power sector eco. and management.pptx

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SUBJECT NOTES:-503202: POWER SECTOR ECONOMICS AND MANAGEMENT

Teaching Scheme Examination SchemeLectures: 4 Hours / Week In Semester Assessment: 50Credits: 4 End Semester Assessment: 50

Sinhgad Technical Education Society’s

SINHGAD INSTITUTE OF TECHNOLOGY(Affiliated to University of Pune and Approved by, AICTE, New Delhi.)

DEPARTMENT OF ELECTRICAL ENGINEERING

Prepared ByMr. Girish R. Walke

Prepared By:- Mr. Girish R. Walke 2

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The Ministry of Power started functioning independently with effect from 2nd July, 1992. Earlier it was known as the Ministry of Energy comprising the Departments of Power, Coal and Non-Conventional Energy Sources.

The Ministry of Power is primarily responsible For:

• the development of electrical energy in the country.

• planning, policy formulation, processing of projects for investment decision, monitoring of the implementation of power projects, training and manpower development and the administration and enactment of legislation in regard to thermal, hydro power generation, transmission and distribution.

• administration of the Indian Electricity Act, 1910 and Electricity (Supply) Act, 1948, Electricity Regulatory Commission Act, 1998, Electricity Laws (Amendment) Act, 1998 (No.22 of 1998) Energy Conservation Act, 2001 and to undertake such amendments to these Acts, as may be necessary from time to time, in conformity with the Government’s policy objectives.

Ministry of Power

Prepared By:- Mr. Girish R. Walke

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Central Electricity Authority

• Commensurate with the capacity addition, The new capacity additions callfor further expansion of the transmission system. The addition programme is being continuously monitored by the Power System Project Monitoring Division in the Central Electricity Authority.

• The Central Electricity Authority is a the key institution in promoting and assisting the timely completion of the schemes for improving and augmenting the electricity system.

• The Power System Project Monitoring Division which acts as a facilitator in expediting construction of the transmission schemes and help to the Utilities in solving their problems like technical, financial and arranging various clearances like forest clearance fr etc..

• The site visits by the officers of the Power System Project Monitoring Division and the “Review Meetings” held in the Central Electricity Authority with the Utility representatives provide an excellent ground for inter-action to identify bottlenecks and identify action required to ensure completion of schemes as per targets.


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Planning CommissionThe main functions of the Planning Commission are:

1. Assessment of the material, capital and human resources of the country, including

technical personnel, and formulation of proposals for augmenting such of these resources

as are found to be deficient.

2. Formulation of Plans for the most effective and balanced utilization of the country's

resources.

3. Definition of stages in which the Plan should be carried out or a determination of

priorities and allocation of resources for completion of each stage.

4. Determination of the nature of the machinery necessary for the implementation of the

Plan in all its aspects.

5. Appraisal from time to time of the progress achieved in the execution of each stage of

the Plan.

6. Public co-operation in national development.

7. Perspective planning.Prepared By:- Mr. Girish R. Walke


REC was set up in July 1969, in the backdrop of a critical draught situation facing

India in the late sixties.

The company’s initial mandate was mainly to help State Electricity Boards energies

pump-sets across the country to boost agriculture and overcome the crippling impact

of three successive years of deficient monsoons.

The company also provided finance to accelerate the pace of rural electrification in

the overall context of planned programmes for increased agricultural production.

Besides finance, REC also offered appraising, consultancy, technical support and

monitoring of projects, to assist State Electricity Boards/Power Utilities, Rural

Electric Cooperatives and other such institutions.

Rural Electrification Corporation (REC)

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Rural Electrification Corporation (REC)To facilitate availability of electricity for accelerated growth and for enrichment of quality of life of rural and urban population.

To act as a competitive, client friendly and development oriented organisation for financing and promoting projects covering power generation, power conservation, power transmission and power distribution network in the country.

To promote and finance projects aimed at integrated system improvement, power generation, promotion of decentralized

To mobilise funds from different sources including raising of funds from domestic and international agencies and sanction loans to the State Electricity Boards, Power utilities, State Governments, Rural Electric Cooperatives, Non-Government Oragnisations (NGOs) and private power developers.

To optimize the rate of economic and financial returns for its operations while fulfilling the corporate goals

To ensure client satisfaction and safeguard customers interests through mutual trust and self respect within the organization as well as with business partners by effecting continuous improvement in operations and providing the requisite servicesPrepared By:- Mr. Girish R. Walke

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Power Finance Corporation Ltd. (PFC)


Power Finance Corporation Ltd. is an Indian financial institution. Established in 1986, it is the financial back bone of Indian Power Sector. Initially wholly owned by the Govt. of IndiaThe Corporation is headed by the Chairman and Managing Director; who at present is Satnam Singh.The company has three wings, each headed by a Functional Director namely, Institutional Development & Administration (IDA) Division, Projects Division and Finance & Financial Operations division.

The IDA Division looks after the credit appraisal and categorization of borrower entities, power sector reforms, review and analysis. The Projects Division controls the operation in various states and project appraisal. Finance & Financial Operations Division looks after the Fund Mobilization and Disbursement.

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Power Finance Corporation Ltd. (PFC)

1. PFC was set up on 16th July 1986 as a Financial Institution (FI) dedicated to Power Sector financing and committed to the integrated development of the power and associated sectors.

2. PFC is the most preferred Financial Institution; providing affordable and competitive products and services with efficient and internationally integrated sourcing and servicing, partnering the reforms in the Indian Power Sector

3. Power Finance Corporation Ltd. (PFC) is a leading power sector public financial institution and a non-banking financial company, providing fund and non-fund based support for the development of the Indian power sector.

4. It plays a major role in channelising investment into the power sector and acts as a vehicle for development of this sector. Our clients include state power utilities, central power sector utilities, power departments, private power sector utilities (including independent power producers), joint sector power utilities etc

5. PFC has developed the Fair Practices Code (FPC) for its lending operations based on the RBI guidelines, which intends to provide assurance to all the borrowers of the Company’s commitment to fair dealing and transparency in its businesses transactions.


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POWER GRID CORPORATION OF INDIA LIMITED


The Power Grid Corporation of India Limited (POWERGRID), is an Indian state-owned electric utilities company headquartered in Gurgaon, India.

POWERGRID transmits about 50% of the total power generated in India on its transmission network. Its subsidiary company, Power System Operation Corporation Limited (POSOCO) handles power management for Power Grid. POWERGRID also operates a telecom business under the name POWERTEL..

Its original name was the 'National Power Transmission Corporation Limited', and it was charged with planning, executing, owning, operating and maintaining high-voltage transmission systems in the country.

On 8 November 1990, the National Power Transmission Corporation received its Certificate for Commencement of Business. Their name was subsequently changed to Power Grid Corporation of India Limited, which took effect on October 23, 1992.

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POWER GRID CORPORATION OF INDIA LIMITED

The Corporation has set following objectives

1. Undertake transmission of electric power through Inter-State Transmission System

2. To ensure development of an efficient, coordinated and economical system of inter-

state transmission lines for smooth flow of electricity from generating stations to the

load centres.

3. Efficient Operation and Maintenance of Transmission Systems.

4. Restoring power in quickest possible time in the event of any natural disasters like

super-cyclone, flood etc. through deployment of Emergency Restoration Systems.

5. Ensure principles of Reliability, Security and Economy matched with the rising /

desirable expectation of a cleaner, safer, healthier Environment of people, both

affected and benefited by its activities.


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Background

• Three Acts that regulated the electricity sector:

• The Indian Electricity Act, 1910

• The Electricity (Supply) Act, 1948

• The Electricity Regulatory Commissions Act, 1998

13Contd..Prepared By:- Mr. Girish R. Walke

Background (contd..)

• The Indian Electricity Act, 1910• Provided basic framework for electric supply industry in

India.• Growth of the sector through private licensees. Licence by

State Govt.• Provision for licence for supply of electricity in a specified

area.• Legal framework for laying down of wires and other works.• Provisions laying down relationship between licensee and

consumer.

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• The Electricity (Supply) Act, 1948• Mandated creation of SEBs.• Need for the State to step in (through SEBs) to extend

electrification (so far limited to cities) all across the country.Contd..Prepared By:- Mr. Girish R. Walke


• Main amendments to the existing Acts• Amendment in 1975 to enable generation in Central sector

• Amendment to bring in commercial viability in the functioning of SEBs –

• Amendment in 1991 to open generation to private sector and establishment of RLDCs

• Amendment in 1998 to provide for private sector participation in transmission, and also provision relating to Transmission Utilities.



• The Electricity Regulatory Commissions Act, 1998• Provision for setting up of Central / State Electricity

Regulatory Commission to with powers to determine tariffs.

• Constitution of SERC optional for States. .

• Distancing of Govt from tariff determination.

16Prepared By:- Mr. Girish R. Walke

Common features of State Acts

• Independent Regulatory Mechanism• Constitution of SERC

• Powers of tariff fixation, licensing, regulation or working of

licensees, performance standards etc. to SERC

• Re-organisation of SEB• Separation of generation, transmission & distribution


Common features contd…..

• Powers of State Governments to give policy directions

to SERCs.

• Policy directions also on subsidy

• State Governments to compensate licensee affected by

direction regarding subsidy


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Need for the new legislation

• Create competitive environment for benchmark competition which will result in enhancing quality and reliability of service to consumer.

• Reform legislation by several States separately.

• Preventing need for individual States to enact their own reform laws.

• Requirement of introducing newer concepts like power trading, open access, Appellate Tribunal etc.

• Special provision for the Rural areas.


Salient features of the Electricity Act, 2003• Role of Government • Rural Electrification • Generation • Transmission • Distribution • Consumer Protection • Trading / Market Development• Regulatory Commission / Appellate Tribunal • Tariff Principles• CEA• Measures against Theft of electricity • Restructuring of SEBs


Role of Government

• Central Government to prepare National Electricity Policy and Tariff Policy.

• Central Govt. to notify a National Policy for rural areas permitting stand alone systems based on renewal and Non-Conventional energy sources in consultation with States.

• Central Govt. to formulate a National Policy in consultation with the concerned State Govts. for bulk purchase of power and management of local distribution through Users’ Association, Cooperatives, Franchisees and Panchayat Institutions etc.


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• Appropriate Govt to endeavor to extend supply of electricity to

all villages/hamlets.

• No requirement of license if a person intends to generate and

distribute power in rural area.

Rural Electrification


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• Generation free from licensing.

• Requirement of TEC (Total Energy Consumption) for non-hydro

generation done away with.

• Captive Generation is free from controls. Open access to Captive

generating plants subject to availability of transmission facility.

• Clearance of CEA for hydro projects required. Necessary due to concern of

dam safety and inter-State issues.

• Generation from Non-Conventional Sources / Co-generation to be

promoted.

Generation


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• There would be Transmission Utility at the Centre and in the States to undertake planning & development of transmission system.

• Load despatch to be in the hands of a govt company/organisation. Flexibility regarding keeping Transmission Utility and load despatch together or separating them.

• Transmission companies to be licensed by the Appropriate Commission after giving consideration to the views of the Transmission Utility.

• Open access to the transmission lines to be provided to distribution licensees,

generating companies. This would generate competitive pressures and lead to gradual cost reduction.

Transmission


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- Distribtution to be licensed by SERCs. - Distribution licensee free to take up generation &

Generating co. free to take up distribution licence. This would facilitate private sector participation without Government guarantee.

- Retail tariff to be determined by the Regulatory Commission.

- Metering made mandatory. - Provision for suspension/withdraw of licence by

Regulatory Commission as it is an essential service which can not be allowed to collapse.

- Open access in distribution to be allowed by SERC in phases. This would give choice to customer.

Distribution


Consumer Protection

Consumer to be given connection within stipulated time.

Penalty in the event of failure to give connection

Regulatory commission to specify Electricity supply code to be

followed by licensees.

No sum due from consumers recoverable after a period of two years

unless the same was shown recoverable continuously.

26Contd…Prepared By:- Mr. Girish R. Walke

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Redressal forum for redressal of grievances of consumers, to be

appointed by every distribution licensee within six months.

Standards of performance

Licensees required to meet standards of performance specified by

Regulatory Commission. Failure to meet standards makes them

liable to pay compensation to affected person within ninety days.

Licensee to furnish to the Commission periodical information on

standards of performance

District level committee - (a) to coordinate and review extension of

electrification in each district; (b) to review quality of power supply

and consumer satisfaction, etc.

Consumer Protection contd…


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- Trading distinct activity permitted with licencing.

- Regulatory Commission may fix ceiling on trading margin to

avoid artificial price volatility.

Trading/ Market Development


Regulatory Commissions/Appellate Tribunal• State Electricity Regulatory Commission to be constituted within six

months.• Provision for Joint Commission by more than one State. • Provision for constitution of Appellate Tribunal consisting of Chairman

and three Members. • Appellate Tribunal to hear appeals against the orders of CERC/SERC, and

also to exercise general supervision and control over the Central/State Commissions.

• Appellate Tribunal considered necessary to-• Reduce litigation and delay in decisions through High Court.• Provide technical expertise in decision on appeals.


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• CEA to continue as the main technical Advisor of the Govt. of India/

State Government with the responsibility of overall planning.

• CEA to specify the technical standards for electrical plants and

electrical lines.

• CEA to be technical adviser to CERC as well as SERCs.

• CEA to specify the safety standards.

Central Electricity Authority


Tariff Principles• Regulatory Commission to determine tariff for supply of electricity by generating co. on long/medium term contracts.• No tariff fixation by regulatory commission if tariff is determined through competitive bidding or where consumers, on being allowed open access enter into agreement with generators/traders.• Consumer tariff should progressively reduce cross subsidies and move towards actual cost of supply. • State Government may provide subsidy in advance through the budget for specified target groups if it requires the tariff to be lower than that determined by the Regulatory Commission. •Regulatory Commission to look at the costs of generation, transmission and distribution separately.


