DANIEL S. KIRSCHEN, PHD, is the Donald W. and Ruth Mary Close Professor of Electrical Engineering at the University of Washington, Seattle, USA. GORAN STRBAC, PHD, is a Professor of Energy Systems at Imperial College London, UK. He is also a member of the Steering Committee of the SmartGrids European Technology Platform, co-chair of EU WG on Sustainable Districts and Built Environment of Smart Cities, and Director of the UK Centre for Grid Scale Energy Storage.

• Preface to the First Edition xiiiPreface to the Second Edition xv1 Introduction 11.1 Why Competition? 11.2 Market Structures and Participants 21.2.1 Traditional Model 21.2.2 Introducing Independent Power Producers 41.2.3 Wholesale Competition 51.2.4 Retail Competition 61.2.5 Renewable and Distributed Energy Resources 61.3 Dramatis Personae 71.4 Competition and Privatization 81.5 Experience and Open Questions 91.6 Problems 10Further Reading 112 Basic Concepts from Economics 132.1 Introduction 132.2 Fundamentals of Markets 132.2.1 Modeling the Consumers 132.2.1.1 Individual Demand 132.2.1.2 Surplus 142.2.1.3 Demand and Inverse Demand Functions 152.2.1.4 Elasticity of Demand 182.2.2 Modeling the Producers 182.2.2.1 Opportunity Cost 182.2.2.2 Supply and Inverse Supply Functions 192.2.2.3 Producers’ Revenue 202.2.2.4 Elasticity of Supply 202.2.3 Market Equilibrium 222.2.4 Pareto Efficiency 242.2.5 Global Welfare and Deadweight Loss 252.2.6 Time-varying Prices 262.3 Concepts from the Theory of the Firm 272.3.1 Inputs and Outputs 272.3.2 Long Run and Short Run 272.3.3 Costs 302.3.3.1 Short-run Costs 302.3.3.2 Long-run Costs 322.4 Risk 342.5 Types of Markets 342.5.1 Spot Market 352.5.2 Forward Contracts and Forward Markets 352.5.3 Futures Contracts and Futures Markets 372.5.4 Options 382.5.5 Contracts for Difference 392.5.6 Managing the Price Risks 402.5.7 Market Efficiency 412.6 Markets with Imperfect Competition 412.6.1 Market Power 412.6.2 Monopoly 422.7 Problems 43Further Reading 493 Markets for Electrical Energy 513.1 What Is the Difference Between a Megawatt-hour and a Barrel of Oil? 513.2 Trading Periods 523.3 Forward Markets 533.3.1 Bilateral or Decentralized Trading 543.3.2 Centralized Trading 573.3.2.1 Principles of Centralized Trading 573.3.2.2 Day-ahead Centralized Trading 593.3.2.3 Formulation as an Optimization Problem 603.3.2.4 Market Clearing Price 613.3.2.5 Recovering the Fixed Costs 633.3.3 Comparison of Centralized and Decentralized Trading 673.4 Spot Markets 683.4.1 Obtaining Balancing Resources 693.4.2 Gate Closure 703.4.3 Operation of the Spot Market 703.4.4 Interactions Between the Spot Market and the Forward Market 723.5 The Settlement Process 733.6 Problems 75References 86Further Reading 864 Participating in Markets for Electrical Energy 894.1 Introduction 894.2 The Consumer’s Perspective 894.3 The Retailer’s Perspective 914.4 The Producer’s Perspective 984.4.1 Perfect Competition 984.4.1.1 Basic Dispatch 984.4.1.2 Unit Limits 994.4.1.3 Piecewise Linear Cost Curves 1004.4.1.4 No-load Cost 1014.4.1.5 Scheduling 1024.4.1.6 Startup Cost 1034.4.1.7 Operating Constraints 1044.4.1.8 Environmental Constraints 1054.4.1.9 Other Economic Opportunities 1054.4.1.10 Forecasting Errors 1054.4.2 The Produce Vs Purchase