Power System Expansion Planning in a Liberalized Market

Power System Expansion Planning in a Liberalized Market

The ideas of liberalism, monetarism, deregulation of the economy (including the electric power industry), privatization of state property, freedom from state intervention in trade and other economic activities became quite popular. Thus, it was not by accident that radical and liberal reforms were often accompanied by a considerable relaxation of state control aimed at fast activation of self-regulatory market mechanisms, which were supposed to stimulate economic growth and restructuring of electric power industry  This approach was mainly based on the theoretical conclusions of the classical school of economics that the market balance is achieved owing to the law of demand and supply by means of flexible market pricing under the conditions of perfect competition; prices reflect individual preferences and fluctuations according to the changes in demand and supply; resources are distributed according to the relative price level in the market, and if this level depends on fluctuations in demand and supply, the absolute price level is determined by the amount of money; when the balance is disturbed, the system strives to restore it, that is why any attempts to interfere in the operation of market mechanisms can only aggravate the situation.

The experience of market transformations in electric power industry in most of the countries showed that the initial excessive optimism about the efficiency of purely market forces in the operation and, particularly, expansion of electric power systems proved unjustified. Extremely liberal models of electricity market organization and functioning were set aside and the role of “soft” regulation of these markets by implementing the appropriate government policy was recognized. In essence, the specialists acknowledge now that the most rational method for efficient operation and expansion of electric power systems is a combination of market mechanisms and state regulation. It is worth emphasizing that the determination of such a rational combination is not an easy task and its performance is country-specific because of specific features of economy and electric power industry, conditions of their operation and development.

Moreover, by the late 1990s, the backup generating capacities had started to decrease considerably in many countries, since it turned out to be unprofitable for the generating companies to maintain extra capacities. The electricity market functioning revealed the limitations on the transfer capability of the electric network often at the points, where such limitations had not manifested themselves before (the so- called congestion problem). All this triggered the research into the methods   of   expansion   planning   of   generating   capacities,   and particularly electric networks, on a new market basis.

Under the conditions of liberalized relationships in electric power I industry, the process of analyzing and making decisions on its development involves many participants (stakeholders) that have different interests. These are electric power companies, consumers, investors, and public organizations, federal and regional authorities. Today, the coordination of interests of stakeholders and the formation of mechanisms for ensuring the development process become that present, the methodology of power industry expansion planning is undergoing radical transformation from centralized planning into a new paradigm of the multilateral process for justifying the decisions and creating the mechanisms for their implementation under the conditions of uncertainty, multi-criteria or objectives, and multiplicity of different interests.  This  transformation  is  characteristic  of  all  the countries  experiencing  energy  liberalization  and  deregulation’s main objectives of expansion planning of electric power systems and companies.

The operation of a liberalized power system requires flexible and fast support tools, given the variety of partially autonomous agents that can take decisions that compromise the security of the system.. Generators working in a competitive pool must evaluate a wide range of factors to prepare their bids or asses their trades.. a competitive industry  will  be more focused on its customers, there will be an increased need  for  load  modeling and  control;

A competitive generation market requires three basic functions:

1.    The operation of the market (pool): collecting and processing bids, establishing the balance between generation and demand, computing the system marginal price that will be used to remunerate the energy supplied by the generators, etc.

2.     The  operation  of  the  system:  monitoring  the security of the network , taking into account all the physical constraints that can affect the dispatch, authorizing and applying the generation dispatch provided by the market, as well as the bilateral transactions; arranging the supply of reserve and voltage control services, operating the transmission network. Etc.

3.     The ownership of the transmission network.

In competitive environments, functions 1, 2 and 3 can be carried out by separate entities. The entity in charge of function 2 is usually called the independent system operator. It is responsible for controlling the behavior of the market participants, since they are no longer constrained to follow instructions coming from a centralized control, but may have a certain degree of autonomy. This is especially important if physical contracts are allowed. In this case, the generation dispatch is not  only  a  result  of  a  centralized  market, but generators  can directly  supply  energy  (i.e., can modify their dispatch) through a bilateral arrangement with a consumer or reseller , by-passing the market.