Measures Against Theft of Electricity- Focus on revenue realisation rather than criminal proceedings.

- Penalties linked to the connected load and energy and financial gain involved in theft.

- Provisions for compounding of offences.

- Assessment of electricity charges for unauthorised use of electricity by the assessing officer designated by the State Government.

- Theft punishable with imprisonment.

- Punishment provision for discourage of theft. - Special Courts.


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- Provision for transfer scheme to create one or more

companies from SEB.

- Provision for continuance of SEBs

- States given flexibility to adopt reform model/path.

Restructuring of SEBs


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National Electricity PolicyThe Policy aims at accelerated development of the power sector, providing supply of electricity to all areas and protecting interests of consumers and other stakeholders keeping in view availability of energy resources, technology available.

The National Electricity Policy is one of the key instruments for providing policy guidance to the Electricity Regulatory Commissions in discharge of their functions and to the Central Electricity Authority for preparation of the National Electricity Plan.

The Plan prepared by CEA and approved by the Central Government can be used by prospective generating companies, transmission utilities and transmission/distribution licensees as reference document.

While evolving the National Electricity Plan, CEA will consult all the stakeholders including state governments and the state governments would, at state level, undertake this exercise in coordination with stakeholders including distribution licensees and STUs. While conducting studies periodically to assess short-term and long-term demand, projections made by distribution utilities would be given due weightage. CEA will also interact with institutions and agencies having economic expertise, particularly in the field of demand forecasting. Projected growth rates for different sectors of the economy will also be taken into account in the exercise of demand forecasting.Prepared By:- Mr. Girish R. Walke

Accordingly, the CEA shall prepare short-term and perspective plan. The National Electricity Plan would be for a short-term framework of five years while giving a 15 year perspective and would include:

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•Short-term and long term demand forecast for different regions;

•Suggested areas/locations for capacity additions in generation and transmission keeping

in view the economics of generation and transmission, losses in the system, load centre

requirements, grid stability, security of supply, quality of power including voltage profile

etc. and environmental considerations including rehabilitation and resettlement;

•Integration of such possible locations with transmission system and development of

national grid including type of transmission systems. and

•Different technologies available for efficient generation, transmission and distribution.

•Fuel choices based on economy, energy security and environmental considerations


Objectives of the Policy

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a) Access to Electricity Available for all households in next five years.

b) Availability of Power Demand to be fully met by 2012. Energy and peakingshortages to be overcome and spinning reserve to be available.

c) Supply of Reliable and Quality Power of specified standards in an efficientmanner and at reasonable rates.

d) Per capita availability of electricity to be increased to over 1000 units by 2012.

e) Minimum lifeline consumption of 1 unit/household/day as a merit good by year 2012.

f) Financial Turn around and Commercial Viability of Electricity Sector.

g) Protection of consumers interests.Prepared By:- Mr. Girish R. Walke

Main thrust Areas

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The National Electricity Policy lays down the approach for developing Rural Electrification distribution backbone and village electrification to achieve the target of completing household electrification in next five years.

The Policy recognizes the need for ensuring recovery of cost of service from consumers to make the power sector sustainable. The existing cross-subsidies for other categories of consumers need to be reduced progressively and gradually.

The policy recognizes that a minimum level of support is required to make the electricity affordable for consumers of very poor category. Consumers below poverty line who consume below a specified level, say 30 units per month may receive special support in terms of tariff which are cross-subsidized. Efforts would be made to ensure that the subsidies reach the targeted beneficiaries in the most transparent and efficient way.

The National Electricity Policy lays special emphasis on reduction of transmission and distribution losses and advocates promotion of competition aimed at consumer benefits.

The policy estimates that to meet the objective of rapid economic growth and power for all including household electrification, an investment of the order of Rs.9,00,000 crores would be required to finance generation, transmission, sub-transmission, distribution and rural electrification projects upto the year 2012.Prepared By:- Mr. Girish R. Walke

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Open access in transmission will promote competition and in turn lead to availabilityof cheaper power.

Open access to distribution networks, initially for bulk consumers, would increase the availability of cheaper and reliable power supply.

The Policy stipulates that Regulatory Commissions should regulate utilities based onpre-determined indices on quality of power supply. Parameters should includefrequency and duration of interruption, voltage parameters, harmonics, transformerfailure rates, waiting time.


Salient features of the National Electricity Policy

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1. Aims at accelerated development of power sector, providing supply of electricity to all areas and protecting interests of consumers and other stakeholders.

2. Objectives :a) Access to Electricity Available for all households in next five years.b) Availability of Power Demand to be fully met by 2012. Energy and peaking shortages to be overcome and spinning reserve to be available.c) Supply of Reliable and Quality Power of specified standards in an efficient manner and at reasonable rates.d) Per capita availability of electricity to be increased to over 1000 units by 2012.e) Minimum lifeline consumption of 1 unit/household/day as a merit good by year 2012.f) Financial Turnaround and Commercial Viability of Electricity Sector.g) Protection of consumers interests.

3. CEA to notify first National Electricity Plan in six months with a perspective up12th Plan period. The Plan prepared by CEA to be used by prospective generatingcompanies, transmission utilities and transmission / distribution licensees as referencedocument.


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4. Development of Rural Electrification Distribution backbone, village electrificationand household electrification to achieve the target of completing householdelectrification in next five years. 5. Creation of adequate generation capacity with a spinning reserve of at least 5% by2012 with availability of installed capacity at 85%.6. Full development of hydro potential. Provision of long tenor finance for theseprojects.7. Choice of fuel for thermal generation to be based on economics of generation andsupply of electricity.8. Development of National Grid.9. Cost of recovery of service from consumers at tariff reflecting efficient costs toensure financial viability of the sector.10. Provision of support to lifeline consumers (households below poverty line havingconsumption of 30 units per month) in terms of tariffs.11. Special emphasis on time bound reduction of transmission and distribution losses.12. Measures to promote competition aimed at consumer benefits.13. Reliability and quality of power supply to be monitored by State ElectricityRegulatory Commissions.14. Exploitation of non-conventional energy sources such as small hydro, solar,biomass and wind for additional power generation capacity.


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15.Adequate transitional financial support for reforming power utilities. Encouragement for private sector participation in distribution.16. The State Regulatory Commissions to put in place independent third party metertesting arrangement.17. Support for adoption of IT system for ensuring correct billing to consumers.18. Speedy implementation of stringent measures against theft of electricity.20. Demand side management through energy conservation measures. Labelsregarding energy efficiency to be displayed on appliances. 21.Efficient agricultural pump sets and efficient lighting technologies to be promoted. Appropriate tariff structure for managing the peak load.


India's electricity sector faces many issues. Some areGovernment giveaways such as free electricity for farmers, partly to curry political favour,

have depleted the cash reserves of state-run electricity-distribution system. This has financially

crippled the distribution network, and its ability to pay for power to meet the demand. This

situation has been worsened by government departments of India that do not pay their bills.

Shortages of fuel: despite abundant reserves of coal, India is facing a severe shortage of coal.

The country isn't producing enough to feed its power plants. Some plants do not have reserve

coal supplies to last a day of operations. India's monopoly coal producer, state-controlled Coal

India, is constrained by primitive mining techniques and is widespread with theft and

corruption;

Coal India has consistently missed production targets and growth

targets. Poor coal transport infrastructure has worsened these problems. To expand its coal

production capacity, Coal India needs to mine new deposits. However, most of India's coal lies

under protected forests or designated tribal lands. Any mining activity or land acquisition for

infrastructure in these coal-rich areas of India, has been rife with political demonstrations, social

activism and public interest litigations.


Poor pipeline connectivity and infrastructure to harness India's abundant coal bed

methane and shale gas potential.

The giant new offshore natural gas field has delivered less fuel than projected. India

faces a shortage of natural gas.

Hydroelectric power projects in India's mountainous north and northeast regions have

been slowed down by ecological, environmental and rehabilitation controversies,

coupled with public interest litigations.

India's nuclear power generation potential has been prevented by political activism

since the Fukushima disaster in Japan.

Average transmission, distribution and consumer-level losses exceeding 30% which

includes auxiliary power consumption of thermal power stations, etc.

Over 30 crore (300 million) people in India have no access to electricity, almost all

find electricity supply intermittent and unreliable.43Prepared By:- Mr. Girish R. Walke

Lack of clean and reliable energy sources such as electricity is, in part, causing about 80

crore (800 million) people in India to continue using traditional biomass energy sources –

namely fuel wood, agricultural waste– for cooking and other domestic needs. Traditional

fuel combustion is the primary source of indoor air pollution in India, causes between

300,000 to 400,000 deaths per year and other chronic health issues.

India’s coal-fired, oil-fired and natural gas-fired thermal power plants are inefficient and

offer significant potential for greenhouse gas (CO2) emission reduction through better

technology. Compared to the average emissions from coal-fired, oil-fired and natural gas-

fired thermal power plants in European Union (EU-27) countries, India’s thermal power

plants emit 50% to 120% more CO2 per kWh produced.

The July 2012 blackout, affecting the north of the country, was the largest power grid

failure in history by number of people affected.


http://en.wikipedia.org/wiki/July_2012_India_blackout

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What is Life Cycle Costing?

The Life Cycle Cost (LCC) of an asset is defined as:

“The total cost throughout its life including planning, design, acquisition and

support costs and any other costs directly attributable to owning or using the

benefit".

Life Cycle Costing adds all the costs of alternatives over their life period and enables an

evaluation on a common basis for the period of interest (usually using discounted costs). This

enables decisions on acquisition, maintenance, renovation or disposal to be made in the light of

full cost implications.

Life cycle cost is the total cost of ownership of machinery and equipment, including its cost of

purchase, research and development, operation, maintenance, conversion, and/or terminations


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End users and suppliers of equipment can use life-cycle costs for:

· Affordability studies:Measure the impact of a system or project’s LCC on long term budgets and operating results.· Source selection studies:Compare estimated LCC among competing systems or suppliers of goods and services.· Design trade-offs:Influence design aspects of plants and equipment that directly impact LCC.· Repair level analysis:Quantify maintenance demands and costs rather than using rules of thumb such as “…maintenance costs ought to be less than of the capital cost of the equipment”.· Warranty and repair costs:Suppliers of goods and services along with end-users need to understand the cost of early failures in equipment selection and use.· Suppliers sales strategies-can merge specific equipment grades with general operating experience and end-user failure rates using LCC to sell for best benefits rather than just selling on the attributes of low, first cost.


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LCC limitations:

· LCC is not an exact science, everyone gets different answers and the answers are neither wrong nor

right—only reasonable or unreasonable. LCC experts do not exist because the subjects are too broad

and too deep.

· LCC outputs are only estimates and can never be more accurate that the inputs and the intervals used

for the estimates—this is particularly true for cost-risk analysis.

· LCC estimates lack accuracy. Errors in accuracy are difficult to measure as the variances obtained by

statistical methods are often large.

· LCC models operate with limited cost databases and the cost of acquiring data in the operating and

support areas is both difficult to obtain and expensive to get.

· LCC cost models must be calibrated to be highly useful.

· LCC models require volumes of data and often only a few handfuls of data exist—and most of the

available data is suspect.



Net Present Value (NPV)

Money now is more valuable than money later on.Why? Because you can use money to make more money!You could run a business, or buy something now and sell it later for more, or simply put the money in the bank to earn interest.

Example: Let us say you can get 10% interest on your money.So $1,000 now could earn $1,000 x 10% = $100 in a year.Your $1,000 now would become $1,100 by next year.So $1,100 next year is the same as $1,000 now.

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Net Present Value (NPV)

NPV can be described as the “difference amount” between the sums of discounted: cash inflows and cash outflows. It compares the present value of money today to the present value of money in the future, taking price rises and returns into account.

Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms,

where t - the time of the cash flowi - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.); the opportunity cost of capital Rt- the net cash flow i.e. cash inflow – cash outflow, at time t . For educational purposes, is commonly placed to the left of the sum to emphasize its role as (minus) the investment.


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NPV Use in decision making

NPV is an indicator of how much value an investment or project adds to the firm. With a particular project, if is a positive value, the project is in the status of positive cash inflow in the time of t. If is a negative value, the project is in the status of discounted cash outflow in the time of t.

If... It means... Then...

NPV > 0the investment would

add value to the firm

the project may be accepted

NPV < 0the investment would

subtract value from the firm

the project should be rejected

NPV = 0the investment would

neither gain nor lose value for the firm

We should be indifferent in the decision whether to accept or reject the project. This project adds no monetary value. Decision should be based on other criteria, e.g., strategic positioning or other factors not explicitly included in the calculation.


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Investment Needs over 2007-12 period reasonably well established…..

• Installed generation capacity to increase by about 60,000 MW (from 125,000 MW to 185,000 MW)– Of this about 20-30,000 MW hydro

• Investment program estimated to cost Rs. 4,50,000 crores– Generation –Rs. 2,70,000 crores– Transmission & Distribution –Rs. 1,80,000 crores

• In addition:– About 20,000 MW of existing thermal capacity to be

rehabilitated and modernized– Distribution networks to be upgraded and MIS

strengthened– Human resources to be revitalized

• And:– A “low carbon growth” strategy to be followed with

international supportPrepared By:- Mr. Girish R. Walke

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India market environment • Government of India policy response is appropriate:

– Electricity Act, 2003– National Electricity Policy (March 2005)– National Tariff Policy (January 2006)

• Correct focus on:– Governance Commercialization Private participation– Competition Rural services

• Key challenge:– Ramp up pace and quality of policy implementation –

• What must be done to move from about $6 billion to $20 investment/year?

