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The Economics of Electricity Markets

Book Description

Bridges the knowledge gap between engineering and economics in a complex and evolving deregulated electricity industry, enabling readers to understand, operate, plan and design a modern power system

With an accessible and progressive style written in straight-forward language, this book covers everything an engineer or economist needs to know to understand, operate within, plan and design an effective liberalized electricity industry, thus serving as both a useful teaching text and a valuable reference. The book focuses on principles and theory which are independent of any one market design. It outlines where the theory is not implemented in practice, perhaps due to other over-riding concerns. The book covers the basic modelling of electricity markets, including the impact of uncertainty (an integral part of generation investment decisions and transmission cost-benefit analysis). It draws out the parallels to the Nordpool market (an important point of reference for Europe). Written from the perspective of the policy-maker, the first part provides the introductory background knowledge required. This includes an understanding of basic economics concepts such as supply and demand, monopoly, market power and marginal cost. The second part of the book asks how a set of generation, load, and transmission resources should be efficiently operated, and the third part focuses on the generation investment decision. Part 4 addresses the question of the management of risk and Part 5 discusses the question of market power. Any power system must be operated at all times in a manner which can accommodate the next potential contingency. This demands responses by generators and loads on a very short timeframe. Part 6 of the book addresses the question of dispatch in the very short run, introducing the distinction between preventive and corrective actions and why preventive actions are sometimes required. The seventh part deals with pricing issues that arise under a regionally-priced market, such as the Australian NEM. This section introduces the notion of regions and interconnectors and how to formulate constraints for the correct pricing outcomes (the issue of "constraint orientation"). Part 8 addresses the fundamental and difficult issue of efficient transmission investment, and finally Part 9 covers issues that arise in the retail market.

  • Bridges the gap between engineering and economics in electricity, covering both the economics and engineering knowledge needed to accurately understand, plan and develop the electricity market

  • Comprehensive coverage of all the key topics in the economics of electricity markets

  • Covers the latest research and policy issues as well as description of the fundamental concepts and principles that can be applied across all markets globally

  • Numerous worked examples and end-of-chapter problems Companion website holding solutions to problems set out in the book, also the relevant simulation (GAMS) codes