Decision 1054.4.3 Imperfect Competition 1074.4.3.1 Bertrand Model 1084.4.3.2 Cournot Model 1094.4.3.3 Supply Functions Equilibria 1164.4.3.4 Agent-Based Modeling 1174.4.3.5 Experimental Economics 1174.4.3.6 Limitations of These Models 1174.5 Perspective of Plants That Do Not Burn Fossil Fuels 1174.5.1 Nuclear Power Plants 1184.5.2 Hydroelectric Power Plants 1184.5.3 Wind and Solar Generation 1194.5.3.1 Intermittency and Stochasticity 1194.5.3.2 Government Policies and Subsidies 1194.5.3.3 Effect on the Markets 1204.6 The Storage Owner’s Perspective 1214.6.1 Self-scheduling 1214.6.2 Centralized Operation 1224.7 The Flexible Consumer’s Perspective 1254.7.1 Flexible Demand Vs Storage 1254.7.2 Remunerating Flexible Demand 1264.7.3 Implementation Issues 1264.8 The Neighbor’s Perspective 1314.9 An Overall Market Perspective 1314.9.1 Clearing the Market 1314.9.2 Exercising Market Power 1334.9.3 Dealing with Market Power 1354.10 Problems 136Further Reading 1385 Transmission Networks and Electricity Markets 1415.1 Introduction 1415.2 Decentralized Trading over a Transmission Network 1415.2.1 Physical Transmission Rights 1425.2.2 Problems with Physical Transmission Rights 1435.2.2.1 Parallel Paths 1435.2.2.2 Example 1445.2.2.3 Physical Transmission Rights and Market Power 1475.3 Centralized Trading over a Transmission Network 1485.3.1 Centralized Trading in a Two-Bus System 1485.3.1.1 Unconstrained Transmission 1495.3.1.2 Constrained Transmission 1505.3.1.3 Congestion Surplus 1535.3.2 Centralized Trading in a Three-Bus System 1555.3.2.1 Economic Dispatch 1565.3.2.2 Correcting the Economic Dispatch 1595.3.2.3 Nodal Prices 1625.3.2.4 Congestion Surplus 1675.3.2.5 Economically Counterintuitive Flows 1675.3.2.6 Economically Counterintuitive Prices 1695.3.2.7 More Economically Counterintuitive Prices 1715.3.2.8 Nodal Pricing and Market Power 1715.3.2.9 A Few Comments on Nodal Marginal Prices 1735.3.3 Losses in Transmission Networks 1745.3.3.1 Types of Losses 1745.3.3.2 Marginal Cost of Losses 1745.3.3.3 Effect of Losses on Generation Dispatch 1765.3.3.4 Merchandising Surplus 1785.3.3.5 Combining Losses and Congestion 1785.3.3.6 Handling of Losses Under Bilateral Trading 1795.3.4 Mathematical Formulation of Nodal Pricing 1795.3.4.1 Network with a Single Busbar 1795.3.4.2 Network of Infinite Capacity with Losses 1805.3.4.3 Network of Finite Capacity with Losses 1825.3.4.4 Network of Finite Capacity, DC Power Flow Approximation 1845.3.4.5 AC Modeling 1875.3.5 Managing Transmission Risks in a Centralized Trading System 1885.3.5.1 The Need for Network-Related Contracts 1885.3.5.2 Financial Transmission Rights 1895.3.5.3 Point-to-Point Financial Transmission Rights 1915.3.5.4 Flowgate Rights 1955.4 Problems 195References 202Further Reading 2026 Power System Operation 2036.1 Introduction 2036.1.1 The Need for Operational Reliability 2036.1.2 The Value of Reliability 2046.1.3 The Cost of Reliability 2046.1.4 Procuring Reliability Resources 2066.1.5 Outline of the Chapter 2066.2 Operational Issues 2076.2.1 Balancing Issues 2076.2.1.1 Balancing Resources 2106.2.1.2 Effect of Generation from Stochastic Renewable Sources 2126.2.2 Network Issues 2126.2.2.1 Limits on Power Transfers 2126.2.2.2 Voltage Control and