– Overcome concerns and resistance at state level• Accelerated reform of distribution still a critical bottleneck

– Resolve fuel supply bottlenecks– Engage the private sector– Remain conscious of international commitments – clean energy


World Bank role in India

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• Continue to support state level reforms –– Critical for mobilizing the volume of investments

needed to meet India’s demands in an affordable manner

• Support rural access to spur rural development

• Show-case mechanisms for scaling-up a low-carbon power generation program

• Continue to support expansion of the national transmission system to facilitate access and trade

• Continue to provide analytical, advisory and capacity building supportPrepared By:- Mr. Girish R. Walke

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Role of regulation and evolution of regulatory commission in India

Market Development - CERC initiatives

Regulations on

• Short-term Open Access

• Grant of Connectivity, Long-term Access and Medium-term Open Access in inter-State

Transmission.

• Grant of Regulatory Approval for execution of Inter-State Transmission Scheme to CTU

• Transmission Pricing


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Special Features of CERC regulations on short-term open access

• Timelines for concurrence of SLDC in case use of intra-State system is

involved

• Provision of deemed concurrence if SLDC does not decide within above

timelines.

• SLDC to look at only two aspects:

existence of metering infrastructure, and

availability of surplus transmission capacity in the State network.


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• Features of CERC regulations on Grant of Connectivity, Long-term Access and

Medium-term Open Access in inter-State Transmission

• Enabling transmission products of different varieties, standardization of procedures, defining

time lines and ensuring level playing field among different categories of market players.

• Introduced medium-term Open Access to inter-State grid - for a period ranging from 3 months to

3 years.

• New regulatory provisions for seeking connectivity to grid.

• Discrimination between public and private sector generators on connectivity to grid.

• Regulations on Grant of Regulatory Approval for execution of Inter-State

Transmission Scheme to Central Transmission Utility• This is to facilitate network expansion keeping in view the anticipated

transmission needs without the requirement of prior agreement with the beneficiaries

• CERC has granted approval for investment (of about Rs. 58000 Cr. ) to CTU for nine

high capacity transmission corridors.Prepared By:- Mr. Girish R. Walke

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• Regulations on Sharing of Inter State Transmission Charges and Losses

• National transmission tariff framework – in line with vision of tariff policy.

• Sensitive to direction, distance and quantum;

• Addresses short-comings of existing system.


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Grid discipline - IEGC

• IEGC and UI regulations amended to ensure greater grid discipline .

• Operational frequency band tightened from ‘50.3 Hz to 49.2 Hz’ to ‘50.2

to 49.5 Hz’.

• This is aimed at ensuring better performance of generating stations and

user appliances.

• All users of inter-State grid including distribution utilities will also now be

directly responsible for grid discipline and load management, in addition

to SLDCs.


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Regulatory Commissions

• At the Center – CERC• Powers to regulate centrally owned generating companies and companies

having composite scheme for generation and sale of electricity in more

than one State.

• To regulate inter-State transmission/Trading.

• In the States – SERCs• Powers to regulate intra-State generation, transmission and distribution.

• CERC vis a vis SERCs

• No hierarchical relationship. However, SERCs are to be guided by the

principles of tariff determination specified by CERC.


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Functions of CERC• to regulate the tariff of inter-state generating companies

• to regulate the inter-State transmission of electricity

• to determine tariff for inter-State transmission of electricity

• to issue licenses for inter state electricity transmission and trading.

• to adjudicate upon inter-State disputes

• to specify Grid Code

• to specify and enforce the standards with respect to quality, continuity

and reliability of service

• to fix the trading margin


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• Advisory Functions:– formulation of National electricity Policy and tariff policy;

– promotion of competition, efficiency and economy in the activities

of the electricity industry;

– promotion of investment in electricity industry;

– any other matter referred to the Central Commission by the Central

Government


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Functions of SERCs

• determine the tariff for generation, supply, transmission and wheeling of electricity,

wholesale, bulk or retail within the State

• regulate electricity purchase and procurement process of distribution licensees

• facilitate intra-State transmission and wheeling of electricity

• issue licences for intra state transmission, distribution and trading.

• promote co-generation and generation of electricity from renewable sources of

energy

• adjudicate upon the intra-state disputes

• specify or enforce standards with respect to quality, continuity and reliability of

service by licensees;

• fix the trading margin in the intra-State trading of electricity Prepared By:- Mr. Girish R. Walke

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Net present Value method (NPV method)

The NPV method gives consideration of the time value of money.

Steps

1. Determine an suitable rate of interest to discount cash flow.

2. Compute the present value of cash out flow at the determined discounting rate.

3. Compute the present value of total cash inflows at the above determined discount rate.

4. Subtract the present value of cash outflow from the present value of cash inflow to

arrive at the net present value.

5. If the NPV is –ve , the project proposal will be rejected. If the NPV is 0 or +ve the

proposal can be accepted.

6. If the projects are ranked, the project with the maximum NPV should be chosenPrepared By:- Mr. Girish R. Walke

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Example:- Calculate NPV of the 2 projects and suggest which of the 2 projects should be accepted assuming a discount rate of 10%

Project A Project BInitial Investment Rs.40000 Rs.60000Estimated life 5 years 5 yearsScrap value 2000 4000

Year Project 1cash flow in Rs.

Project 2cash flow in Rs.

1 12000 35000

2 18000 25000

3 7000 12000

4 5000 4000

5 4000 4000


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Project AYear cash inflow Present value of cash inflow1 12000 109082 18000 148693 7000 52574 5000 34155 4000 24845 Scrap value 2000 1242Total cash inflow 38174Less PV of initial investment - 40000

= -1825

=======This project is rejected because NPV is – ve.


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Project BYear cash inflow present value of cash inflow1 35000 318152 25000 206503 12000 90124 4000 27325 4000 24845 scrap value 4000 2484Total cash inflow 69177Less PV of initial investment - 60000

= 9177Here NPV is +ve. So Project B is selected



Advantage and Disadvantage of NPV

Advantage: Net present value accounts for time value of money. Thus it is more reliable than other investment appraisal techniques which do not discount future cash flows such payback period and accounting rate of return.Disadvantage: It is based on estimated future cash flows of the project and estimates may be far from actual results.

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PAY BACK PERIOD MEHOD

It represents the no. of years required to recover the original investment. The payback period is also called payout or pay off period. This period is calculated by dividing the cost of the project by annual earnings after tax but before depreciation. A project with shortest pay back period will be given the highest rank. This method is more suitable in industries where the risk of obsolescence is high.

Methods of computation of Payback period

I. When annual cash in flow is constant,

II. When annual cash inflow is not constant


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I:- When annual cash in flow is constant

pay back period = Original cost of the project

Annual cash inflow

Q 1. A project cost Rs. 50000 and yields an annual cash inflow of Rs. 10000 for 7

years. Calculate its pay back period.

PBP = Original cost of the project

Annual cash inflow

= 50000 = 5 years 10000


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II. When annual cash inflow is not constant

Q 2. Determine the PBP for a project which requires a cash outlay of Rs. 12000 and

generate cash inflows of Rs. 2000, Rs.4000, Rs. 4000 and Rs. 5000 in the 1st, 2nd, 3rd

and 4th year respectively.

Year Annual cash inflow cumulated annual cash inflow.

1 2000 -----

2 4000 -----

3 4000 -----

4 5000 -----

Up to 3rd year the initial investment of Rs. 12000 is not recovered, rather only

Rs.10000 is recovered. But the total cash inflow for the 4 years is 15000 ie. Rs.3000

more than the cost of the project. Thus the time required to recover Rs. 2000 will be

2000 = 0.4years. Here the payback period 3.4 years.

5000 Prepared By:- Mr. Girish R. Walke

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Q 1. A project cost Rs. 5,00,000 and yields annually a profit of Rs. 80,000 after

depreciation at the rate of 12% per annum but before tax of 50%. Calculate the pay

back period.

Profit before tax = 80000

Less tax @ 50% = 80000 – (80000x 50/100)

Profit after tax = 40000

Add depreciation @ 12%= 500000x12/100 = 60000

Profit after tax and before depreciation = 40000+ 60000= 100000

Pay back period = Cost of project / Annual cash inflow.

= 500000 / 100000 = 5 Years


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Advantages of payback period.

1. Simple to understand and easy to calculate.

2. As the project with a short payback period is preferred the chance of

obsolescence is reduced.

3. A firm which has shortage of funds finds this method very useful.

4. This method costs less as it requires only very little effort for its computation.

Disadvantages

1. This method cannot take into consideration the cash inflows beyond the pay

back period.

2. It does not take into consideration the time value of money.

3. It gives over emphasis for liquidity


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The internal rate of return (IRR) or economic rate of return (ERR)

IRR defined as the discount rate at which the present value of all future cash flow is equal to the initial investment or in other words the rate at which an investment breakeven.

In more specific terms, the IRR of an investment is the discount rate at which the net present value of costs (negative cash flows) of the investment equals the net present value of the benefits (positive cash flows) of the investment.

USES:- Because the internal rate of return is a rate quantity, it is an indicator of the efficiency, quality, or yield of an investment. This is in contrast with the net present value, which is an indicator of the value or magnitude of an investment.


http://en.wikipedia.org/wiki/Discount_rate

http://en.wikipedia.org/wiki/Net_present_value

http://en.wikipedia.org/wiki/Net_present_value

http://en.wikipedia.org/wiki/Rate_(mathematics)

http://en.wikipedia.org/wiki/Yield_(finance)

http://en.wikipedia.org/wiki/Magnitude_(mathematics)

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Internal Rate of Return (IRR)

IRR for an investment proposal is that discount rate which equates the

present values of cash inflows with the present values of cash outflows of the

investment

The higher the IRR on a project and the greater the amount by which it

exceeds the cost of capital, the higher the net cash flows to the investor. In general

terms, a company that has to choose one, among several similar projects with

equivalent degrees of risk, may go with the one that provides the highest IRR.

Decision Rule

A project should only be accepted if its IRR is NOT less than the target

internal rate of return. When comparing two or more mutually exclusive projects, the

project having highest value of IRR should be accepted.Prepared By:- Mr. Girish R. Walke

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IRR Calculation

The calculation of IRR is a bit complex than other capital budgeting techniques. We

know that at IRR, Net Present Value (NPV) is zero, thus:

NPV = 0; or

PV of future cash flows − Initial Investment = 0; or

Where,

r is the internal rate of return;

CF1 is the period one net cash inflow;

CF2 is the period two net cash inflow,

CF3 is the period three net cash inflow, and so on ...


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PROCEDURES WHICH CAN BE FOLLOWED TO FIND IRR:-

1. Guess the value of r and calculate the NPV of the project at that value.2. If NPV is close to zero then IRR is equal to r.3. If NPV is greater than 0 then increase r and jump to step 5.4. If NPV is smaller than 0 then decrease r and jump to step 5.5. Recalculate NPV using the new value of r and go back to step 2.

ExampleFind the IRR of an investment having initial cash outflow of 2,13,000. The cash inflows during the first, second, third and fourth years are expected to be 65,200, 98,000, 73,100 and 55,400 respectively.SolutionAssume that r is 10%.NPV at 10% discount rate = 18,372Since NPV is greater than zero we have to increase discount rate, thusNPV at 13% discount rate = 4,521But it is still greater than zero we have to further increase the discount rate, thusNPV at 14% discount rate = 204NPV at 15% discount rate = 3,975Since NPV is fairly close to zero at 14% value of r, thereforeIRR ≈ 14%


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Let us try 10% interest:Now: PV = -$2,000Year 1: PV = $100 / 1.10 = $90.91Year 2: PV = $100 / 1.102 = $82.64Year 3: PV = $100 / 1.103 = $75.13Year 3 (final payment): PV = $2,500 / 1.103 = $1,878.29Adding those up gets: NPV = -$2,000 + $90.91 + $82.64 + $75.13 + $1,878.29 = $126.97

at 12% interest rate Now: PV = -$2,000Year 1: PV = $100 / 1.12 = $89.29Year 2: PV = $100 / 1.122 = $79.72Year 3: PV = $100 / 1.123 = $71.18Year 3 (final payment): PV = $2,500 / 1.123 = $1,779.45Adding those up gets: NPV = -$2,000 + $89.29 + $79.72 + $71.18 + $1,779.45 = $19.64

at 12.4% interest rate Now: PV = -$2,000Year 1: PV = $100 / 1.124 = $88.97Year 2: PV = $100 / 1.1242 = $79.15Year 3: PV = $100 / 1.1243 = $70.42Year 3 (final payment): PV = $2,500 / 1.1243 = $1,760.52Adding those up gets: NPV = -$2,000 + $88.97 + $79.15 + $70.42 + $1,760.52 = -$0.94

Internal Rate of Return is 12.4%In a way it is saying "this investment would earn 12.4%" (assuming it all goes according to plan!).

Example: Invest $2,000 now, receive 3 yearly payments of $100 each, plus $2,500 in the 3rd year.


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Find out the IRR of the following investment proposals. Initial investment RS. 70000Expected annual cash in flow Rs.24000Economic life of the project – 4 years

Solution:-PV of Rs. 1 for 4 years At 10% = 3.17

12% = 3.03714% = 2.91416% = 2.798

At 12%PV of total cash inflow = 3.037 x 24000 = 72880

At 14% PV of total cash inflow = 2.914 x 24000 = 69936


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IRR = 12 + 72880 – 70000 x 2 72880- 69936

= 13.6 %

Thus the actual rate of return is between 12% and 14%. The actual rate of return can be found out by interpolation.