  • Table of Contents

    1. Cover
    2. Title Page
    3. Copyright
    4. Preface
    5. Nomenclature
    6. Part I: Introduction to Economic Concepts
      1. Chapter 1: Introduction to Micro-economics
        1. 1.1 Economic Objectives
        2. 1.2 Introduction to Constrained Optimisation
        3. 1.3 Demand and Consumers' Surplus
        4. 1.4 Supply and Producers' Surplus
        5. 1.5 Achieving Optimal Short-Run Outcomes Using Competitive Markets
        6. 1.6 Smart Markets
        7. 1.7 Longer-Run Decisions by Producers and Consumers
        8. 1.8 Monopoly
        9. 1.9 Oligopoly
        10. 1.10 Summary
        11. Questions
        12. Further Reading
    7. Part II: Introduction to Electricity Networks and Electricity Markets
      1. Chapter 2: Introduction to Electric Power Systems
        1. 2.1 DC Circuit Concepts
        2. 2.2 AC Circuit Concepts
        3. 2.3 Reactive Power
        4. 2.4 The Elements of an Electric Power System
        5. 2.5 Electricity Generation
        6. 2.6 Electricity Transmission and Distribution Networks
        7. 2.7 Physical Limits on Networks
        8. 2.8 Electricity Consumption
        9. 2.9 Does it Make Sense to Distinguish Electricity Producers and Consumers?
        10. 2.10 Summary
        11. Questions
        12. Further Reading
      2. Chapter 3: Electricity Industry Market Structure and Competition
        1. 3.1 Tasks Performed in an Efficient Electricity Industry
        2. 3.2 Electricity Industry Reforms
        3. 3.3 Approaches to Reform of the Electricity Industry
        4. 3.4 Other Key Roles in a Market-Orientated Electric Power System
        5. 3.5 An Overview of Liberalised Electricity Markets
        6. 3.6 An Overview of the Australian National Electricity Market
        7. 3.7 The Pros and Cons of Electricity Market Reform
        8. 3.8 Summary
        9. Questions
        10. Further Reading
    8. Part III: Optimal Dispatch: The Efficient Use of Generation, Consumption and Network Resources
      1. Chapter 4: Efficient Short-Term Operation of an Electricity Industry with no Network Constraints
        1. 4.1 The Cost of Generation
        2. 4.2 Simple Stylised Representation of a Generator
        3. 4.3 Optimal Dispatch of Generation with Inelastic Demand
        4. 4.4 Optimal Dispatch of Both Generation and Load Assets
        5. 4.5 Symmetry in the Treatment of Generation and Load
        6. 4.6 The Benefit Function
        7. 4.7 Nonconvexities in Production: Minimum Operating Levels
        8. 4.8 Efficient Dispatch of Energy-Limited Resources
        9. 4.9 Efficient Dispatch in the Presence of Ramp-Rate Constraints
        10. 4.10 Startup Costs and the Unit-Commitment Decision
        11. 4.11 Summary
        12. Questions
        13. Further Reading
      2. Chapter 5: Achieving Efficient Use of Generation and Load Resources using a Market Mechanism in an Industry with no Network Constraints
        1. 5.1 Decentralisation, Competition and Market Mechanisms
        2. 5.2 Achieving Optimal Dispatch Through Competitive Bidding
        3. 5.3 Variation in Wholesale Market Design
        4. 5.4 Day-Ahead Versus Real-Time Markets
        5. 5.5 Price Controls and Rationing
        6. 5.6 Time-Varying Demand, the Load-Duration Curve and the Price-Duration Curve
        7. 5.7 Summary
        8. Questions
        9. Further Reading
      3. Chapter 6: Representing Network Constraints
        1. 6.1 Representing Networks Mathematically
        2. 6.2 Net Injections, Power Flows and the DC Load Flow Model
        3. 6.3 The Matrix of Power Transfer Distribution Factors
        4. 6.4 Distribution Factors for Radial Networks
        5. 6.5 Constraint Equations and the Set of Feasible Injections
        6. 6.6 Summary
        7. Questions
      4. Chapter 7: Efficient Dispatch of Generation and Consumption Resources in the Presence of Network Congestion
        1. 7.1 Optimal Dispatch with Network Constraints
        2. 7.2 Optimal Dispatch in a Radial Network
        3. 7.3 Optimal Dispatch in a Two-Node Network
        4. 7.4 Optimal Dispatch in a Three-Node Meshed Network
        5. 7.5 Optimal Dispatch in a Four-Node Network
        6. 7.6 Properties of Nodal Prices with a Single Binding Constraint
        7. 7.7 How Many Independent Nodal Prices Exist?
        8. 7.8 The Merchandising Surplus, Settlement Residues and the Congestion Rents
        9. 7.9 Network Losses
        10. 7.10 Summary
        11. Questions
        12. Further Reading
      5. Chapter 8: Efficient Network Operation
        1. 8.1 Efficient Operation of DC Interconnectors
        2. 8.2 Optimal Network Switching
        3. 8.3 Summary
        4. Questions
        5. Further Reading
    9. Part IV: Efficient Investment in Generation and Consumption Assets
      1. Chapter 9: Efficient Investment in Generation and Consumption Assets
        1. 9.1 The Optimal Generation Investment Problem
        2. 9.2 The Optimal Level of Generation Capacity with Downward Sloping Demand
        3. 9.3 The Optimal Mix of Generation Capacity with Downward Sloping Demand
        4. 9.4 The Optimal Mix of Generation with Inelastic Demand
        5. 9.5 Screening Curve Analysis
        6. 9.6 Buyer-Side Investment
        7. 9.7 Summary
        8. Questions
        9. Further Reading
      2. Chapter 10: Market-Based Investment in Electricity Generation
        1. 10.1 Decentralised Generation Investment Decisions
        2. 10.2 Can We Trust Competitive Markets to Deliver an Efficient Level of Investment in Generation?