Reactive Support 2146.2.2.3 Stability Services 2186.2.3 System Restoration 2186.2.4 Market Models Vs Operational Models 2196.3 Obtaining Reliability Resources 2196.3.1 Compulsory Provision 2196.3.2 Market for Reliability Resources 2206.3.3 System Balancing with a Significant Proportion of Variable Renewable Generation 2216.3.4 Creating a Level-playing Field 2226.4 Buying Reliability Resources 2236.4.1 Quantifying the Needs 2236.4.2 Co-optimization of Energy and Reserve in a Centralized Electricity Market 2246.4.3 Allocation of Transmission Capacity Between Energy and Reserve 2326.4.4 Allocating the Costs 2376.4.4.1 Who Should Pay for Reserve? 2376.4.4.2 Who Should Pay for Regulation and Load Following? 2386.5 Selling Reliability Resources 2386.6 Problems 243References 246Further Reading 2477 Investing in Generation 2497.1 Introduction 2497.2 Generation Capacity from an Investor’s Perspective 2497.2.1 Building New Generation Capacity 2497.2.2 Retiring Generation Capacity 2557.2.3 Effect of a Cyclical Demand 2577.3 Generation Capacity from the Customers’ Perspective 2607.3.1 Expansion Driven by the Market for Electrical Energy 2617.3.2 Capacity Payments 2637.3.3 Capacity Market 2647.3.4 Reliability Contracts 2657.4 Generation Capacity from Renewable Sources 2667.4.1 The Investors’ Perspective 2667.4.2 The Consumers’ Perspective 2677.5 Problems 267References 269Further Reading 2708 Investing in Transmission 2718.1 Introduction 2718.2 The Nature of the Transmission Business 2728.3 Cost-Based Transmission Expansion 2738.3.1 Setting the Level of Investment in Transmission Capacity 2748.3.2 Allocating the Cost of Transmission 2748.3.2.1 Postage Stamp Method 2758.3.2.2 Contract Path Method 2758.3.2.3 MW-mile Method 2768.3.2.4 Discussion 2768.4 The Arbitrage Value of Transmission 2768.4.1 The Transmission Demand Function 2788.4.2 The Transmission Supply Function 2808.4.3 Optimal Transmission Capacity 2818.4.4 Balancing the Cost of Constraints and the Cost of Investments 2828.4.5 Effect of Load Fluctuations 2838.4.5.1 Load-duration Curve 2848.4.5.2 Recovery of Variable Transmission Investment Costs 2878.4.6 Revenue Recovery for Suboptimal Transmission Capacity 2888.4.7 Economies of Scale 2908.4.8 Transmission Expansion in a Meshed Network 2928.4.9 Concept of Reference Network 2988.4.9.1 Notations 2988.4.9.2 Problem Formulation 3008.4.9.3 Implementation 3008.4.9.4 Considering Other Factors 3038.5 Other Sources of Value 3038.5.1 Sharing Reserve 3038.5.2 Sharing Balancing Capacity 3068.5.3 Sharing Generation Capacity Margin 3088.6 Decentralized Transmission Expansion 3108.6.1 Concept 3108.6.2 Illustration on a Two-bus System 3118.7 Non-wires Alternatives for Transmission Expansion 3148.8 Problems 315References 316Further Reading 317Index 319

DANIEL S. KIRSCHEN, PHD, is the Donald W. and Ruth Mary Close Professor of Electrical Engineering at the University of Washington, Seattle, USA. GORAN STRBAC, PHD, is a Professor of Energy Systems at Imperial College London, UK. He is also a member of the Steering Committee of the SmartGrids European Technology Platform, co-chair of EU WG on Sustainable Districts and Built Environment of Smart Cities, and Director of the UK Centre for Grid Scale Energy Storage.