IRR = L + P1 – Q x DP1 – P2

L = lower discount rateP1 = P. V at lower rateP2 = P.V at higher rateQ = actual investmentD = difference in rate


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A firm has an investment opportunity involving Rs.50000. The cost of capital is 10%. From the details given find out the IRR and see whether the project is acceptable.

Cash flow for the 1st year - Rs.50002nd year - Rs.100003rd year - Rs.150004th year - Rs.250005th year - Rs.30000

IRR = 15 + 50990 – 50000 x 5 50990- 43900

= 15.7%Year cash inflow PV factor discounted PV factor discounted

at 15% cash inflow at 20% cash inflow1 5000 0.870 4350 0.833 41652 10000 0.756 7560 0.694 69403 15000 0.658 9870 0.579 86854 25000 0.572 14300 0.582 120005 30000 0.497 14910 0.402 12060

50990 43900Thus the actual rate of return is between 15% and 20%. The actual rate of return can be found out by interpolation.

IRR = L + P1 – Q x D P1 – P2


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Types and Method of Regulation:-

The Methods Of The Regulation Are

1. Rate Of Return Regulation

2. Performance Based Regulation

3. Incentive Regulation

4. Benchmarking And Yardstick Regulation


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Rate Of Return Regulation A form of price setting regulation where governments

determine the fair price which is allowed to be charged by a monopoly. Rate of return

regulation is meant to protect customers from being charged higher prices due to the

monopoly's power, while still allowing the monopoly to cover its costs and earn a fair return

for its owners

It restrict the amount of profit that a firm can earn.

Two steps in implementation:-

1) Determine economically appropriate revenue required based on incurred expenses and

for return on the invest capital

2) Set prices for industrial services accordingly. This guarantees agreed rate of return of the

company..• Very low risk as rate of return is initially agreed• Return is directly linked to invested capital, hence need to monitor the capital carefully• Revenue required= total expense + depreciation + interest + gross profit.


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Performance Based Regulation

1. In this approach regulatory commission sets target for key performance

parameter of utility and calculate tariff assuming that targets are met. If the

utility exceeds targets, it makes more profit and if it fails short, it’s profits

are reduced and it could even makes loss.

2. Hence this method provides utilities with better initiatives incentives to

reduce their costs and improve it’s efficiency.

3. Ensure a rational planning and acquisition process, maintain sensitivity

towards environment. The structure of PBR defines the incentive it

produces.

4. Performance is judged for evaluating

• Regulatory program

• For allocating resources

• Legal commands are structured accordinglyPrepared By:- Mr. Girish R. Walke

93

Incentive Regulation

1. incentive-based regulation can be defined as the conscious use of rewards and

penalties to encourage good performance in the utility sector.

2. Incentive regulation is often used to regulate the overall price level of utilities. There

are four primary approaches to regulating the overall price level:

I. rate of return (or cost of service) regulation,

II. price cap regulation,

III. revenue cap regulation,

IV. benchmarking (or yardstick) regulation.


94

3. the operator's performance is compared to other operators' performance and

penalties or awards are assessed based on the operator's relative performance.

For instance, the regulator might identify a number of comparable operators

and compare their cost efficiency. The most efficient operators would be

rewarded with extra profits and the least efficient operators would be

penalized.

4. RC’s reward the operator by giving incentives for it’s operations, the reward

should be

I. provide the operator with additional units

II. Give the operator performance option

III. Allow the operator to keep minimum reward.

IV. Encourage him for more challenging goalsPrepared By:- Mr. Girish R. Walke

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Benchmarking And Yardstick Regulation

1. Process of benchmarking involves detailed analysis and comparison of

company operating characteristics in the vertical production chain.

2. RC decides some Benchmark for operation depending on performance of utility

corresponding to benchmark tariff is set to earn more profit for utility.

3. Yadrstick method allows competition between different utilities available so that

consumer gets the maximum benefit out of the utilities.

4. When utility suppliers do not face direct competition, regulators can put

pressures on those firms by basing their prices on the cost performance of

comparable firms. This technique provide companies with strong incentives to

cut costs and damp the effect of information asymetryies between companies

and regulators.


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Price Cap Regulation

Price cap regulation is sometimes called "CPI - X"Price cap regulation sets a cap on the price that the utility provider can charge. The cap is set according to several economic factors, such as the price cap index, expected efficiency savings and inflation.

After the rising costs of inputs (inflation) and the prices charged by competitors are considered, price cap regulation is introduced to protect the consumers while ensuring that the business can remain profitable.

The regulator establishes a set of acceptable prices for the service. The regulated company can sell its services at any price that is equal to or below the price ceiling. The regulator may also set a price floor to discourage anticompetitive pricing, and it might require companies to refund excess profits.

Price caps depend on several variables, including (but not limited to) efficiency, inflation, and underlying costs, but the idea behind price cap regulation is to protect consumers from price increases and protect utility providers from losses.


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Revenue-cap regulation is a system for setting the prices charged by regulated monopolies by limiting the total revenue in a given period. It is contrasted with rate of return regulation, in which utilities are permitted a set rate of return on capital

A form of economic regulation generally applied to utility companies. Revenue cap regulation seeks to limit the amount of total revenue received by a company operating which holds monopoly status in the industry. Like price cap regulation, revenue cap regulation is determined according to inflation, the Consumer Price Index (CPI) and the efficiency savings factor.

Revenue cap regulation stands in contrast to price cap regulation, which seeks to control the prices set by produces. It also differs from rate of return regulation, which seeks to control the rate of return earned by companies. Revenue cap regulation is designed to incentify regulated companies to increase their efficiency.

Revenue-cap regulation


Unit No. 3

98

The first question which comes to our mind is to know what exactly a tariff is!

It’s simple! The electricity tariff is a representation of

the sum of all the costs incurred in the process of generation, transmission,

distribution and commercialization of electricity. It includes capital (or

investment), operational and financial costs incurred till the electricity

reaches you.

On the basis of various specifications of each

consumer category, like the voltage of the connection, the nature and

purpose of supply, the geographical area, etc., a different tariff may apply

to different categories of consumers. Prepared By:- Mr. Girish R. Walke

99

Consumer tariff structures and considerationsWhat’s a tariff structure?

Tariff structures are designed to enable the distribution licensee (e.g. Reliance Energy) to

recover its cost. It includes the following components:

a)Fixed Charge: This charge is to recover the expenditure incurred on Erection & Up-

gradation, Repairs & Maintenance of electricity network, Customers Services, General

Administration etc. Fixed charges may also be linked to the quantum of consumer’s

contracted demand and impose as Demand Charges.

b)Energy Charge: This charge is to recover the expenditure incurred on procurement of

fuel for Power Station and for purchasing power from TPC & other electricity generators

and traders.


100

c)Fuel Adjustment Charge (FAC): This charge represents the additional cost of

power incurred by the Licensee due to increase in fuel prices during a financial

year, over and above what has been approved by the MERC in its Tariff Order.

This increase is passed on the consumers in terms of Rs.per unit FAC, subject to

the limit, as approved by the MERC from time to time.

d)Maharashtra Government tax on sale of electricity: This charge is towards

Tax levied by Government of Maharashtra on every unit of electricity used by a

consumer.

The tax rates are reviewed by the government of the state from time to time.


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Average cost of supply:-

1. the utility cost is simply divided by the units billed and the average cost is applied to

all consumers.

2. This, was considered as possibility by the ERC Act 1998 as the basis for fixing tariff

for all consumers.

3. It does not consider the issues like Time of Use, or voltage of supply.

Embedded cost of supply:-

3. the actual cost of supplying electricity to each class of consumer is calculated and it

is suggested that the tariff for that class of consumer is based on this cost.

4. The time of use by the average household or farmer is accounted for while

calculating this tariff.

5. The voltage of supply, and reliability of supply are the kind of issues that are inputs

for calculating such cost.

Different tariff principles


102

4. The historical investment (depreciated book value) of lines, transformers,

substations and generating stations are summed up to find out the cost of supply

to a particular class of consumer.

5. Expected cost of power generation and purchase, and the level of T&D loss are

also factored in this cost.

6. The tariff for HT industry would be the lowest going by this principle and the

tariff for rural houses in remote areas would be the highest (if they receive

reliable supply)!


103

Long-range marginal cost (LRMC):-

1. This is a theoretical concept that attempts to estimate the cost of expanding

the system (in an efficient manner) to satisfy the load o new customers.

2. Supplying additional power nia cost less or more than the average cost or

the embedded (or historical) cost. In the past decade the average cost in

India was much less than the marginal cost.

3. But this may change, at least for some plants, as some generation plants are

likely to produce electricity at a low cost of Rs 2 to 2.25 /unit.

4. LRMC pricing gives the i.e. economic efficiency - i.e. it gives a correct tariff

signal to consumers and helps them change their consumption accordingly.

5. Only limitation is that there are problems in implementing such tariffs


104

TELESCOPIC TARIFF

A Tariff structure where rate increases as the consumption rises is termed as Telescopic Tariff.

i.e. only consumption in higher slabs is charged higher tariff.

INTERRUPTIBLE TARIFF

Consumers who use power in off-peak periods use the grid when it is not fully utilised. These

consumers should not be charged the full cost of capital invested in the grid or the power

plants. We also need to take into account consumers who are forced to shift their

consumption by the utility, by restricting supply hours (like the agriculture consumers). Such

consumers in the USA are given special low tariff called 'interruptible tariff' because they

agree to let the utility interrupt their supply in peak conditions.

LIFELINE TARIFF

Households and other small consumers using verv little electricity generally indicate a poor

population. These are subsidized in India and pay just a low charge for the initial

consumption. This is known as 'lifeline tariff'.


105

Time of Day (ToD) Tariff:-

The tariff changes with time of day, to reflect the utility's cost of supplying

power. Peak time usage is charged more and night time usage is offered

concession. The difference in the tariff for these two periods can be as high as

25% of the base tariff.

In addition, maximum demand charges are calculated only for peak time

demand. Industries are finding ways to adjust their production schedules to

increase night time consumption and reduce peak time usage.


106

Subsidy; There are two types of subsidy:-

1. Cross subsidy:- where some consumers pay higher than cost and

subsidies those who pay less than cost. And State subsidy, where the

Government pays to this to keep Tariff low.

2. Claus subsidy:- If costs Rs.2/U for to supply to consumers. India pays

Rs 4, higher than the cost of supply and hence contributes Rs 2/U as

cross subsidy.


107

Non Price Issues In Electricity Restructuring

The energy fed into the grid is metered at generation stations and the

export/import substations (where power is exchanged with neighboring utilities).

The difference between the energy fed into the grid and the total energy sold is the

T&.D loss. But as energy sales consist of metered sale and estimate of un-metered

sale.

Hence estimates of un-metered sales have a direct linkage to the

T&D loss. If the estimate of un-metered sale is high, T&D loss would appear to be

low and vice versa.

If the utility fails to reduce the T&D loss or to limit the sale to

agricultural consumers, then the cost of additional power purchased to meet these

requirements is usually not charged to consumer tariffs.Prepared By:- Mr. Girish R. Walke

108

The financial implications of a reduction in T&D loss can be

worked out using different methodologies, and the method used can differ from

RC to RC.

T&D losses can come down if there is a reduction in technical losses

or commercial losses (theft and metering-billing inefficiency).

Both these need to be separately accounted for:-

1) Reduction in technical losses requires sizeable investment. But from the

savings the utility makes, it can either reduce the power purchase bill or can

supply more power to consumers by reducing load shedding.

2) Reduction in commercial losses requires managerial improvement. It may

need a small investment in terms of better metering and overhaul of billing

systems. Such reduction increases the utility's revenue at the rate of the tariff

for the consumer category where the losses are reduced. Prepared By:- Mr. Girish R. Walke

109

We are in a situation where the base level of T&D loss itself is

a highly contentious figure. Hence the exact reduction in T&D loss, and the contribution of the two above-mentioned sources to it is not exactly known. As a result, RCs may use a combination of technical and commercial loss reduction while estimating the financial implications (cost reduction or increased revenue) ofreducing T&D losses.


110

Tariff Linked to the Quality of Supply In most states the quality and reliability of supply to rural areas is so bad

that consumers on rural feeders complain about having to pay the same tariff as

urban consumers. There is some economic logic to this. Providing assured and

uninterrupted supply clearly has higher cost implications.

Karnataka has offered a rural subsidy to reflect lower reliability of rural

power supply. On the other hand, in MP and AP the lower agricultural tariff is

justified on the basis of the fewer hours of supply (during off-peak periods of

the day) given to agricultural consumers.

Maharashtra's Regulatory commission has inserted a provision in the tariff

policy whereby the utility can charge a higher tariff to the HT industry if it

gives supply without a single interruption for the whole of the month.


111

From the utility's point of view, the time of supply has clear cost

implications. Consumers who use power in off-peak periods use the

grid when it is not fully utilized. These consumers should not be

charged the full cost of capital invested in the grid or the power plants.

Also need to take into account consumers who are forced to shift

their consumption by the utility, by restricting supply hours (like the

agriculture consumers). Such consumers in the USA are given special

low tariff called 'interruptible tariff' because they agree to let the utility

interrupt their supply in peak conditions.


112

Tariff Linked to the Quality of Service As the power sector is passing through a financial crisis and the government

does not have resources to extend sufficient subsidy.This is more noticeable in the case of large industrial and commercial

consumers. Their tariffs are generally not increasing, and have, at times, even started reducing. In addition, some RCs have also started linking industrial and commercial tariffs to the factors that affect the cost of supply.

