind or solar)

52. • Wind and solar needs conventional backup
• Firm capacity 10%-15%
http://ejournal.windeng.net/3/01/GGiebel-
CapCredLit_WindEngEJournal_2005_right_links.pdf

54. Wind generation in Germany
http://www.pnl.gov/main/publications/external/technical_reports/PNNL-19225.pdf

55. Feed-in tariffs
Case of Germany
2004 2012
0.50 €/kWh 0.20€/kWh
Coal or gas plant costs
0.04€/kWh

56. €/kWH Uniform price auction
D S=MC
0.10
0
-0.10

57. €/kWH Uniform price auction
Negative electricity wholesale price in Germany!
D S=MC
0.10
0
-0.10

58. German electricity wholesale market

59. Electricity prices 2001-2012
€24 billion deficit
Czech Germany Spain
Republic
http://epp.eurostat.ec.europa.eu/portal/page/portal/energy/data/main_tables

60. EU Electricity industry Association

62. Need for long-distance transmission

63. Hydro-plant and pumped storage

64. Hydro-plant and pumped storage

65. Hydro potential
Need for long-distance transmission

66. Need for long-distance transmission

67. 2. Transmission lines

68. Industrial
consumers
Transmission Other countries
Distributors
Power Plants
Residential consumers:
Households

69. September 28th, 2003
Huge blackout cripples Italy!

70. Rome’s “white night”

71. 110 trains stopped night”
Rome’s “white
Thousands of people stuck

73. Sils-Soazza
Tree
flashover!
“Cross-border
transmission lines”
Mettlen- “Interconnectors”
Lavorgo
03:01

74. Sils-Soazza
Tree
flashover!
Mettlen-
Lavorgo
03:01

75. Sils-Soazza
Mettlen-
Lavorgo
03:01
03:01-03.16

76. The Swiss TSO operator asks the
Italian TSO for countermeasures
TSO= Transmission System Operator
03:11

77. Sils-Soazza
Tree
flashover!
Mettlen-
Italy reduces
Lavorgo import by -300 MW
03:25
03:21

78. Sils-Soazza
Tree
flashover!
Mettlen-
Lavorgo
03:25

79. All interconnectors are
automatically disconnected
03:26

82. 1. Transmission lines limits
2. Dispatch
3. Frequency and synchronicity
4. Transmission shortage in the EU

83. Transmission lines limits
Sils-Soazza
Tree
flashover!
Mettlen-
Lavorgo
03:01

84. Transmission lines limits
flashover

85. High voltage

86. Transmission lines limits
High load
Sagging of the line

87. 1. Transmission lines limits
2. Dispatch

88. Dispatch
Sils-Soazza
Mettlen-
Lavorgo
03:01

89. Dispatch
Net Injection:
Injection:
50MW
100MW Injection:
20MW
?
A B
Withdrawal: Net
Withdrawal:
50MW Withdrawal:
70MW
50MW

90. Dispatch
Net Injection:
50MW
Physical flow: 50MW
A B
Net
Withdrawal:
50MW

91. Dispatch
∆-10MW
Net Injection:
50MW
40MW ∆ -10MW
Physical flow: 50MW
40MW
A B
∆ -10MW
Net
Withdrawal:
40MW
50MW

92. Dispatch
Net Injection:
40MW
Physical flow: 40MW
A B
Electricity cannot just be “send”
somewhere Net
Withdrawal:
Any flow is the RESULT of the 40MW
injection and withdrawals

93. The Swiss TSO operator asks the
Italian TSO for countermeasures
Dispatch is done by national TSOs
03:11

94. Dispatch
Sils-Soazza
Mettlen-
Italy reduces
Lavorgo import by -300 MW
03:25
03:21

95. 1. Transmission lines limits
2. Dispatch
3. Frequency and synchronicity

96. Frequency and Synchronicity
Direct Current (DC)
Alternating Current (AC)

97. Frequency and Synchronicity
50 Hertz
Alternating
Current (AC)

98. Frequency and Synchronicity
Does a lamp in your house receive zero energy 100 times a second
and is thus blinking?
Raise your hand if you think that this is indeed the case.

99. Frequency and Synchronicity
50 Herz is the frequency in Europe

100. Frequency and Synchronicity
A shortage of generation
makes the frequency fall
Slight shortage

101. Frequency and Synchronicity
A surplus of generation
makes the frequency rise
Slight surplus

102. Frequency and Synchronicity
http://www.dynamicdemand.co.uk/grid.htm

105. Frequency and Synchronicity
http://www.dynamicdemand.co.uk/grid.htm

106. Russian frequency

107. All generators are synchronized
UCTE =
Continental
Synchronous
Area

108. UCTE =
Continental
Synchronous
Area

109. •Azerbaijan, Belarus, Georgia, Kazakhstan, Moldova, Mongolia, Ukraine
•Armenia
•Latvia, Lithuania, Estonia
•Uzbekistan, Tajikistan
•Kazakhstan, Kyrgyzstan?
http://so-ups.ru/index.php?id=ees

110. Frequency and Synchronicity
All interconnectors are
automatically disconnected
03:26

111. Frequency and Synchronicity
Mini circuit breakers

112. Frequency and Synchronicity
High voltage circuit breakers

113. 1. Transmission lines limits
2. Dispatch
3. Frequency and synchronicity
4. Transmission shortage in the EU

114. The future of the EU transmission network
Interconnectors very high loaded at night!
03:26

115. The future of the EU transmission network
Internal EU market induces increase
in cross-border trading

117. The future of the EU transmission network
Massive deployment of wind and solar energy

118. The future of the EU transmission network
European 2050
Climate
Increase from
Foundation
34 GW to 127
GW
Increase
of almost
400%