• Preface to the First Edition xiiiPreface to the Second Edition xv1 Introduction 11.1 Why Competition? 11.2 Market Structures and Participants 21.2.1 Traditional Model 21.2.2 Introducing Independent Power Producers 41.2.3 Wholesale Competition 51.2.4 Retail Competition 61.2.5 Renewable and Distributed Energy Resources 61.3 Dramatis Personae 71.4 Competition and Privatization 81.5 Experience and Open Questions 91.6 Problems 10Further Reading 112 Basic Concepts from Economics 132.1 Introduction 132.2 Fundamentals of Markets 132.2.1 Modeling the Consumers 132.2.1.1 Individual Demand 132.2.1.2 Surplus 142.2.1.3 Demand and Inverse Demand Functions 152.2.1.4 Elasticity of Demand 182.2.2 Modeling the Producers 182.2.2.1 Opportunity Cost 182.2.2.2 Supply and Inverse Supply Functions 192.2.2.3 Producers’ Revenue 202.2.2.4 Elasticity of Supply 202.2.3 Market Equilibrium 222.2.4 Pareto Efficiency 242.2.5 Global Welfare and Deadweight Loss 252.2.6 Time-varying Prices 262.3 Concepts from the Theory of the Firm 272.3.1 Inputs and Outputs 272.3.2 Long Run and Short Run 272.3.3 Costs 302.3.3.1 Short-run Costs 302.3.3.2 Long-run Costs 322.4 Risk 342.5 Types of Markets 342.5.1 Spot Market 352.5.2 Forward Contracts and Forward Markets 352.5.3 Futures Contracts and Futures Markets 372.5.4 Options 382.5.5 Contracts for Difference 392.5.6 Managing the Price Risks 402.5.7 Market Efficiency 412.6 Markets with Imperfect Competition 412.6.1 Market Power 412.6.2 Monopoly 422.7 Problems 43Further Reading 493 Markets for Electrical Energy 513.1 What Is the Difference Between a Megawatt-hour and a Barrel of Oil? 513.2 Trading Periods 523.3 Forward Markets 533.3.1 Bilateral or Decentralized Trading 543.3.2 Centralized Trading 573.3.2.1 Principles of Centralized Trading 573.3.2.2 Day-ahead Centralized Trading 593.3.2.3 Formulation as an Optimization Problem 603.3.2.4 Market Clearing Price 613.3.2.5 Recovering the Fixed Costs 633.3.3 Comparison of Centralized and Decentralized Trading 673.4 Spot Markets 683.4.1 Obtaining Balancing Resources 693.4.2 Gate Closure 703.4.3 Operation of the Spot Market 703.4.4 Interactions Between the Spot Market and the Forward Market 723.5 The Settlement Process 733.6 Problems 75References 86Further Reading 864 Participating in Markets for Electrical Energy 894.1 Introduction 894.2 The Consumer’s Perspective 894.3 The Retailer’s Perspective 914.4 The Producer’s Perspective 984.4.1 Perfect Competition 984.4.1.1 Basic Dispatch 984.4.1.2 Unit Limits 994.4.1.3 Piecewise Linear Cost Curves 1004.4.1.4 No-load Cost 1014.4.1.5 Scheduling 1024.4.1.6 Startup Cost 1034.4.1.7 Operating Constraints 1044.4.1.8 Environmental Constraints 1054.4.1.9 Other Economic Opportunities 1054.4.1.10 Forecasting Errors 1054.4.2 The Produce Vs Purchase Decision 1054.4.3 Imperfect Competition 1074.4.3.1 Bertrand Model 1084.4.3.2 Cournot Model 1094.4.3.3 Supply Functions Equilibria 1164.4.3.4 Agent-Based Modeling 1174.4.3.5 Experimental Economics 1174.4.3.6 Limitations of These Models 1174.5 Perspective of Plants That Do Not Burn Fossil Fuels 1174.5.1 Nuclear Power Plants 1184.5.2 Hydroelectric Power Plants 1184.5.3 Wind and Solar Generation 1194.5.3.1 Intermittency and Stochasticity 1194.5.3.2 Government Policies and Subsidies 1194.5.3.3 Effect on the Markets 1204.6 The Storage Owner’s Perspective 1214.6.1 Self-scheduling 1214.6.2 Centralized Operation 1224.7 The Flexible Consumer’s Perspective 1254.7.1 Flexible Demand Vs Storage 1254.7.2 Remunerating Flexible Demand 1264.7.3 Implementation Issues 1264.8 The Neighbor’s Perspective 1314.9 An Overall Market Perspective 1314.9.1 