The  independent  system operator  must obviously .assess and  authorize  those contracts,  and  monitor their application . This process has different aspects: The losses caused by each transaction must be estimated and charged to the responsible participants. The impact of each set of transactions in security must be evaluated. If they lead to the violation of security constraints,   the   independent   system operator must re-schedule the transactions. Nevertheless, this rescheduling must be carried out in a non-discriminatory way. For instance, the Californian regulat ion establishes that the dispatch resulting from the pool cannot be given priority over the bilateral transactions. Moreover, the rescheduling should preferably be based on economic signals that would give an estimate of how costly the rescheduling is for each participant.

Transparency   and availability of information are required to obtain an efficient market. A solid structure of  information processing and data communication systems will be require to make sure that all agents have access to the relevant data and can make informed decisions , and the regulation has acknowledged this importance. For instance, the US Federal Energy Regulatory Commission has established the basis for the so called Open Access Same-Time Information System (OASIS) that will be the basis of the US electricity marketplace.

The ability to accurately forecast electricity demand will be increasingly important in a competitive environment, since it will allow the power marketers to negotiate good prices for the energy that they buy.

Another important aspect of modern approaches to the planning of electric power industry, electric power systems and power companies under the conditions of liberalization and deregulation is connected to greatly increasing uncertainty of the expansion planning factors and a growing number of factors forming this uncertainty, as compared to the conditions of the centralized electric power industry. In terms of methodology, there is a short-term uncertainty and a long-term uncertainty. The short-term uncertainty (for instance, fluctuations in electricity prices in prospect as against the forecast, load variations at system nodes as against the forecast, etc.) is represented as random and modeled, for example, by the Monte-Carlo method   The long-term uncertainty is represented by scenarios (for instance, the scenarios of electricity consumption, fuel or equipment prices, etc.)   The fuzzy sets and fuzzy logic are used   In many cases, uncertainty is associated with risk  

Considering    the    uncertainty    of    electric    power    industry development, it is recognized that the ideology of approaches to the expansion planning of electric power systems and companies should be transformed from optimization to forecast and simulation, and from planning to a development strategy   As compared to the previous conditions, the sense and content of mathematical models used for forecasts and simulation expand since the technological models for electric power system expansion planning are supplemented with financial ones [3,42] and gain new functions including assessment of power supply reliability, consideration of demand-side management (DSM), and other capabilities   The use of such powerful means as the geographic information systems is also considered  

Some  authors  do  not  regard  the  generation expansion  planning problem as pressing and assume that the market mechanisms should give the necessary economic signals to the investors to invest in the construction  of  new  power  plants.  However, this  viewpoint  is supported by fewer and fewer researchers, since a deeper analysis and the existing practice show that the market is “shortsighted” and there is a need to foresee the corresponding mechanisms to improve the investment attractiveness of new power plants and reduce the financial risks to investors. To this end, a lot of different approaches are suggested, one of which is the so-called Stratum Electricity Market (SEM). According to this approach, the electricity market structure is considered hierarchically in time, including the spot (hourly), monthly, yearly and long-term markets. The long-term market makes it possible to arrange auctions and attract investment in the construction of power plants   A similar idea was also formulated in   Also, consideration is given to the capacity markets (in addition to electricity markets) that create long-term economic signals for investors for the expansion of power plants  

since every generating company and every independent investor that explore the possibility of investing in the construction of power plants, have their own interests, which should be reconciled taking into account the general system requirements. An independent system operator is considered as the coordinator   and social requirements (the main of which is the reliability of power supply to consumers) – as the system requirements to be checked by the operator. In other cases, the function of the generation expansion coordinator is performed by the state   (which is often identical to the previous case, where the system operator is the state property), and the problem can be viewed as a hierarchical game   When the power plant expansion is regulated, the coordination can be performed by the companies. In this case, the problem is formulated as a cooperative game].

Some authors consider the state generation expansion planning as a means of protection against market risks in a more general case; it is most rational to combine market mechanisms of power plant expansion with the system of state and corporate generation expansion planning, which reduces investment risks. In this case a special fund is established to hedge independent investors against financial risks and construct   power   plants   to   avoid   generating   capacity   shortage

“Holistic” means considering an object as a whole, and not just dealing with particular aspects. In , the electric power systems are comprehensively considered in terms of cost-effectiveness, required reliability, and acceptable environmental impact. The authors of  also consider the social welfare.