119. Industrial
consumers
Transmission Other countries
Distributors
Power Plants
Residential consumers:
Households

120. Market organization and regulation
Industrial
consumers
Other countries
Transmission
Distributors
Power Plants
Residential consumers: Households

121. 3. Market organization
and regulation

122. Transmission: large returns to scale
Natural monopoly
State monopoly

124. Vertically
integrated
Power Plants electricity
Utility
State
Transmission monopoly
Distributors

126. Vertically
integrated
Power Plants electricity
Utility
State
Transmission monopoly
Distributors

127. Competitive
Open to the
Power Plants market!
Remains a
monopoly
Transmission
Needs regulation:
• Cost+
• Tariff
• Benchmarking
Distributors

128. 2003 and 2009 Electricity laws
(2003/54/EC and 2009/72/EC)
• Separation from networks and generator
activities
• Non-discriminatory access of generators to
networks
• “EU regulator”: ACER

129. Most EU consumers no longer
protected by electricity price
regulation!

130. How is the electricity price
then determined?
Competition
But… Competition must work

131. Concentration Generators

132. Well-developed financial electricity
market
- Exchanges and OTC
- risk management

133. Financial market manipulation
• US hedge fund, Amaranth Advisors LLC held
1. gas derivates at ICE and OTC markets
2. Gas futures on NYMEX
• Then sold the gas futures on NYMEX to
affect the settlement price at ICE and OTC
markets
• Profit: $60m-$170m

134. REMIT
• Regulation on Energy Market Integrity and
Transparency
• Forbids:
– Market abuse
– Insider trading
• Monitoring task for National Regulaturs and
“EU regulator” ACER

135. 2003 and 2009 Electricity laws
(2003/54/EC and 2009/72/EC)
• Separation from networks and generator
activities
• Non-discriminatory access of generators to
networks
• “EU regulator”: ACER
• 2020 goals: 20% renewable energy in 2020
– Feed-in tariffs
– Emission Trading Scheme

136. Greenhouse gasses heat up the earth
Abate CO2

137. EMISSION PERMIT
MARKET
Competition
for
permits
Decisions on
abatement
A B C

140. • United Power System (UPS): 4-th largest
electricity market in the World.
• 700 generating plants Installed generating
capacity 220 GW

141. Electricity generation Russia, 2006

142. Reform of the system 1992-2015
• 1992 United Energy Systems of Russia (RAO-
UES) replaces soviet ministerial units
• 1998 Anatoly Chubais president of RAO-UES.
• 2003–2011
– restructuring and private ownership
– Partial price deregulation
• 2011 full competition in generation
• 2015 price deregulation for retail conconsumers

143. RAO UES split up in 2008
• OGK 1: http://www.ogk1.com/en/ • TGK 7: http://en.votgk.com/
• OGK 2: • TGK 8: http://www.tgk-8.ru/
http://www.ogk2.ru/eng/index.wbp
• TGK 9: http://www.tgk9.ru
• OGK 3: http://www.ogk3.ru/en-
main/ • TGK 10: http://www.fortum.ru/company/
• • TGK 11: http://eng.tgk11.com/about/
OGK 4: http://eng.ogk-4.ru/
• TGK 12: http://www.kuzbassenergo.ru/eng/
• OGK 5: http://www.ogk-5.com/en/
• TGK 13: http://eng.tgk13.ru/
• OGK 6: http://www.ogk6.ru/en/
• TGK 14: http://www.tgk-14.com/
• GidroOGK:
http://www.eng.rushydro.ru/ • IDGC North-West: http://eng.mrsksevzap.ru/
• TGK 1: • IDGC Ural: http://www.mrsk-
http://www.tgc1.ru/en/home/ ural.ru/eng/company/
• • IDGC South: http://www.mrsk-yuga.ru/
TGK 2: http://www.tgc-
2.ru:8101/en/index.shtml • IDGC Center: http://www.mrsk-1.ru/
• TGK 3: • IDGC Center and Volga Region:
http://www.mosenergo.ru/Eng/Defa http://www.mrsk-cp.ru/
ult.aspx • Manager of the unified transport network:
• TGK 4: http://www.quadra.ru/ http://www.fsk-ees.ru/
• TGK 5: http://www.tgc5.ru/rus.html • Rosenergoatom: http://www.rosenergoatom.ru/
• TGK 6:
http://www.tgc6.ru/index.php?
id=news&L=1

144. Largest 3 foreign investors:
• E.ON (Germany)
• Enel (Italy)
• Fortum (Finland)

145. Need for new investment
• Most power stations built in 1960-1970
– Low efficiency ratio of 33-35% instead of 40-52%
• Ministry of Energy: modernization program for
generators of 10 trillion rubles up till 2030
– Increase in demand for equipment
• Russian technology behind western standards
– heavy duty gas turbines
– ultra supercritical steam turbines
– gasification
– process control systems

146. Electricity consumption Russia, 2007
Gigantic losses

147. Growth of electricity demand

148. Competition problems
• No working retail markets yet
• Fair access to gas for fair and equal prices
– Gas fired generators 40% of production
– Newcomers often CCGT
– Gazprom (75% share) seems to favor its own
subsidiary generators
• Financial energy market not developed
– Risk management

149. Regulation
• regulatory authority: the Market Council
• But not independent, government:
– control over most pricing issues
– Veto over Market Council decisions

150. Industrial
consumers
Transmission Other countries
Distributors
Power Plants
Residential consumers:
Households