Clearing the Market 1314.9.2 Exercising Market Power 1334.9.3 Dealing with Market Power 1354.10 Problems 136Further Reading 1385 Transmission Networks and Electricity Markets 1415.1 Introduction 1415.2 Decentralized Trading over a Transmission Network 1415.2.1 Physical Transmission Rights 1425.2.2 Problems with Physical Transmission Rights 1435.2.2.1 Parallel Paths 1435.2.2.2 Example 1445.2.2.3 Physical Transmission Rights and Market Power 1475.3 Centralized Trading over a Transmission Network 1485.3.1 Centralized Trading in a Two-Bus System 1485.3.1.1 Unconstrained Transmission 1495.3.1.2 Constrained Transmission 1505.3.1.3 Congestion Surplus 1535.3.2 Centralized Trading in a Three-Bus System 1555.3.2.1 Economic Dispatch 1565.3.2.2 Correcting the Economic Dispatch 1595.3.2.3 Nodal Prices 1625.3.2.4 Congestion Surplus 1675.3.2.5 Economically Counterintuitive Flows 1675.3.2.6 Economically Counterintuitive Prices 1695.3.2.7 More Economically Counterintuitive Prices 1715.3.2.8 Nodal Pricing and Market Power 1715.3.2.9 A Few Comments on Nodal Marginal Prices 1735.3.3 Losses in Transmission Networks 1745.3.3.1 Types of Losses 1745.3.3.2 Marginal Cost of Losses 1745.3.3.3 Effect of Losses on Generation Dispatch 1765.3.3.4 Merchandising Surplus 1785.3.3.5 Combining Losses and Congestion 1785.3.3.6 Handling of Losses Under Bilateral Trading 1795.3.4 Mathematical Formulation of Nodal Pricing 1795.3.4.1 Network with a Single Busbar 1795.3.4.2 Network of Infinite Capacity with Losses 1805.3.4.3 Network of Finite Capacity with Losses 1825.3.4.4 Network of Finite Capacity, DC Power Flow Approximation 1845.3.4.5 AC Modeling 1875.3.5 Managing Transmission Risks in a Centralized Trading System 1885.3.5.1 The Need for Network-Related Contracts 1885.3.5.2 Financial Transmission Rights 1895.3.5.3 Point-to-Point Financial Transmission Rights 1915.3.5.4 Flowgate Rights 1955.4 Problems 195References 202Further Reading 2026 Power System Operation 2036.1 Introduction 2036.1.1 The Need for Operational Reliability 2036.1.2 The Value of Reliability 2046.1.3 The Cost of Reliability 2046.1.4 Procuring Reliability Resources 2066.1.5 Outline of the Chapter 2066.2 Operational Issues 2076.2.1 Balancing Issues 2076.2.1.1 Balancing Resources 2106.2.1.2 Effect of Generation from Stochastic Renewable Sources 2126.2.2 Network Issues 2126.2.2.1 Limits on Power Transfers 2126.2.2.2 Voltage Control and Reactive Support 2146.2.2.3 Stability Services 2186.2.3 System Restoration 2186.2.4 Market Models Vs Operational Models 2196.3 Obtaining Reliability Resources 2196.3.1 Compulsory Provision 2196.3.2 Market for Reliability Resources 2206.3.3 System Balancing with a Significant Proportion of Variable Renewable Generation 2216.3.4 Creating a Level-playing Field 2226.4 Buying Reliability Resources 2236.4.1 Quantifying the Needs 2236.4.2 Co-optimization of Energy and Reserve in a Centralized Electricity Market 2246.4.3 Allocation of Transmission Capacity Between Energy and Reserve 2326.4.4 Allocating the Costs 2376.4.4.1 Who Should Pay for Reserve? 2376.4.4.2 Who Should Pay for Regulation and Load Following? 