        3. 10.3 Price Caps, Reserve Margins and Capacity Payments
        4. 10.4 Time-Averaging of Network Charges and Generation Investment
        5. 10.5 Summary
        6. Questions
    10. Part V: Handling Contingencies: Efficient Dispatch in the Very Short Run
      1. Chapter 11: Efficient Operation of the Power System in the Very Short-Run
        1. 11.1 Introduction to Contingencies
        2. 11.2 Efficient Handling of Contingencies
        3. 11.3 Preventive and Corrective Actions
        4. 11.4 Satisfactory and Secure Operating States
        5. 11.5 Optimal Dispatch in the Very Short Run
        6. 11.6 Operating the Power System Ex Ante as though Certain Contingencies have Already Happened
        7. 11.7 Examples of Optimal Short-Run Dispatch
        8. 11.8 Optimal Short-Run Dispatch Using a Competitive Market
        9. 11.9 Summary
        10. Questions
        11. Further Reading
      2. Chapter 12: Frequency-Based Dispatch of Balancing Services
        1. 12.1 The Intradispatch Interval Dispatch Mechanism
        2. 12.2 Frequency-Based Dispatch of Balancing Services
        3. 12.3 Implications of Ignoring Network Constraints when Handling Contingencies
        4. 12.4 Procurement of Frequency-Based Balancing Services
        5. 12.5 Summary
        6. Questions
        7. Further Reading
    11. Part VI: Managing Risk
      1. Chapter 13: Managing Intertemporal Price Risks
        1. 13.1 Introduction to Forward Markets and Standard Hedge Contracts
        2. 13.2 The Construction of a Perfect Hedge: The Theory
        3. 13.3 The Construction of a Perfect Hedge: Specific Cases
        4. 13.4 Hedging by Customers
        5. 13.5 The Role of the Trader
        6. 13.6 Intertemporal Hedging and Generation Investment
        7. 13.7 Summary
        8. Questions
      2. Chapter 14: Managing Interlocational Price Risk
        1. 14.1 The Role of the Merchandising Surplus in Facilitating Interlocational Hedging
        2. 14.2 Interlocational Transmission Rights: CapFTRs
        3. 14.3 Interlocational Transmission Rights: Fixed-Volume FTRs
        4. 14.4 Interlocational Hedging and Transmission Investment
        5. 14.5 Summary
        6. Questions
        7. Further Reading
    12. Part VII: Market Power
      1. Chapter 15: Market Power in Electricity Markets
        1. 15.1 An Introduction to Market Power in Electricity Markets
        2. 15.2 How Do Generators Exercise Market Power? Theory
        3. 15.3 How do Generators Exercise Market Power? Practice
        4. 15.4 The Incentive to Exercise Market Power: The Importance of the Residual Demand Curve
        5. 15.5 The Incentive to Exercise Market Power: The Impact of the Hedge Position of a Generator
        6. 15.6 The Exercise of Market Power by Loads and Vertical Integration
        7. 15.7 Is the Exercise of Market Power Necessary to Stimulate Generation Investment?
        8. 15.8 The Consequences of the Exercise of Market Power
        9. 15.9 Summary
        10. Questions
        11. Further Reading
      2. Chapter 16: Market Power and Network Congestion
        1. 16.1 The Exercise of Market Power by a Single Generator in a Radial Network
        2. 16.2 The Exercise of Market Power by a Single Generator in a Meshed Network
        3. 16.3 The Exercise of Market Power by a Portfolio of Generators
        4. 16.4 The Effect of Transmission Rights on Market Power
        5. 16.5 Summary
        6. Questions
        7. Further Reading
      3. Chapter 17: Detecting, Modelling and Mitigating Market Power
        1. 17.1 Approaches to Assessing Market Power
        2. 17.2 Detecting the Exercise of Market Power Through the Examination of Market Outcomes in the Past
        3. 17.3 Simple Indicators of Market Power
        4. 17.4 Modelling of Market Power
        5. 17.5 Policies to Reduce Market Power
        6. 17.6 Summary
        7. Questions
        8. Further Reading
    13. Part VIII: Network Regulation and Investment
      1. Chapter 18: Efficient Investment in Network Assets
        1. 18.1 Efficient AC Network Investment
        2. 18.2 Financial Implications of Network Investment
        3. 18.3 Efficient Investment in a Radial Network
        4. 18.4 Efficient Investment in a Two-Node Network
        5. 18.5 Coordination of Generation and Network Investment in Practice
        6. 18.6 Summary
        7. Questions
        8. Further Reading
    14. Part IX: Contemporary Issues
      1. Chapter 19: Regional Pricing and Its Problems
        1. 19.1 An Introduction to Regional Pricing
        2. 19.2 Regional Pricing Without Constrained-on and Constrained-off Payments
        3. 19.3 Regional Pricing with Constrained-on and Constrained-off Payments
        4. 19.4 Nodal Pricing for Generators/Regional Pricing for Consumers
        5. 19.5 Summary
        6. Questions
        7. Further Reading
      2. Chapter 20: The Smart Grid and Efficient Pricing of Distribution Networks
        1. 20.1 Efficient Pricing of Distribution Networks
        2. 20.2 Decentralisation of the Dispatch Task
        3. 20.3 Retail Tariff Structures and the Incentive to Misrepresent Local Production and Consumption
        4. 20.4 Incentives for Investment in Controllable Embedded Generation
        5. 20.5 Retail Tariff Structures
        6. 20.6 Declining Demand for Network Services and Increasing Returns to Scale
        7. 20.7 Summary
        8. Questions
    15. References
    16. Index
    17. End User License Agreement