Power System Economics: Designing Markets for Electricity - Softcover

Stoft, Steven

Softcover

ISBN 10: 0471150401 ISBN 13: 9780471150404

Publisher: Wiley-IEEE Press, 2002

Synopsis

The first systematic presentation of electricity market design-from the basics to the cutting edge. Unique in its breadth and depth. Using examples and focusing on fundamentals, it clarifies long misunderstood issues-such as why today's markets are inherently unstable. The book reveals for the first time how uncoordinated regulatory and engineering policies cause boom-bust investment swings and provides guidance and tools for fixing broken markets. It also takes a provocative look at the operation of pools and power exchanges.
* Part 1 introduces key economic, engineering and market design concepts.
* Part 2 links short-run reliability policies with long-run investment problems.
* Part 3 examines classic designs for day-ahead and real-time markets.
* Part 4 covers market power, and
* Part 5 covers locational pricing, transmission right and pricing losses.
The non-technical introductions to all chapters allow easy access to the most difficult topics. Steering an independent course between ideological extremes, it provides background material for engineers, economists, regulators and lawyers alike. With nearly 250 figures, tables, side bars, and concisely-stated results and fallacies, the 44 chapters cover such essential topics as auctions, fixed-cost recovery from marginal cost, pricing fallacies, real and reactive power flows, Cournot competition, installed capacity markets, HHIs, the Lerner index and price caps.

About the Author
Steven Stoft has a Ph.D. in economics (U.C. Berkeley) as well as a background in physics, math, engineering, and astronomy. He spent a year inside FERC and now consults for PJM, California and private generators. Learn more at www.stoft.com.

About this title

About the Author

STEVEN STOFT has a BS in engineering mathematics and a PhD in economics from the University of California at Berkeley, and over ten years of experience in power market analysis and design. He has held positions at FERC, the University of California's Energy Institute, and the Lawrence Berkeley National Laboratory. He is currently a consultant to the Pennsylvania-New Jersey-Maryland ISO (PJM), California's Electricity Oversight Board, the U.S. Department of Energy, and an independent power producer.

From the Back Cover

An Introduction to the Fundamental Economics of Power Market Design and Analysis

Power System Economics is the first systematic presentation of power-market design principles from economic theory to market architecture. The approach is pragmatic, and the discussion illustrates economic and engineering fundamentals with simple examples. The volume breaks new ground in its analysis of price spikes, market-based unit commitment, and the prediction of market power.

Power System Economics includes five parts. Part 1 introduces key economic, engineering, and market design concepts. Part 2 explains how short-run reliability policies determine long-run average installed capacity and reliability. Part 3 examines classic designs for day-ahead and real-time markets. Part 4 covers market power, and Part 5 covers the effect of networks on prices. Topics include:
* How marginal-cost prices cover fixed costs
* Fundamentals of auction design
* The value of lost load (VOLL) as a price cap: theory versus practice
* Price limits, price spikes, investment, and reliability
* Standard market designs, including PJM
* Power pools versus power exchanges
* Market power fallacies and the HHI
* Losses pricing and congestion pricing

Excerpt. © Reprinted by permission. All rights reserved.

Chapter 1-1

Why Deregulate?

The propensity to truck, barter, and exchange one thing for another. . . is common to all men.
Adam Smith

The Wealth of Nations 1776

In the beginning there was competition brutal and inefficient. Between 1887 and 1893, twenty-four central station power companies were established within Chicago alone. With overlapping distribution lines, competition for customers was fierce and costs were high. In 1898, the same year he was elected president of the National Electric Light Association, Samuel Insull solved these problems by acquiring a monopoly over all central-station production in Chicago. In his historic presidential address to NELA, Insull explained not only why the electricity business was a "natural monopoly" but why it should be regulated and why this regulation should be at the state level, not the local level. Insull argued that

exclusive franchises should be coupled with the conditions of public control, requiring all charges for services fixed by public bodies to be based on cost plus a reasonable profit.

These ideas shocked his fellow utility executives but led fairly directly to regulatory laws passed by New York and Wisconsin in 1907 establishing the first two state utility commissions. Reformers of the Progressive era also lent support to regulation although they were about equally supportive of municipal power companies. Their intention, to hold down monopoly profits, was at odds with Insull's desire to keep profits above the competitive level, but both sides agreed that competition was inefficient and that providing electricity was a natural monopoly.

On the scale of an isolated city, provision of electricity is a natural monopoly and requires regulation or municipal ownership, but as transmission technology developed, it brought new possibilities for trade and competition. The earliest electric companies, for instance Brush's company which lighted New York's Broadway in 1880, integrated generation with distribution, and, in fact, sold light, not electricity. Edison initially did the same, installing the light bulbs in the homes he lit and charging by the number of bulbs installed. Westinghouse introduced high-voltage transmission using alternating current (AC) technology to the United States in 1886, and by 1892 Southern California Edison was operating a 10-kV transmission line 28 miles in length. This, too, was an integrated part of a full-service utility.

Integrated utilities remained natural monopolies for many years while expansion of the high-voltage transmission network continued, mainly for purposes of reliability. Eventually the entire Eastern United States and Eastern Canada were united in a single synchronized AC power system. By operating at extremely high voltages, this system is able to move power over great distances with very little loss, often less than three percent in a thousand miles.

Regulated, vertically integrated utilities were well established by the time the transmission system made substantial long-distance trade possible. As a consequence, trade was slow to develop, but the existence of the grid made the de-integration of the electric industry a possibility. Generation could now be split off to form a separate competitive market, while the remaining parts of the utilities remained behind as regulated monopolies. By 1990, encouraged by a general trend toward deregulation, the de-integration trend in electric markets was underway in a number of countries. Today, more than a dozen semi-deregulated electricity markets are operating in at least ten countries, with several operating in the United States.

In spite of this apparent success, many fundamental problems remain. After ten years of operation, the British market has declared itself a failure and replaced all of its market rules. In a single year, the California market managed to cost its customers more than ten years of hoped-for savings. Alberta (Canada) is worried over the results of its recent auction of generation rights that brought in much less revenue than planned. New York saw prices spike to over $6,000/MWh in 2000, and the New England ISO had to close its installed capacity market due to extreme problems with market power. But initial problems do not prove deregulation is doomed; some markets are functioning well. A closer look at fundamental arguments for and against deregulation may help explain why such mixed results might be expected.

Edition details

• Publisher: Wiley-IEEE Press
• Publication date: 2002
• ISBN 10: 0471150401
• ISBN 13: 9780471150404
• Binding: Paperback
• Language: English
• Edition number: 1
• Number of pages: 496