2386.5 Selling Reliability Resources 2386.6 Problems 243References 246Further Reading 2477 Investing in Generation 2497.1 Introduction 2497.2 Generation Capacity from an Investor’s Perspective 2497.2.1 Building New Generation Capacity 2497.2.2 Retiring Generation Capacity 2557.2.3 Effect of a Cyclical Demand 2577.3 Generation Capacity from the Customers’ Perspective 2607.3.1 Expansion Driven by the Market for Electrical Energy 2617.3.2 Capacity Payments 2637.3.3 Capacity Market 2647.3.4 Reliability Contracts 2657.4 Generation Capacity from Renewable Sources 2667.4.1 The Investors’ Perspective 2667.4.2 The Consumers’ Perspective 2677.5 Problems 267References 269Further Reading 2708 Investing in Transmission 2718.1 Introduction 2718.2 The Nature of the Transmission Business 2728.3 Cost-Based Transmission Expansion 2738.3.1 Setting the Level of Investment in Transmission Capacity 2748.3.2 Allocating the Cost of Transmission 2748.3.2.1 Postage Stamp Method 2758.3.2.2 Contract Path Method 2758.3.2.3 MW-mile Method 2768.3.2.4 Discussion 2768.4 The Arbitrage Value of Transmission 2768.4.1 The Transmission Demand Function 2788.4.2 The Transmission Supply Function 2808.4.3 Optimal Transmission Capacity 2818.4.4 Balancing the Cost of Constraints and the Cost of Investments 2828.4.5 Effect of Load Fluctuations 2838.4.5.1 Load-duration Curve 2848.4.5.2 Recovery of Variable Transmission Investment Costs 2878.4.6 Revenue Recovery for Suboptimal Transmission Capacity 2888.4.7 Economies of Scale 2908.4.8 Transmission Expansion in a Meshed Network 2928.4.9 Concept of Reference Network 2988.4.9.1 Notations 2988.4.9.2 Problem Formulation 3008.4.9.3 Implementation 3008.4.9.4 Considering Other Factors 3038.5 Other Sources of Value 3038.5.1 Sharing Reserve 3038.5.2 Sharing Balancing Capacity 3068.5.3 Sharing Generation Capacity Margin 3088.6 Decentralized Transmission Expansion 3108.6.1 Concept 3108.6.2 Illustration on a Two-bus System 3118.7 Non-wires Alternatives for Transmission Expansion 3148.8 Problems 315References 316Further Reading 317Index 319

DANIEL S. KIRSCHEN, PHD, is the Donald W. and Ruth Mary Close Professor of Electrical Engineering at the University of Washington, Seattle, USA. GORAN STRBAC, PHD, is a Professor of Energy Systems at Imperial College London, UK. He is also a member of the Steering Committee of the SmartGrids European Technology Platform, co-chair of EU WG on Sustainable Districts and Built Environment of Smart Cities, and Director of the UK Centre for Grid Scale Energy Storage.

• Preface to the First Edition xiiiPreface to the Second Edition xv1 Introduction 11.1 Why Competition? 11.2 Market Structures and Participants 21.2.1 Traditional Model 21.2.2 Introducing Independent Power Producers 41.2.3 Wholesale Competition 51.2.4 Retail Competition 61.2.5 Renewable and Distributed Energy Resources 61.3 Dramatis Personae 71.4 Competition and Privatization 81.5 Experience and Open Questions 91.6 Problems 10Further Reading 112 Basic Concepts from Economics 132.1 Introduction 132.2 Fundamentals of Markets 132.2.1 Modeling the Consumers 132.2.1.1 Individual Demand 132.2.1.2 Surplus 142.2.1.3 Demand and Inverse Demand Functions 152.2.1.4 Elasticity of Demand 182.2.2 Modeling the Producers 182.2.2.1 Opportunity Cost 182.2.2.2 Supply and Inverse Supply Functions 192.2.2.3 Producers’ Revenue 202.2.2.4 Elasticity of Supply 202.2.3 Market Equilibrium 222.2.4 Pareto Efficiency 242.2.5 Global Welfare and Deadweight Loss 252.2.6 Time-varying Prices 262.3 Concepts from the Theory of the Firm 272.3.1 Inputs and Outputs 272.3.2 Long Run and Short Run 272.3.3 Costs 302.3.3.1 Short-run Costs 302.3.3.2 Long-run Costs 322.4 Risk 342.5 Types of Markets 342.5.1 Spot Market 352.5.2 Forward Contracts and Forward Markets 352.5.3 Futures Contracts and Futures Markets 372.5.4 Options 382.5.5 Contracts for Difference 392.5.6 Managing the Price Risks 402.5.7 Market Efficiency 412.6 Markets with Imperfect Competition 412.6.1 Market Power 412.6.2 Monopoly 422.7 Problems 43Further Reading 493 Markets for Electrical Energy 513.1 What Is the Difference Between