Examples of costs associated with the kind of services given by the utility. the voltage level of supply, the time of power consumption, and the power

factor are critical in determining the cost to the utility of supplying power.

The lower the supply voltage, the higher is the use of the network and the higher the loss in supply, implying a higher cost of supply. Use of power at peak time strains the system and increases costs because it requires strengthening the system as well as increasing generation capacity, again implying higher cost to the utility.


113

The lower the power factor, the higher is the current drawn (for the same amount of energy use) hence the higher are the demands from the system, implying higher costs.

These are only sonic examples of costs associated with the kind of services given by the utility.

Linking tariff to such factors is usually done by adding incentives or disincentives (linked to these factors) over and above the basic tariff. These take the shape of

(a) incentive/penalty linked to power factor or the load factor,(b) lower tariff for consumption during off-peak hours and higher tariff for

consumption during peak hours (this is called ToD or Time of Day tariff)(c) tariff linked to supply voltage, and so on.This has complicated the tariff structures for these consumers. But it has an

advantage. As these consumers strive to reduce their bills by adjusting time of use or increasing their power factor it helps the utility reduce costs by reducing peak power requirement or avoiding investments for system strengthening. Prepared By:- Mr. Girish R. Walke

114

Standards of Performance By Utility

To minimize the commercial loss, utilities are choosing to limit the power supply to rural, agricultural feeders or to provide them power when cost of supply is low (such as, the oft-peak time). Basically, the utilities are trying to separate the loss making and profit making consumers using different mechanisms. In AP, these feeders are entitled to get supply for seven hours a day, whereas in Karnataka, the debate is about three to five hours a day in Madhya Pradesh, the RC has allowed the utility to limit the supply to just six hours a day.

Another set of mechanism being adopted by the utilities to separate the consumers is to lay separate feeders for agricultural consumers and bunching all pumps on one transformer. Utilities control the timing and hours of supply to pumps by physically controlling the agricultural feeders or by providing single-phase supply on rural feeders.


115

Consumer category:

This is usually an extrapolation based on number of

consumers, expected growth in number of consumers, and the past trend

of consumption norm (consumption per consumer). There are three

consumer categories

1. Residential consumer

2. Agricultural consumer

3. Industrial consumer


116

Environmental And Social Considerations

Social considerations played a key role in shaping tariffs in

the past. Households and other small consumers using very little electricity

generally indicate a poor population.

These are subsidized in India and pay just a low charge for

the initial consumption. This is also known as 'lifeline tariff'. Similarly,

agricultural consumers and power-loons consumers (in some states) have been

highly subsidized to encourage agriculture and employment in power-looms.


117

Environmental And Social Considerations

As we know. the loss to the SEB due to this low tariff

(lower than the cost of supply) is in some part made up by large industrial

consumers being charged tariff that is higher than the cost of supply. This

subsidy-among the consumer classes or within the same consumer class is called

cross-subsidy (as against direct subsidy received from state government budget).

It has been argued that the quantum of cross-subsidy has

become too high. As we have seen earlier, the higher industrial tariff did not only

subsidies the poor and agricultural consumers, but also the inefficiency of SEBs,

especially for high T&D losses.


118

In recent years, tariff setting has been a major challenge as it has

had to take into account the competition in supply to utilities (from captive

generation) sales or open access etc.

This is accelerating the movement towards cost reflective tariffs.

As a result, the social considerations in setting tariffs have become less

important and commercial considerations are becoming more important.

In other words, the tariff for industries is reducing, or remaining

stable, and the tariff for poor and other subsidized categories (agricultural

consumers and power-loom consumers) is rapidly increasing.

Effect of renewable energy and captive power generation on tariff


119

Reduction in cross-subsidy or tariff rationalization is very

rapid in the state of Maharashtra. A similar process is going on in several

other states, but at a much slower pace.

In states where the industrial tariff has not been reduced,

industries have a higher incentive to opt out of the grid by setting up captive

generation plants. Hence. to a certain extent, the cross-subsidy removal (also

called tariff rationalization) is an economic imperative.

But some state governments are using their powers to put

electricity duty on different consumers. This tax revenue is then used by the

state government to subsidies agricultural and other consumers.


120

Comparison of different tariff structures for different load patterns


121

Above figure compares the average cost of supply with agricultural

and industrial tariffs in Maharashtra. It can be seen that the difference in the cost

of supply and agricultural tariff widened in the 15 years from 1985 to 2000. It is

essential to note that after the RC was established,

The true agricultural Consumption was revealed to be much

less than what was being claimed earlier." Before scrutiny by the RC, the

agricultural tariff (revenue/sales) was suppressed. Hence, the jump in agricultural

tariff in the year 2001 is a combined result of reassessed consumption (towards the

lower side) and an increase in tariff by the RC.

Thereafter, the increase in agricultural tariff is largely due to

"corrections" in tariff by the RC. After 2000, the industrial tariff has steadily

declined and the agricultural tariff has increased.Prepared By:- Mr. Girish R. Walke

122

UNIT NO. 04


123

IntroductionMeaning Of Reform, Deregulation And Restructuring

The word 'reform' is employed to denote the recent changes in the Indian

power sector that emphasis market orientation, cost based pricing, reduced role of the

state etc. The dictionary meaning of this word is'

1) Removal of vices, imperfections etc.

2) Change made in order to remove imperfections.

It will not be totally correct to attribute these meanings to the market oriented power

sector reform in India.

To give the correct perspective, the word 'reform' is employed to denote the recent

changes in the Indian power sector.


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'Deregulation' is a term used more commonly in the international

context and as applied to the power sector, it has the following meaning.:- the act

or process of removing restrictions and regulations on the electric utility industry.

Some authors prefer the word 'Restructuring' since the role of regulation has in

fact increased in the past few years.

The power sector in most countries has traditionally consisted of

vertically integrated monopolies, regulated by the government. Reforms in the

power sector (or restructuring as it is called in many countries') started in 1982 In

Chile. UK, Argentina, Australia, and the USA etc followed .


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Vertically Integrated Monopoly

The electricity utility controls and

undertakes all business functions: generation,

transmission, distribution, wholesale and retail

energy supply and services. There is no competition

at any level.

Utilities have the obligation to serve

customers within their own region. Government

regulates the utility to prevent monopoly abuse. All

customers in the region must buy energy from that

utility.


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Developed countries like the US and UK found the new low cost

generation options attractive (compared to the old high cost ones) and were

excited at the possibility of reducing state control to transform electricity into a

marketable commodity.

In many countries like India, international financial institution:.

(the World Bank, Asian Development Bank etc) actively supported the

approach that market oriented reform is essential to overcome the sector crisis,

These multilateral development banks (MDBs) have been in the forefront to

prepare and promote the reform “agenda”


127

IntroductionThe Reasons For

Deregulation

The reasons for initiating the idea of deregulation in power industry are many. Following are the main reasons:

1. Privatization Usually the motive was the government's firm conviction that private industry could do a

better job of running the power industry. This belief, of course came from better privatization experiences of the other industries.

2. Cost is expected to drop Competition brings innovation, efficiency, and lower costs. The rate of cost decline is

different in different areas. The reasons for this are manifold. The overall experience all over the world is that the electricity prices have declined.

3. Customer focus will improve Although monopoly franchise utilities have an obligation to serve all customers, that does

not promote the pro-active attention to customer needs. A monopoly franchise utility listens to its customers when they explain their needs, and then responds. A competitive electric service company anticipates customer's needs and responds in advance.


128

4. Encourages innovation The regulatory process and the lack of competition gave electric utilities no incentive to improve on yesterday's performance or to take risks on new ideas that might increase customer value. If a new idea succeeded in cutting costs, the utility still made only its regulated rate of return on investment; if it didn't work, the utility would usually have to `eat' a good deal of the failed attempt, as imprudent expenses. Some other forces supporting the main reasons for motivating the deregulation can also be enlisted as follows: 1. Overstaffing in the regulated electric industry. 2. Global economic crisis 3. Political and ideological changes 4. Managerial inefficiency in the regulated company 5. Lack of public resources for the further development 6. More demanding environment issues 7. Pressure of financial institutes It is unfair to blame the electric utilities for their unwillingness to take risks, and their lack of technological progress and lower customer focus under regulation. They were simply responding to the system of rules set down by government.

Thus, what needed to be fixed was the regulatory framework, and, hence deregulation.


129

1. Symbols a. Generators:- On the left side-can be State owned. Private IPP’s or Central Generating Stations(CGS)b. Transmission :- Towersc. Distribution :- Poled. Small consumer Housee. bulk Consumer: Factory2. Power flow from Generator to Transmission to Distribution to Consumer.

3. Money flow from Consumer to SEB. SEB to IPP & CGS

4. Regulation on tariff & investments by state or state appointed RC.

Reform Models


130

In Figure

boxes on the left side are generating stations,

which supply power to the transmission system

(indicated by the tower), The transmission

system delivers electricity to the distribution

system (indicated by the pole), which In turn

delivers power to the houses, offices and

factories (shown at the right side of the figure).

Generation, Transmission and distribution are

controlled by the government or regulator, with

which the public interacts


131

The first change in this model was the functional unbundling of the

integrated utility to three components :- generation. transmission and distribution.

Generation and distribution functions are managed by many separate

companies (which may be private or state owned), whereas transmission is managed

by one company (typically state owned).

All the generators sell power to the transmission company, which in

turn sells it to the many distribution companies Thus, the transmission. company is

the 'Single Buyer' of all power. Different consumer may be buying power from

different distribution companies, but they have no choice about whom to buy it from.

They buy power from the distribution company to which it is

physically connected and thus, there is no competition. The power procurement by

Transmission company is the large value transaction and the regulator can introduce

competitive bidding for power procurement. All the utilities are regulated by a

regulator. Prepared By:- Mr. Girish R. Walke

132

1. Symbols a. Generators:- On the left side-can be State owned. Private IPP’s or Central Generating Stations(CGS)b. Transmission :- Towersc. Distribution :- Poled. Small consumer Housee. bulk Consumer: Factory

2. Power flow from Generator to Transmission to Distribution to Consumer.

3. Money flow (dashed lines) from Consumer toDISCOM to TRANSCO to Generator4. Consumes pays energy charge and network charge. Energy charge is passed though to Generator Through DISCOM and TRANSCO. Network charges are kept by DISCOM and TRANSCO. This aspect as not detailed in the diagram

5. Regulation:a. Generator: Power Purchase Agreement with TRANSCO. License conditionsb. TRANSCO: Bulk Supply Tariff to DISCOM, License conditionsc. DISCOM: Retail Supply Tariff to consumes, License conditions Prepared By:- Mr. Girish R. Walke

133

The next stage in the change of model is the introduction of Limited (or

Bulk) competition. Big consumer are given the option of buying power from the

generating source of their choice. This may not mean that there would be separate

Physical wires from generating stations to the individual consumers.

The physical network remains the same and purchase of power is kept

track of by proper metering and accounting. The transmission or distribution network

in this case are like toll roads, which anyone can use, after paying a fee.

Giving the choice of power supplier to small consumers brings

competition to the retail level and is the high point of market-oriented reform.


134

In this model, the small consumers choose

their power supplier. As in the case of the Bulk

competition model (as shown figure ), they would

remain physically connected to the local

distribution company, but proper metering and

accounting techniques keep track of the purchase

of power.

The regulator does not interfere with these

arrangements between the generator and trader or

the generator and the bulk consumer. These

transactions are governed by the dynamics of

market competition. and its role is limited to

deciding the toll or the service charges for use of

lines and monitoring that the market is functioning

in a competitive manner.Prepared By:- Mr. Girish R. Walke

135

Competition In The Electricity Sector

For the past many years, there has been monopoly in electricity supply irrespective of ownership). and the tariff was set by a regulator (state or RC). Generators could not choose whom they could sell power to, and consumer had no choice about whom to buy it from. Tariff was set to ensure fair return on investments and recover operational expenses. There is not much incentive for the utility to reduce costs or make risky investments.

In a perfect competitive market. there are many generators and consumers Their interaction decides the market price, which can be quite different from the cost of power. The role of the regulator is to set up competitive conditions and to monitor them. It is to be noted that real-life markets lie in between monopoly and perfect competition depending on the number of players and their interaction. Prepared By:- Mr. Girish R. Walke

136

In a competitive market, several generators (private or public owned) compete to sell energy. If competition is introduced at consumer level (individual, or many consumers grouped together), then the consumers can choose to buy power from any supplier, based on cost or quality considerations. There can be many retail companies (DISCOMs) and many transmission companies (TRANSCOs). TRANSCOs are still considered natural monopolies. They are regulated and have to provide open access to generators, DISCOMs, consumers etc. It is to be ensured that no one exercises 'market power' by which prices are manipulated or some players are elbowed out. In such a situation, it is expected that the short and long term objectives of the sector would be met.


137

The introduction of deregulation has brought several new entities in

the electricity market place, while on the other hand redefining 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 as

shown in the figure.

Key Market Entities In Deregulated Environment


138

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 delivered. The Transco owns and maintains

the transmission facilities, and may perform many of the management and

engineering functions required to ensure the system can continue to do its job. In

most deregulated industry structure the Transco owns and maintains the transmission

lines under monopoly franchise, but does not operate them. That is done by

Independent System Operator (ISO). The Transco is paid for the use of its lines.


139

3. DISCO (Distribution Company): It is the monopoly franchise owner-operator of

the local power delivery system, which delivers power to individual businesses and

home-owners. In some places, the local distribution function is combined with retail

function, i.e. to buy wholesale electricity either through the spot market or through

direct contracts with GENCOS and supply electricity to the end use customers. In

many other cases, however, the disco does not sell the power. It only ownes and

operates the local distribution system, and obtains it’s revenues by `renting' space on

it, or by billing for deliver y of electric power.