The following principles of holistic power system planning are considered:

1.    Comparison of alternative strategies  for  expansion,  using integrated quantitative assessment and maximizing social benefits of expanding the system as a whole;

2.     Use of probabilistic reliability criteria to counterbalance the commonly used deterministic criteria, such as the reliability rule "n-1";

3.     Consideration of the entire expanding system in terms of how it is connected to other electric power systems around it and adjacent systems of different nature at the local, regional, and global levels;

4.     Assessment of costs and benefits from the standpoint of all the stakeholders in terms of their share in the used assets and fair cost and profit sharing among the parties;

5.     Behavior of individual parties in accord with the global goal of the system; in other words, each stakeholder should contribute to the improvement in the efficiency of the entire system, i.e. despite the individual goals of the stakeholders; they should make a contribution to the global goal.

Holistic planning is a new concept which attempts to take into account the characteristics of current split organization structure of the electric power industry, a methodology of gaining the common benefit from optimal allocation of resources with no return to a fully integrated and strictly regulated structure.

The author of  consider two aspects of holistic planning: electric network planning and resource planning. At present, the electric network planning involves great difficulties. The substantial uncertainty about the load forecast, placement of generating capacities, regulatory decisions, construction opportunities, etc. and a large number of stakeholders engaged in expansion planning necessitate the development of new approaches and methods for creating future flexible electric power systems which expand in an efficient manner. The electric network planning is impossible to perform holistically without consideration of resource planning, decisions on electricity consumption, and environmental constraints. The placement of new generating capacities can considerably affect the formation of the electric network. Social welfare implies making decisions optimal from a market viewpoint, under various alternatives, in accordance with the concept "Unity in Diversity”, which is viewed as a way of reconciling individual decisions to the benefit of the society.

The new approach separates the problem of the electric network expansion planning from the problem of generation expansion planning. However, the decision-making about the investment in the electric network expansion should agree with the development of generation and consumption markets to the maximum.

The   holistic   resource   planning   under   the conditions,   where centralized expansion planning does not work and the free market mechanisms turn out to be ineffective made by the stakeholders should agree with social welfare and goals of the society. The mechanisms for implementing such a concept should be developed by the government or by a community of consumers. One of the principles can be based on the inclusion of environmental costs, social needs, etc. in economic and financial criteria, shou On the whole, the new approach called the holistic power system planning, which was considered in [75,76], gives only the main ideas of the new concept of expansion planning under electric power industry restructuring and liberalization. The ideas are aimed at reconciling the individual goals of stakeholders involved in the power system planning and the goals and benefits of the society as a whole.

 It is important to highlight a number of essential aspects which are common for the considered approaches. These aspects are considered both explicitly and implicitly in many studies that solve concrete problems of power system expansion planning.

The first aspect is connected to the systemic character of the studied object whose expansion planning we are dealing with. Electric power systems are objectively viewed as complex integral facilities with a complex, often hierarchical structure and quite strong ties with economic, social, and environmental systems. Such understanding of the systemic character of the object was mainly logical in the past, when the organization structure of electric power systems coincided with their physical and technological structure. It has to be mentioned however that not all specialists realized the systemic character of electric power systems, and therefore their structural complexity and complexity (systemic nature) of their operation and expansion problems. The holistic approach to the expansion planning of a seemingly split electric power system also considers the object of study and the problems of its expansion rather systemically.

Another aspect of the problem consists in the fact that apart from individual interests of the stakeholders in the course of the power system expansion planning, there are also some social interests and social welfare. Certainly, under the prescriptive control of the centralized electric power industry, the individual and local interests were minimal. Individual interests, for instance the interests of private energy companies, were most vividly seen in vertically integrated electric power systems operating in accordance with market principles. In the course of electric power system expansion, individual interests of stakeholders are most tangible in restructured and liberalized electric power industry. Moreover, the interests of different stakeholders contradict each other.

Centralized electric power industry, whose decisions were based on directives, implied that social goals and welfare were evidently prevalent, and the mechanisms for the accomplishment of these social goals were obvious. In the case of vertically integrated electric power companies, which work and develop on the basis of market principles, the social goals are achieved through the corresponding legislative and institutional mechanisms. Characteristically, the operation of competitive market mechanisms and restructured electric power systems, particularly in the holistic approach, also implies the involvement of certain institutions that can regulate the attainment of social goals connected to the electric power system operation and expansion. These institutions can be represented directly by the state or by independent structures, often with state property (communities of consumers, system operator, etc.).

Conclusions

All these considerations lead to the conclusion that in the power system expansion planning it is sensible to rationally combine market mechanisms and state regulation (to a greater extent, “soft” state regulation).