a Megawatt-hour and a Barrel of Oil? 513.2 Trading Periods 523.3 Forward Markets 533.3.1 Bilateral or Decentralized Trading 543.3.2 Centralized Trading 573.3.2.1 Principles of Centralized Trading 573.3.2.2 Day-ahead Centralized Trading 593.3.2.3 Formulation as an Optimization Problem 603.3.2.4 Market Clearing Price 613.3.2.5 Recovering the Fixed Costs 633.3.3 Comparison of Centralized and Decentralized Trading 673.4 Spot Markets 683.4.1 Obtaining Balancing Resources 693.4.2 Gate Closure 703.4.3 Operation of the Spot Market 703.4.4 Interactions Between the Spot Market and the Forward Market 723.5 The Settlement Process 733.6 Problems 75References 86Further Reading 864 Participating in Markets for Electrical Energy 894.1 Introduction 894.2 The Consumer’s Perspective 894.3 The Retailer’s Perspective 914.4 The Producer’s Perspective 984.4.1 Perfect Competition 984.4.1.1 Basic Dispatch 984.4.1.2 Unit Limits 994.4.1.3 Piecewise Linear Cost Curves 1004.4.1.4 No-load Cost 1014.4.1.5 Scheduling 1024.4.1.6 Startup Cost 1034.4.1.7 Operating Constraints 1044.4.1.8 Environmental Constraints 1054.4.1.9 Other Economic Opportunities 1054.4.1.10 Forecasting Errors 1054.4.2 The Produce Vs Purchase Decision 1054.4.3 Imperfect Competition 1074.4.3.1 Bertrand Model 1084.4.3.2 Cournot Model 1094.4.3.3 Supply Functions Equilibria 1164.4.3.4 Agent-Based Modeling 1174.4.3.5 Experimental Economics 1174.4.3.6 Limitations of These Models 1174.5 Perspective of Plants That Do Not Burn Fossil Fuels 1174.5.1 Nuclear Power Plants 1184.5.2 Hydroelectric Power Plants 1184.5.3 Wind and Solar Generation 1194.5.3.1 Intermittency and Stochasticity 1194.5.3.2 Government Policies and Subsidies 1194.5.3.3 Effect on the Markets 1204.6 The Storage Owner’s Perspective 1214.6.1 Self-scheduling 1214.6.2 Centralized Operation 1224.7 The Flexible Consumer’s Perspective 1254.7.1 Flexible Demand Vs Storage 1254.7.2 Remunerating Flexible Demand 1264.7.3 Implementation Issues 1264.8 The Neighbor’s Perspective 1314.9 An Overall Market Perspective 1314.9.1 Clearing the Market 1314.9.2 Exercising Market Power 1334.9.3 Dealing with Market Power 1354.10 Problems 136Further Reading 1385 Transmission Networks and Electricity Markets 1415.1 Introduction 1415.2 Decentralized Trading over a Transmission Network 1415.2.1 Physical Transmission Rights 1425.2.2 Problems with Physical Transmission Rights 1435.2.2.1 Parallel Paths 1435.2.2.2 Example 1445.2.2.3 Physical Transmission Rights and Market Power 1475.3 Centralized Trading over a Transmission Network 1485.3.1 Centralized Trading in a Two-Bus System 1485.3.1.1 Unconstrained Transmission 1495.3.1.2 Constrained Transmission 1505.3.1.3 Congestion Surplus 1535.3.2 Centralized Trading in a Three-Bus System 1555.3.2.1 Economic Dispatch 1565.3.2.2 Correcting the Economic Dispatch 1595.3.2.3 Nodal Prices 1625.3.2.4 Congestion Surplus 1675.3.2.5 Economically Counterintuitive Flows 1675.3.2.6 Economically Counterintuitive Prices 1695.3.2.7 More Economically Counterintuitive Prices 1715.3.2.8 Nodal Pricing and Market Power 1715.3.2.9 A Few Comments on Nodal Marginal Prices 1735.3.3 Losses in Transmission Networks 1745.3.3.1 Types of Losses 1745.3.3.2 Marginal Cost of Losses 1745.3.3.3 Effect of Losses on Generation Dispatch 1765.3.3.4 Merchandising Surplus 1785.3.3.5 Combining Losses and Congestion 1785.3.3.6 Handling of Losses Under Bilateral Trading 1795.3.4 Mathematical Formulation of Nodal Pricing 1795.3.4.1 Network with a Single Busbar 1795.3.4.2 Network of Infinite Capacity with Losses 1805.3.4.3 Network of Finite Capacity with Losses 1825.3.4.4 Network of