4. RESCO (Retail Energy Service Company): It is the retail electric power. Many

of these will be the retail department of the former vertically integrated utilities.

Others will be companies new to the electric industry that believe they are good at

selling services. Either way, a RESCO buys power from GENCOS and sells it directly

to the consumers. Prepared By:- Mr. Girish R. Walke

140

5. Independent System Operator (ISO): The ISO is an entity entrusted with

the responsibility of ensuring the reliability and security of the entire system. It

is an independent authority and does not participate in the electricity market

trades. It usually does not own generating resources, except for some reserve

capacity in certain cases. In order to maintain the system security and reliability,

the ISO procures various services such as supply of emergency reserves, or

reactive power from other entities in the system.

6. Customers: A customer is entity, consuming electricity in deregulated

markets, the customer has several options for buying electricity. It may choose to

buy electricity from the spot market by bidding for purchase, or may buy

directly from a GENCO or even from the local distribution company


141

Concept Is Ancillary Services

These arc services required for the reliable operation of an

interconnected transmission grid. This includes load dispatch, generation

reserve, reactive power support and compensation for T&D loss. Some of

these services can be provided only by the system operator (e g. Load

dispatch) whereas some others (like generation reserve, reactive power)

can be provided by generators or consumers. These services are also

traded in the market.


142

In deregulated power systems, transmission networks are available for third party access to allow power wheeling, and spot markets for electricity have been developed in many countries. In such an environment, the ancillary services are no longer treated as an integral part of the electric supply. They are unbundled and priced separately and system operators have to purchase ancillary services from ancillary service providers.

The North American Reliability Council (NERC) together with Electric Power Research Institute (EPRI) has identified 12 ancillary services. They are:

1. Regulation: The use of generation or load to maintain minute-to-minute generation/ load balance within control area. 2. Load Following: This service also refers to instant-to-instant balance between generation and load.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 within several minutes.


143

5. Operating Reserve- Supplemental: The provision of generating capacity and curtail able load to correct for generation/ load imbalances, caused by generation and/ or transmission outages, and that is fully available within several minutes. However, unlike spinning reserves, supplemental reserve is not required to respond immediately. help other units start after a blackout occurs 6. Backup Supply :7. System Control: The control area operator functions that schedule generation and transactions and control generation in real time to maintain generation/ load balance. 8. Dynamic Scheduling 9. Reactive Power and Voltage Control from Generator Sources: The injection or absorption of reactive power from generators or capacitors to maintain system voltages within required ranges. 10.Real power transmission losses11. Network Stability Services from Generation sources: maintenance and use of special equipment (PSS and Dynamic braking resistances) to maintain secure transmission system. 12. System Black-Start Capability: The ability of a generating unit to proceed from a shutdown condition to an operating condition without assistance fro the grid and then to energize the grid to help other units start after a blackout occurs



Classification of Ancillary Services

There can be various ways of classifying the above ancillary services. One common approach would be to identify when and how frequently these services are required by the system operator [23]. Thus, three groups can be formed:1. Services required for routine operation: These are the services which the system

operator requires quite frequently. Some of these may be required to provide corrective action on minute-to-minute basis. Following services can be grouped under this category:

(a) System control (b) Reactive power support (c) Regulation (d) Load following (e) Energy imbalance (f) Real power loss displacement


2. Services required to prevent an outage from becoming a catastrophe: These services prevent the system from going out of step even if a major event occurs. These do not come into picture on daily basis, or rather; no proactive measures are required to be taken either by the system operator or the service provider on daily basis. Their effectiveness is sensed only under contingent situation. Following services fall under this category:

(a) Spinning reserve(b) Supplemental reserve (c) Network stability services

3. Services needed to restore a system after blackout: Re-energizing the system after complete blackout requires support from certain generating stations, which can pickup generation even in the absence of external electricity support. Such generating units provide the system black start capability. These services are very rarely used. A closer look at the list of ancillary services reveals that they are either related to:\

(d) generation-load balancing issues or (e) the network security related issues.

146

What is arbitrage? State its usefulness. Discuss arbitrage in power market.

Arbitrage refers to making profit by a simultaneous purchase and sale of

the same or equivalent commodity with net zero investment and without any risk.

Arbitrage is a new concept in the power industry which is in the midst of its

restructuring. However, arbitrage itself is not new in financial markets. The expanded

usage of arbitrage includes any activity that attempts to buy a relatively under-

priced commodity and to sell a similar and relatively over-priced commodity for

profit.


147

An arbitrageur (i.e., an individual or institution who would engage in

arbitrage) may assume some risk (although the risk of arbitrage is relatively low).

The profit opportunity still comes from price discrepancies.\

However, it is not restricted to the same or equivalent commodity. For

example, gas and electricity are two different limns of energy. With a gas-fired

generating unit, gas may be converted into electricity. If the gas purchase cost and

the gas-to-electricity conversion cost are less than the revenue from electricity

sales. there is an opportunity for an arbitrage. When implementing an arbitrage

opportunity, simultaneity is no longer a factor. In the gas-to-electricity example.

the purchase of'gas and the sale of electricity cannot happen at the same time.


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Usefulness of Arbitrage :-

The act of arbitrage can benefit arbitrageurs as well as the power market. For

arbitrageurs, arbitrage provides a low-risk payoff. It is a reward for the arbitrageur

due to its effort to find price discrepancies. For the market, arbitrage provides

additional pressure on prices to move to rational or normal levels, maintains

liquidity in the market, and provides a pricing mechanism, namely no-arbitrage

pricing.

Should an arbitrage opportunity exist temporarily, investors' trading to earn this

riskless or low-risk profit would tend to move the price of the asset in a direction

that would eliminate the arbitrage. However, the volatility of the market would

create new arbitrage opportunities. When such arbitrage opportunities emerge,

arbitrageurs would attempt to make it disappear as market is liquidated.


149

In competitive asset markets, it may be reasonable to assume that

equilibrium asset prices are such that no arbitrage opportunity could exist.

By assuming the absence of arbitrage, the price of one asset can often be

derived from another asset. This would lead to the well-known no-

arbitrage pricing theory. For example. we can apply the no-arbitrage

theory to price an electricity contract.



Unit No. 5

151

Market Operations

Market Operations goals:

Ensure a reliable and secure grid operation

Facilitating a competitive and economical operation

1. Security is the most important aspect of the grid operation

(regulated operation or not)

2. Competitive and economical operations assumes that the cost of

electricity will bereduced


152

Market Operations

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 sales. 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.

A.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.

B. 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.


153

C. 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 1600 hours. I would pay

Rs. 3.5/ kWhr ", whereas, the seller would enter his demand as, "I have 200 MW and

would like to sell it at Rs. 4.1 kWhr ".

When they transact business with the power exchange, buyers and sellers are really

talking to the `marketplace' and not the individual buyers and sellers.

As in stock exchange, the power exchange constantly updates and posts a market

clearing price (MCP), which is the current price at which the transactions are being done.

Note that when buyers and sellers communicate to the power exchange, they don't

know whom they are dealing with.


154

Market Clearing Price: Price determined by buyers and sellers in a free market.

Market Clearing Price :- is the highest price that a seller can charge and still sell all of his or her products. It literally clears the seller out of his or her supply. It clears out the demand, too, because the MCP is low enough for the buyers to buy as much of the product as they want. Under the MCP, the supply perfectly satisfies the demand.

You might think that once the seller finds the MCP, he or she will get rich. But the MCP moves.

For example, imagine that you run a shoe store. You offer shoes at 2000 per pair, and your customers buy most of them. You say to yourself, "If I lower the shoes' price, people can afford to buy more shoes, and I'll sell more of them." You lower the shoes' price to 1800, and your customers buy all of them. Then you say. “1800 is the market clearing price!" So you order more shoes, you price them at 1800, and no one buys them.

What's happening? Your customers have gone across the street to a store that has started selling the

same shoes at 1700 per pair. If you want to sell your shoes, you'd better sell them for no more than 1700-the new MCP.



Zonal and locational MCPsZonal MCP In a zonal market, the market price is determined by the clearing price of the last megawatt generated to meet load at any point in the geographic zone. When localized congestion occurs within a zone it increases prices for all parties within the zone, even if they are not located near the congestion and even if they are not contributing to the congestion in any way. This results in overall higher system costs because everyone in the zone is paying the higher congestion costs whereas with nodal pricing, only the parties at the congested location would be paying the increased cost. Because pricing zones by their very nature do not represent the effects of localized transmission constraints, the calculated dispatch of generation for a zone often needs to be adjusted to create a physically possible dispatch configuration for actual operation. This re-dispatching increases costs. Various transmission congestion mechanisms have been created over time to mitigate these pre-schedule inefficiencies and change the actual dispatch of generation to more feasible physical configurations. Not surprisingly, market participants have often able to determine when their units were likely to benefit from these intra-zonal congestion mechanisms, leading to the submission of schedules and prices that could take financial advantage of those facts. This increased market costs and required ever more complex congestion adjustment mechanisms to deal with the problems.


locational MCPs

Under LMP auctions, all selected generators will be paid the same price, regardless of their original offer prices. This price is referred to as the market clearing price or the uniform price. The market clearing price for each node and each time period is set as the offered price of energy from the most expensive generator chosen to meet load (the marginal price). Under LMP auctions, generators have an incentive to offer energy at or very close to their marginal cost of generation. This marginal cost is essentially the same as the variable costs of generation. If generators bid higher than that cost, the likelihood of being selected for dispatch is reduced and they may miss out on an opportunity to supply power. If generators bid below that cost, they will not receive enough revenue to cover the variable costs of generation, so they would be better-off not to participate in the market at all. Thus, when generators offer energy at or near the marginal cost of generation, they maximize the chance of being selected while ensuring that they will not operate unprofitably if they are selected. This principle has been called the “no regrets Rule” in LMP designs.


The generators have an incentive to offer energy at the lowest possible price they are willing to sell it and, if they are selected, they will receive a price that is guaranteed to be no lower (and most likely higher) than that price.

Generators also have an incentive to minimize their operating costs to maximizerevenue. Generators whose operating costs are at or near the market clearing price willnet little income above variable costs to apply towards fixed costs. Alternatively,generators with lower operating costs will net more income to pay down long-termobligations and record profits.

158

Market Models

There are mainly two models of deregulation presently preferred in

the various countries all over the world. The Poolco model adopted

primarily in UK, and the ISO model adopted in Nordic Pool (Norway,

Sweden) and California in US. The various countries like Australia,

New Zealand and European Union are employing one of the two

models with minor changes to meet their specialized demands.


159

Open access model

The models used in Nordic Pool (Norway, Sweden) and California are

examples of this model. The energy auction and future markets are conducted by an

independent entity called Power Exchange (PX) and the system is operated by another

independent body called Independent System Operator (ISO), who assures equal

opportunities to all sellers and buyers through open access to grid.

The buyers and sellers have an option of entering in bilateral transactions or

be participants in the energy auction conducted by the PX. The auction conducted by PX

is double sided auction as sellers as well as buyers place the bids. The sellers and buyers

are allowed to place a portfolio bid, i.e. a combined bid for many generators.


161

Pool model The UK model is monopoly, i.e., there is only a single buyer for

all the energy generated by gencos. The buyer here is a Poolco, which also operates the system. So, UK Poolco is responsible for inviting bids for energy and deciding the energy price for a particular period in the future markets like day-ahead market. It is also responsible for real time operation of the system; hence it also buys ancillary services.

The way, UK market works is quite similar to centralized unit commitment and economic dispatch. The difference is that in traditional unit commitment and economic dispatch the actual cost of the energy generations are considered but in deregulated environment, the gencos place price curves of each of its generators and the actual cost is hidden from general knowledge. Poolco being the system operator and auctioneer as well, takes care of network congestion at the auction level itself in a manner similar to the economic dispatch. Participation in the auction conducted by Poolco is a must for all gencos. As Poolco is the only buyer, there are no bids from buyer's side; the auction is single sided auction.



Spot Market In a spot market, the seller delivers the goods immediately and the buyer pays for them “on the spot”. No conditions are attached to the delivery. This means that neither party can back out of the deal. A fruit and vegetable market is a good example of a spot market: you inspect the quality of the product and tell the vendor how many you want, they hands them to you, you pay the price indicated and the transaction is complete.

A spot market has the advantage of immediacy. As a producer, I can sell exactly the amount that I have available. As a consumer, I can purchase exactly the amount I need.

Unfortunately, prices in a spot market tend to change quickly. A sudden increase in demand (or a drop in production) sends the price high-ceilinged because the stock of goods available for immediate delivery may be limited. Similarly, a surplus in production or a dip in demand depresses the price. Spot markets also react to news about the future availability of a commodity. For example, a forecast about a bumper harvest of an agricultural commodity could send its price on the spot market (the spot price)


“Real-time pricing" means tariffed retail charges for delivered electric power and energy that vary hour-to-hour and are determined from wholesale market prices using a methodology approved by the Commission.

Real-time Pricing

Real-time electricity pricing requires the installation of an electricity smart

meter that can send and receive information about electricity costs and give consumers

more information about their own usage .

By providing accurate information about electricity rates – as determined

by overall demand – real-time pricing allows consumers to use that information to make

decisions about electricity use. Adjusting personal electricity usage to coincide with

times of lower demand can save consumers money by taking advantage of lower prices.

This is particularly effective when adjusting usage for air conditioners, dishwashers,

washing machines and other appliances that use large amounts of electricity.