Finite Capacity, DC Power Flow Approximation 1845.3.4.5 AC Modeling 1875.3.5 Managing Transmission Risks in a Centralized Trading System 1885.3.5.1 The Need for Network-Related Contracts 1885.3.5.2 Financial Transmission Rights 1895.3.5.3 Point-to-Point Financial Transmission Rights 1915.3.5.4 Flowgate Rights 1955.4 Problems 195References 202Further Reading 2026 Power System Operation 2036.1 Introduction 2036.1.1 The Need for Operational Reliability 2036.1.2 The Value of Reliability 2046.1.3 The Cost of Reliability 2046.1.4 Procuring Reliability Resources 2066.1.5 Outline of the Chapter 2066.2 Operational Issues 2076.2.1 Balancing Issues 2076.2.1.1 Balancing Resources 2106.2.1.2 Effect of Generation from Stochastic Renewable Sources 2126.2.2 Network Issues 2126.2.2.1 Limits on Power Transfers 2126.2.2.2 Voltage Control and Reactive Support 2146.2.2.3 Stability Services 2186.2.3 System Restoration 2186.2.4 Market Models Vs Operational Models 2196.3 Obtaining Reliability Resources 2196.3.1 Compulsory Provision 2196.3.2 Market for Reliability Resources 2206.3.3 System Balancing with a Significant Proportion of Variable Renewable Generation 2216.3.4 Creating a Level-playing Field 2226.4 Buying Reliability Resources 2236.4.1 Quantifying the Needs 2236.4.2 Co-optimization of Energy and Reserve in a Centralized Electricity Market 2246.4.3 Allocation of Transmission Capacity Between Energy and Reserve 2326.4.4 Allocating the Costs 2376.4.4.1 Who Should Pay for Reserve? 2376.4.4.2 Who Should Pay for Regulation and Load Following? 2386.5 Selling Reliability Resources 2386.6 Problems 243References 246Further Reading 2477 Investing in Generation 2497.1 Introduction 2497.2 Generation Capacity from an Investor’s Perspective 2497.2.1 Building New Generation Capacity 2497.2.2 Retiring Generation Capacity 2557.2.3 Effect of a Cyclical Demand 2577.3 Generation Capacity from the Customers’ Perspective 2607.3.1 Expansion Driven by the Market for Electrical Energy 2617.3.2 Capacity Payments 2637.3.3 Capacity Market 2647.3.4 Reliability Contracts 2657.4 Generation Capacity from Renewable Sources 2667.4.1 The Investors’ Perspective 2667.4.2 The Consumers’ Perspective 2677.5 Problems 267References 269Further Reading 2708 Investing in Transmission 2718.1 Introduction 2718.2 The Nature of the Transmission Business 2728.3 Cost-Based Transmission Expansion 2738.3.1 Setting the Level of Investment in Transmission Capacity 2748.3.2 Allocating the Cost of Transmission 2748.3.2.1 Postage Stamp Method 2758.3.2.2 Contract Path Method 2758.3.2.3 MW-mile Method 2768.3.2.4 Discussion 2768.4 The Arbitrage Value of Transmission 2768.4.1 The Transmission Demand Function 2788.4.2 The Transmission Supply Function 2808.4.3 Optimal Transmission Capacity 2818.4.4 Balancing the Cost of Constraints and the Cost of Investments 2828.4.5 Effect of Load Fluctuations 2838.4.5.1 Load-duration Curve 2848.4.5.2 Recovery of Variable Transmission Investment Costs 2878.4.6 Revenue Recovery for Suboptimal Transmission Capacity 2888.4.7 Economies of Scale 2908.4.8 Transmission Expansion in a Meshed Network 2928.4.9 Concept of Reference Network 2988.4.9.1 Notations 2988.4.9.2 Problem Formulation 3008.4.9.3 Implementation 3008.4.9.4 Considering Other Factors 3038.5 Other Sources of Value 3038.5.1 Sharing Reserve 3038.5.2 Sharing Balancing Capacity 3068.5.3 Sharing Generation Capacity Margin 3088.6 Decentralized Transmission Expansion 3108.6.1 Concept 3108.6.2 Illustration on a Two-bus System 3118.7 Non-wires Alternatives for Transmission Expansion 3148.8 Problems 315References 316Further Reading 317Index 319