Gate Closure

“Gate Closure” is the deadline for trading electricity to be

delivered in a specified period. Gate Closure could be from one or more days to one

hour or less before delivery time. By Gate Closure, balanced (injections and

withdrawals) positions are declared (possibly through balance responsible agents) to

the relevant SO for scheduling (the PX may itself be a balance responsible agent).

At Gate Closure the SO takes over the management of electricity flows over the

network Deviations of actual injections/withdrawals from positions attract

imbalance charges and are settled with the SO.


Energy trading must stop at some point before real time to give the SO

time to balance the system. How much time should elapse between this gate closure

and real time is a hotly debated issue. System operators prefer longer intervals

because this gives them more time to develop their plans and more flexibility in their

selection of balancing resources.

For example, if the gate closes half an hour before real time, there is

not enough time to bring on-line a large coal-fired plant to make up a deficit in

generation. Participants in the energy market, on the other hand, usually prefer a

shorter gate closure because it reduces their exposure to risk. A load forecast

calculated one hour ahead of real time is usually much more accurate than a forecast

calculated four hours ahead. A retailer would therefore like to trade electronically up

to the last minute to match its purchases with its anticipated load.


Commercial transactions are normally settled directly between the

two parties involved following: the delivery of the goods by the seller to the buyer, the

buyer pays the seller the agreed price. If the amount delivered is less than the amount

contracted, the buyer is entitled to withhold part of the payment. Similarly, if the buyer

consumes more than the agreed amount, the seller is entitled to an additional payment.

This process is more complex for electricity markets because the energy is pooled during

its transmission from the producers to the consumers. This is why a centralized

settlement system is needed.

The Settlement Process


For bilateral transactions in electrical energy, the buyer pays the seller the

agreed price as if the agreed quantity had been delivered exactly. However, there will

always be inaccuracies in the completion of the contracts. If a generator fails to produce

the amount of energy that it has contracted to sell, the deficit cannot simply be withheld

from this generator’s customers. Instead, to maintain the stability of the system, the

system operator buys replacement energy on the managed spot market.

Similarly, if a large user or retailer consumes less than it has brought, the

system operator sells the excess on the managed spot market. These balancing activities

make all bilateral contracts look as if they have been fulfilled perfectly. They also carry

a

cost.

In most cases, the amount of money paid by the system operator to purchase

replacement energy is not equal to the amount of money earned when selling excess

energy. The parties that are responsible for the imbalances should pay the cost of these

balancing activities.


The first step in the settlement process consists, therefore, in determining the net position of every market participant. To this end, each generator must report to the settlement system the net amount of energy that it had contracted to sell for each period, including the energy traded through the managed spot market. This amount is subtracted from the amount of energy that it actually produced. If the result is positive, the generator is deemed to have sold this excess energy to the system. On the other hand, if the result is negative, the generator is treated as if it had bought the difference from the system. Similarly, all large consumers and retailers must report the net amount of energy that they had contracted to buy for each period, including the energy traded through the managed spot market. This amount is subtracted from the amount of energy actually consumed. Depending on the sign of the result, the consumer or the retailer is deemed to have sold energy to the system or bought energy from the system.

These imbalances are charged at the spot market price. Settlement in a pool-based electricity market is more straight forward because all transactions take place through the pool.


Explain various market structures based on number of participants.

In economics, market structure is the number of firms producing identical products which are homogeneous. The types of market structures include the following:1. Monopolistic competition, also called competitive market, where there is a large2. number of firms, each having a small proportion of the market share and slightly

differentiated products.3. Oligopoly, in which a market is run by a small number of firms that together

control the majority of the market share. Duopoly, a special case of an oligopoly with two firms.

4. Monopsony, when there is only one buyer in a market.5. Oligopsony, a market where many sellers can be present but meet only a few

buyers.6. Monopoly, where there is only one provider of a product or service.Natural

monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms.

7. Perfect competition, a theoretical market structure that features no barriers to entry, an unlimited number of producers and consumers, and a perfectly elastic demand curve.

http://en.wikipedia.org/wiki/Economics

http://en.wikipedia.org/wiki/Firm

http://en.wikipedia.org/wiki/Product_(business)

http://en.wikipedia.org/wiki/Monopolistic_competition

http://en.wikipedia.org/wiki/Oligopoly

http://en.wikipedia.org/wiki/Duopoly

http://en.wikipedia.org/wiki/Monopsony

http://en.wikipedia.org/wiki/Oligopsony

http://en.wikipedia.org/wiki/Monopoly

http://en.wikipedia.org/wiki/Natural_monopoly


http://en.wikipedia.org/wiki/Economies_of_scale

http://en.wikipedia.org/wiki/Perfect_competition

http://en.wikipedia.org/wiki/Barriers_to_entry

http://en.wikipedia.org/wiki/Demand_curve


A perfect competition In economic theory, perfect competition (sometimes called pure competition) describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets, say for commodities or some financial assets, may approximate the concept. As a Pareto efficient allocation of economic resources, perfect competition serves as a natural benchmark against which to contrast other market structures.B Monopolistic competition refers to a market situation with a relatively large number of sellers offering similar but not identical products. Examples are fast food restaurants and clothing stores.Characteristics1. A lot of firms: each has a small percentage of the total market.2. Differentiated products: variety of the product makes this model different from pure competition model. Product differentiated in style, brand name, location, advertisement, packaging, pricing strategies, etc.3. Easy entry or exit.Demand CurveThe firm’s demand curve is highly elastic, but not perfectly elastic. It is more elastic than the monopoly’s demand curve because the seller has many rivals producing close substitutes; it is less elastic than pure competition, because the seller’s product is differentiated from its rivals.

http://en.wikipedia.org/wiki/Economic_theory

http://en.wikipedia.org/wiki/Market_power

http://en.wikipedia.org/wiki/Auction

http://en.wikipedia.org/wiki/Commodities

http://en.wikipedia.org/wiki/Pareto_efficient


C. Oligopoly exits where few large firms producing a homogeneous or differentiated product dominate a market. Examples are automobile and gasoline industries.

Characteristics1. Few large firms: each must consider its rivals’ reactions in response to its decisions about prices, output, and advertising.2. Standardized or differentiated products.3. Entry is hard: economies of scale, huge capital investment may be the barriers to enter.

Demand CurveFacing competition or in tacit collusion, oligopolies believe that rivals will match any price cuts and not follow their price rise. Firms view their demands as inelastic for price cuts, and elastic for price rise. Firms face kinked demand curves. This analysis explains the fact that prices tend to be inflexible in some oligopolistic industries.


D. monopsonyIn economics, a monopsony is a market form in which only one buyer faces many sellers.In the microeconomic theory of imperfect competition, the monopsonist is assumed to be able to dictate terms to its suppliers, as the only purchaser of a good or service, much in the same manner that a monopolist is said to control the market for its buyers in a monopoly, in which only one seller faces many buyers.In addition to its use in microeconomic theory, monopsony and monopsonist are descriptive terms often used to describe a market where a single buyer substantially controls the market as the major purchaser of goods and services. Examples include the military industry[1] and the space industry.

E. An oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in a market for inputs where numerous suppliers are competing to sell their product to a small number of (often large and powerful) buyers. It contrasts with an oligopoly, where there are many buyers but few sellers. An oligopsony is a form of imperfect competition.

http://en.wikipedia.org/wiki/Economics

http://en.wikipedia.org/wiki/Market_form

http://en.wikipedia.org/wiki/Microeconomics

http://en.wikipedia.org/wiki/Imperfect_competition

http://en.wikipedia.org/wiki/Monopolist

http://en.wikipedia.org/wiki/Monopoly

http://en.wikipedia.org/wiki/Military_industry


http://en.wikipedia.org/wiki/Space_industry

http://en.wikipedia.org/wiki/Market_form


http://en.wikipedia.org/wiki/Imperfect_competition


F. Monopoly exists when a specific person or enterprise is the only supplier of a particular commodity (this contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few entities dominating an industry).Monopolies are thus characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods.The verb "monopolize" refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge high prices.Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market). A monopoly is distinguished from a monopsony, in which there is only one buyer of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations such that one or a few of the entities have market power and therefore interact with their customers (monopoly), suppliers (monopsony) and the other companies (oligopoly) in ways that leave market interactions distorted.When not legally obliged to do otherwise, monopolies typically maximize their profit by producing fewer goods and selling them at higher prices than would be the case for perfect competition.Monopolies can be established by a government, form naturally, or form by integration.

http://en.wikipedia.org/wiki/Company


http://en.wikipedia.org/wiki/Market


http://en.wikipedia.org/wiki/Industry

http://en.wikipedia.org/wiki/Competition

http://en.wikipedia.org/wiki/Good_(economics)

http://en.wikipedia.org/wiki/Service_(economics)

http://en.wikipedia.org/wiki/Substitute_good

http://en.wikipedia.org/wiki/Substitute_good

http://en.wikipedia.org/wiki/Cartel

http://en.wikipedia.org/wiki/Market_power



UNIT 6


Transmission Pricing

Traditionally, in India, utilities like POWERGRID levied a wheeling charge for

transferring power from generation stations to load centers across states or regions. These

prices were calculated with a view to compensate the fixed and operational cost of

transmission. In the market scenario, transmission utilities have to provide open access.

Transmission lines become like national highways with a toll for use.

As part of a TOA and competitive electricity market, 'wheeling' of electrical

energy is one of the more prevalent of such unbundled services Wheeling can be defined as

'the use of utility's transmission facilities to transmit power for any buyers and sellers'. In

the wheeling transaction at least three parties are normally involved: a seller, a buyer and

one or more wheeling utilities, which transmit the power from the seller to the buyer.


Pricing the transmission service is intended to meet a common set of

objectives: economic efficiency, revenue sufficiency and efficient regulation.

Wheeling rates are the prices which are charged for the use of the transmission

network(s) and are payments made by the seller and/or buyer to compensate the

wheeling utility(ies) for the costs incurred.

There are two critical elements, which determine the wheeling rates. The first one is

that prices are determined in relation to real time situation and the second one

is that prices are determined through market-based competition.


The costs of transmission transactions have four major components:

■ Operating cost: Production (fuels) costs due to generation re-dispatch and

rescheduling resulting from the transmission transaction.

■ Opportunity cost: Benefits of all transactions that the utility forgoes due to

operating constraints that are caused by the transmission transaction.

■ Reinforcement cost: Capital cost of new transmission facilities needed to

accommodate the transmission transaction.

■ Existing system cost: The allocation cost of existing transmission facilities used

by the transmission transaction.


In the above figure, the transmission pricing schemes are classified on the basis of whether they are calculated 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 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.


There are several transmission pricing methods that are listed below.

1.Flat fee

Flat fee prices are the simplest possible approach to distribution of cost over a large

number of customers. Everyone pays the same amount. If the cost is one lakh rupees and

if there are thousand users, then everyone is charged a hundred rupees.

2. Postage Stamp Method

Postage stamp transmission tariffs set a price on use of the grid that depends only on the

amount of power moved, the duration of use. In this case, the approximation is to ignore

distance in allocating cost among users, which is effectively how postage is priced.

3. Pro forma transmission tariffs

In this method, each user must pay a capacity fee, based on the installed cost of the

transmission system as a whole, allocated on a per kW basis, as well as other fees for use

associated with the variable operating costs incurred at the time of their use.


4. Contract path method

Contract path pricing calls for the price of transmission from point A to

point B to be based on the cost of a single identified path.

The parties moving 500 MW from Koyna to Bhubaneshwar might

choose a particular route between the two cities as `contract path'. Even though

they know the actual power flow will split itself among many parallel paths, they

compute the price to be paid on the basis of this one line. ("This segment of route

has 500 MW capacity, and you are moving 500 MW, so we will charge you for the

whole cost of the line. This other segment in the route has 1000 MW capacity, so

we'll charge you 50% of its costs')

The price usually includes a capacity charge to cover the capital cost

of the equipment, and energy charges based on losses and other operating costs.


5. MW-mile Method

This is the pricing that simply sets a wholesale wheeling price proportional to

both amount and distance. A fixed price throughout the network can be used,

e.g., Rs.1 per MW-mile/hour, anywhere, anytime, or different rates can be

charged for different routes or times.

6. Rated System Path

This method bases the cost on a computed set of parallel paths for a particular

path. Here, a rated system path from Koyna to Bhubaneshwar would be

identified by load flow and other engineering studies of the grid


Network congestion Issues Involved in Deregulation of Power Industry

Problem definition:-

When the producers and consumers of the electric energy desire to produce and consume in amounts that would cause the transmission system to operate at or beyond one or more transfer limit, the system is said to be congested. Congestion is a consequence of network constraints characterizing a finite network capacity that prevents the simultaneous delivery of power from an associated set of power transactions. Line outages or higher load demands are the causes of congestion in the transmission network


Effects of network congestion

When a generator bids other than its incremental costs, in an effort to exploit imperfections in the market to increase profits, its behavior is called strategic bidding. If the generator can successfully increase its profit by strategic bidding or by any means other than lowering its costs, it is said to have market power. The obvious example of market power is a non-regulated monopoly, where the generator can ask whatever the price it wants for electric energy. Market power results in market inefficiency. There are many possible causes of market power. One of the main reasons is congestion. Consider a simple example of two-zone system connected by an interface as shown in the figure


If there is no transfer limit between zones, all 200 MW of load will be brought from generator A at Rs. 100/MWh as shown in figure (7a). If there is a 50 MW transfer limit, then 150 MW will be brought from A at Rs.100/MWh and the remaining 50 MW must be brought from generator B at Rs.200/MWh, as shown in figure (7b). The total cost of 200 MW in un-congested market is Rs.20000/h and that in the congested market is Rs.25000/h.

Let each zone have a 100MW constant load. Zone A has 200 MW generator with an incremental cost of Rs.100/MWh. Zone B has a 200 MW generator with an incremental cost of Rs.200/MWh. Assume both generators bid their incremental cost.


Congestion has created a market inefficiency of 25% of the optimal cost, even without strategic behavior of the generator. Congestion has also created unlimited market power for generator at B.

Ways to tackle congestion

In different types of market, the method of tackling the transmission congestion differs. There are three different ways mainly adopted to tackle the network congestion: 1. Price Area Congestion Management 2. Available Transfer Capability (ATC) based Congestion Management 3. Optimal Power Flow (OPF) based Congestion Management. The first method is used in Nordic pool; the second one in US and the third one is employed in UK


Cost Allocation Methods

MWh Energy consumed

Peak MW Usage Flow Based Monetary Metrics

Allocating costs by megawatt- hours of consumption orgeneration, regardless of peak usage. Could be system-wide or locational.Form of socialization of transmission costs.

Allocating costs over peak megawatt use either coincidentally or non-coincidentally to the system peak - regardless of location or overall usage.Form of socialization of transmission costs.

Allocating costs based on the relative impact that parties have on transmission facilities -- which is derived from power flow models or based on location.Form of beneficiary pays.

Allocating costs to parties who are expected to receive a monetary gain -- based on market simulations before and after the proposed project goes into service.Form of beneficiary pays.


One possible method for allocating the costs of transmission is spread costs over megawatt-hours of consumption and/or generation regardless of location or use at peak. Costs may also be implicitly spread over megawatt-hours through marginal loss or congestion surpluses which would reflect locational considerations. Allocating costs over megawatt-hours can be referred to as a form of socialization of transmission costs. One interpretation of this socialization is that some parties who are non-beneficiaries of transmission construction are allocated costs of transmission. Another interpretation is that all parties connected to the system benefit from enhanced reliability, possibly reduced line losses, and other public good or positive externality benefits.

Allocation of Costs over Megawatt-Hours of Consumption and/or Generation


Allocation of Costs Over Peak MW Usage and/or Generation

The costs of transmission can be allocated over the coincident or non-coincident peak megawatt consumption and/or generation without regard to location. Allocating costs in this way has been labeled by some as form of socialization of transmission costs. The term socialization can be interpreted to mean that non-beneficiaries are allocated costs due to a lack of locational considerations. In contrast, socialization of costs could beargued to reflect the public good and positive externality qualities of transmission that are difficult to assign.

Allocation of Costs by Flow-Based Methods Flow-based cost allocation methods reflect users’ impacts on the transmission system under various system conditions. The impacts of load and generation can be derived directly from power flow models used in transmission planning and system operations. This method also can use location as a proxy for a more precise measure of impacts derived from power flow models used in transmission planning.


Allocation of Costs via Monetary Metrics

Allocating transmission costs via monetary metrics entails an examination of which parties will receive a monetary gain from a proposed transmission project. Possible monetary measures for identifying beneficiaries of transmission upgrades/projects are: expected changes in production costs, wholesale energy prices (e.g., LMPs in some organized RTO markets), and expected changes in energy expenditures/revenues that are driven by both production costs and wholesale energy prices as well as expected consumption or generation over the course of a pre-specified time period (one year, for example). For a proposed transmission project, wholesale energy prices and/or energy expenditures/revenues are compared through the use of simulations before and after the proposed project goes into service.


Ways to Evaluate Cost Allocation Methods


Locational marginal pricing

It is complex, but accurate pricing method. It determines transmission prices at each bus in the

system, based on: costs, including the price of power as measures in the

spot market, and the cost of moving power to various locations.

Transmission cost for any new transactions taking place between any two buses is then taken as the difference of these costs.


Locational marginal pricing

HOW IT WORKS??

The LMP is an economic dispatch concept wherein energy and

transmission congestion prices are calculated in specific areas based on the marginal

cost to generate power to serve those areas. The goal of the LMP is to achieve optimal

(least cost) generator dispatch by minimizing locational energy and congestion prices.

As indicated in its name, there are two components that are considered in

the LMP: Locational and Marginal. Locational refers to the fact that prices for energy

may be different in different locations. These differences arise from transmission

congestion constraints and the characteristics of generating units in the dispatch stack.

Marginal refers to the price to produce the next megawatt-hour of energy after load

has been served in a given location (energy produced on the margin).

Problems with Locational marginal pricing

May inflate the economic costs of transmission constraints. May encourage the use of generation market power. May encourage uneconomic investments to relieve

transmission constraints. May encourage gaming of rebates. May discourage the development of bilateral contracts.


Availability Based pricing (ABT)

In ABT, generators and buyers must declare day-ahead availability and demand based on 15-minute time blocks.

Energy charges would be done only on the scheduled drawal by the buyers.

UI charges are levied on the generators or buyers in the case of any deviation from the schedule and also subject to the grid conditions at that time.

ABT system will entitle the generating station to reimbursement of fixed cost based on the availability or declared capacity of the generating station.

ABT introduces system of incentives and disincentives based on actual performance.

National pricing Policy

The objective of the pricing Policy is to ensure reliable and quality

power to the consumers at competitive rates.

pricing should be determined by fair and transparent process for

generation, transmission and distribution.

Appropriate commissions should specify the Multi-Year/Long Term

pricing while reducing the risk possibilities and uncontrollable

parameters.

The pricing should progressively reflect the cost of supply of

electricity and also reduce and eliminate the effect of cross-subsidies

within the period specified by the Appropriate commission


Role Of Load Dispatch Centers (LDCs),

Regional Load Despatch Centre

1. The Regional Load Despatch Centre may give such directions and exercise such

supervision and control as may be required for ensuring stability of grid operations and

for achieving the maximum economy and efficiency in the operation of the power system

in the region under its control.

2. Every licensee, generating company, generating station, substation and any other person

connected with the operation of the power system shall comply with the direction issued

by the Regional Load Despatch Centres.

3. All directions issued by the Regional Load Despatch Centres to any transmission

licensee of State transmission lines or any other licensee of the State or generating

company (other than those connected to inter State transmission system) or sub-station

in the State shall be issued through the State Load Despatch Centre and the State Load

Despatch Centres shall ensure that such directions are duly complied with the licensee

or generating company or sub-station.


4. The Regional Power Committee in the region may, from time to time, agree on

matters concerning the stability and smooth operation of the integrated grid and

economy and efficiency in the operation of the power system in that region.

5. If any dispute arises with reference to the quality of electricity or safe, secure and

integrated operation of the regional grid or in relation to any direction, it shall be

referred to the Central Commission for decision : Provided that pending the decision of

the Central Commission, the directions of the Regional Load Despatch Centre shall be

complied with by the State Load Despatch Centre or the licensee or the generating

company, as the case may be.

6. If any licensee, generating company or any other person fails to comply with the

directions issued under sub-section (2) or sub-section (3), he shall be liable to penalty

not exceeding rupees fifteen lacs


State Load Despatch Centres

1. The State Load Despatch Centre in a State may give such directions and exercise such supervision

and control as may be required for ensuring the integrated grid operations and for achieving the

maximum economy and efficiency in the operation of power system in that State.

2. Every licensee, generating company, generating station, substation and any other person connected

with the operation of the power system shall comply with the direction issued by the State Load

Depatch Centre under subsection (1).

3. The State Load Despatch Centre shall comply with the directions of the Regional Load Despatch

Centre.

4. If any dispute arises with reference to the quality of electricity or safe, secure and integrated

operation of the State grid or in relation to any direction given under sub-section (1) , it shall be

referred to the State Commission for decision: Provided that pending the decision of the State

Commission, the direction of the State Load Despatch Centre shall be complied with by the

licensee or generating company.

5. If any licensee, generating company or any other person fails to comply with the directions issued

under sub-section(1), he shall be liable to penalty not exceeding rupees five lacs.


The unit commitment is one of the most important problems in power system operation. The objective function of vertically integrated utility system was minimizing the operation cost. This model is identified as a cost-based operation.Actually, the output of the SCUC program has two parts, namely defining the units in operation, which are determined by “0” and “1” (integer variables) for on and off units respectively, and determining the quantity of the generation level of operating units considering the pollution criteria. SCUC provides a financially viable unit commitment (UC) that is physically feasible. The generation dispatch based on SCUC is made available to corresponding market participants.The unit commitment is a very significant optimization task, which plays a major role in the daily operation planning of power systems, especially in the framework of the deregulated power markets. The SCUC objective is to minimize the total operating cost of the generating units during the scheduling horizon, subject to a number of system and unit constraints.The objective function of vertically integrated utility system was minimizing the operation cost. Therefore, this model is named cost-based operating system where the cost-based production, startup, and shutdown functions are considered in the SCUC formulation [9].

Security Constrained Unit Commitment (SCUC)


SCUC can provide an hourly commitment of generating units with minimum bid-based dispatch cost. The objective function is composed of bid-based fuel costs for producing electric power and startup and shutdown costs of individual units for the given period. A typical set of constraints in SCUC includes:

1) Power balance2) Hourly generation bids3) Must-on and area protection constraints4) System spinning and operating reserve requirements5) Minimum up and down time limits6) Ramp rate limits7) Startup and shutdown characteristics of units8) Fuel and multiple emission constraints9) Transmission flow and bus voltage limits10) Load shedding and bilateral contracts11) Limits on state and control variables including real and reactive power

generation, controlled voltages, and settings of tap-changing and phase-shifting transformers

12) Scheduled outages


In monopolized and vertically integrated utility the objective was to meet the

forecasted demand plus the spinning reserve to minimize the production cost,

subject to each individual unit's operation constraints and system constraints.

In the competitive power market the objective for each generation company is now

to maximize its profit. A company does not have the obligation to serve the entire

load if it is not profitable .

On the other hand, in developed restructured power systems, the objective function

is maximizing the social welfare. This model is the developed Bid-based one which

the Hydro generation units and emission production limits are considered too


The transmission right proposed is known as a Financial Transmission Right,12 because using one doesn’t affect the way the system operator dispatches the system. This is a different kind of right than Physical Transmission Rights (PTRs) in the gas market or in the electricity wheeling model. The difference is that the use of PTRs does affect the dispatch of the system.A Financial Transmission Right is the right to collect, net of the cost oflosses, the transmission usage charges (bottleneck fees) and implicit transmissionusage charges between one defined location on the system and another.Normally traders would want the rights between locations where they typically buy and sell energy, and in that way they receive back exactly what they pay for congestion in transmission usage charges.In practice, it makes the rights more flexible if they are defined to and from central hubs. This makes it easy for a buyer and a seller each to have one FTR from the same hub. When they make a contract, the two FTRs together hedge the transmission usage charge; but the buyer is not tied forever to the same seller.

Transmission Rights OR Financial Transmission Rights


Financial Transmission Rights should be used to:1. Provide a means for traders to lock in the price of transmission usage (net of

losses) in advance of scheduling a transaction—the locked-in price is the price of acquiring the FTR contract. A contract may be acquired either by building the transmission lines, or purchasing it on a secondary market. This encourages market participants to enter into long-term generation or purchase arrangements because it hedges the uncertainty of transmission usage charges.

2. Give good incentives to regulated transmission owners to maintain their transmission properly.

3. Help address market power problems.4. Encourage market participants to make transmission expansion investments\

as we have described earlier.


Procedural Steps for the Transmission Rights Auction

STEPS Task Detail

Publish pre-auction data for upcoming TR auction

Determine and publish the pre-auction publication data to provide information on the upcoming TR auction, AND

Make information on the upcoming TR auction available that you can access through the IESO Web Portal.

Access information on the upcoming TR auction

You can access and view information on upcoming TR auction or TR auction rounds through the IESO Web Portal, along with the pre-auction publication data, that is also posted on the IESO Web site.

Submit TR bids for TR auction. You submit TR bids for TRs to the TR auction. See the “TR Auction System – A Participant's Guide” for information on how the TR auction system informs a TR participant that the bidding window is open.


Receive, timestamp, and validate TR bids for TR auction.

Your TR bids are received, time-stamped, and validated. TR bids are rejected if the: • Date/time of the bid submission is outside the TR auction bid submission window, • TR bid would increase the aggregate of all bids you have submitted for that auction to a value that exceeds your bidding limit, • Price submitted is zero or a negative, OR • TR bid’s MW quantity exceeds the total amount of TRs available in that round of the auction.

Send message that submission was invalid, with reason.

You are notified if the TR bid fails validation. The message includes the reason why the TR bid was rejected.

Receive message that submission was invalid.

You receive the rejection notification indicating that your TR bid was invalid and the reason for the invalidity if the bid fails validation.

Correct and resubmit TR bid if desired

If desired, you correct the invalidity problem and resubmit the TR bid (within the bidding window).


Accept TR bid. You are notified that a valid bid submission was accepted.

Receive acceptance confirmation.

You receive confirmation that a valid TR bid has been accepted.

Run TR auction and determine TR market clearing prices and winning bids.

We conduct the TR auction, and determine the TR market clearing price for the round and the TR results.

Results of TR auction made available via TR Participant Bid Notification Report and the overall results of TR auction published.

We produce a report for each TR participant who was awarded TRs in the TR auction that details these purchases. This report is made available via the IESO Web Portal

At the same time, we publish the overall results of the auction round through the Post Auction TR Market Clearing Price Report. (See Appendix C for the information contained in the reports).


Access the TR Participant Bid Notification Report.

Successful TR participants may review their purchases at the auction through accessing the TR Participant Bid Notification Report. All TR participants may review the overall auction results via the Post Auction TR MCP Report.


Power System Models Used In Energy Trading1. 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. 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.


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.


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. 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.


4. Retail Competition Model In this model as shown in Figure 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.


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.


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