Dr Biggar is Australia's leading expert on the economics of wholesale electricity markets and the economics of public utility regulation. Since 2002 he has provided economic advice primarily to the Australian Energy Regulator and the Australian Competition and Consumer Commission. He has also provided advice to other government agencies including the Australian Energy Markets Operator, the Australian Energy Markets Commission, and the New Zealand Electricity Authority. He has published a number of papers in academic journals in the economics of electricity markets and the economics of public utility regulation and regularly provides training courses in these areas to government agencies and industry. He has a particular interest in the assessment of market power in wholesale electricity markets and in matters related to wholesale market design.

Dr Hesamzadeh is assistant professor in electric power systems division of the school of electrical engineering at KTH Royal Institute of Technology in Stockholm, Sweden. Dr Hesamzadeh is a world leader in the modelling of market power in wholesale electricity markets, particularly in the context of transmission planning. His special fields of interests include Power Systems Planning and Design, Economics of Wholesale Electricity Markets, and Mathematical Modelling and Computing. Hesamzadeh is currently working towards his Docent degree in Electricity Markets at KTH.

Preface xv

Nomenclature xvii

PART I INTRODUCTION TO ECONOMIC CONCEPTS 1

1 Introduction to Micro-economics 3

1.1 Economic Objectives 3

1.2 Introduction to Constrained Optimisation 5

1.3 Demand and Consumers' Surplus 6

1.3.1 The Short-Run Decision of the Customer 7

1.3.2 The Value or Utility Function 7

1.3.3 The Demand Curve for a Price-Taking Customer Facing a Simple Price 7

1.4 Supply and Producers' Surplus 10

1.4.1 The Cost Function 11

1.4.2 The Supply Curve for a Price-Taking Firm Facing a Simple Price 11

1.5 Achieving Optimal Short-Run Outcomes Using Competitive Markets 14

1.5.1 The Short-Run Welfare Maximum 14

1.5.2 An Autonomous Market Process 15

1.6 Smart Markets 17

1.6.1 Smart Markets and Generic Constraints 17

1.6.2 A Smart Market Process 18

1.7 Longer-Run Decisions by Producers and Consumers 20

1.7.1 Investment in Productive Capacity 20

1.8 Monopoly 22

1.8.1 The Dominant Firm - Competitive Fringe Structure 24

1.8.2 Monopoly and Price Regulation 25

1.9 Oligopoly 26

1.9.1 Cournot Oligopoly 27

1.9.2 Repeated Games 27

1.10 Summary 28

Questions 29

Further Reading 30

PART II INTRODUCTION TO ELECTRICITY NETWORKS AND ELECTRICITY MARKETS 31

2 Introduction to Electric Power Systems 33

2.1 DC Circuit Concepts 33

2.1.1 Energy, Watts and Power 34

2.1.2 Losses 35

2.2 AC Circuit Concepts 36

2.3 Reactive Power 38

2.3.1 Mathematics of Reactive Power 40

2.3.2 Control of Reactive Power 42

2.3.3 Ohm's Law on AC Circuits 43

2.3.4 Three-Phase Power 44

2.4 The Elements of an Electric Power System 45

2.5 Electricity Generation 46

2.5.1 The Key Characteristics of Electricity Generators 49

2.6 Electricity Transmission and Distribution Networks 52

2.6.1 Transmission Networks 54

2.6.2 Distribution Networks 57

2.6.3 Competition and Regulation 59

2.7 Physical Limits on Networks 60

2.7.1 Thermal Limits 61

2.7.2 Voltage Stability Limits 64

2.7.3 Dynamic and Transient Stability Limits 64

2.8 Electricity Consumption 66

2.9 Does it Make Sense to Distinguish Electricity Producers and Consumers? 67

2.9.1 The Service Provided by the Electric Power Industry 69

2.10 Summary 70

Questions 71

Further Reading 72

3 Electricity Industry Market Structure and Competition 73

3.1 Tasks Performed in an Efficient Electricity Industry 73

3.1.1 Short-Term Tasks 73

3.1.2 Risk-Management Tasks 75

3.1.3 Long-Term Tasks 75

3.2 Electricity Industry Reforms 76

3.2.1 Market-Orientated Reforms of the Late Twentieth Century 77

3.3 Approaches to Reform of the Electricity Industry 79

3.4 Other Key Roles in a Market-Orientated Electric Power System 81

3.5 An Overview of Liberalised Electricity Markets 82

3.6 An Overview of the Australian National Electricity Market 85

3.6.1 Assessment of the NEM 87

3.7 The Pros and Cons of Electricity Market Reform 88

3.8 Summary 89

Questions 90

Further Reading 90

PART III OPTIMAL DISPATCH: THE EFFICIENT USE OF GENERATION, CONSUMPTION AND NETWORK RESOURCES 91

4 Efficient Short-Term Operation of an Electricity Industry with no Network Constraints 93

4.1 The Cost of Generation 93

4.2 Simple Stylised Representation of a Generator 96

4.3 Optimal Dispatch of Generation with Inelastic Demand 97

4.3.1 Optimal Least Cost Dispatch of Generation Resources 98

4.3.2 Least Cost Dispatch for Generators with Constant Variable Cost 99

4.3.3 Example 101

4.4 Optimal Dispatch of Both Generation and Load Assets 102

4.5 Symmetry in the Treatment of Generation and Load 104

4.5.1 Symmetry Between Buyer-Owned Generators and Stand-Alone Generators 104

4.5.2 Symmetry Between Total Surplus Maximisation and Generation Cost Minimisation 105

4.6 The Benefit Function 105

4.7 Nonconvexities in Production: Minimum Operating Levels 106

4.8 Efficient Dispatch of Energy-Limited Resources 108

4.8.1 Example 109

4.9 Efficient Dispatch in the Presence of Ramp-Rate Constraints 110

4.9.1 Example 111

4.10 Startup Costs and the Unit-Commitment Decision 113

4.11 Summary 115

Questions 116

Further Reading 117

5 Achieving Efficient Use of Generation and Load Resources using a Market Mechanism in an Industry with no Network Constraints 119

5.1 Decentralisation, Competition and Market Mechanisms 119

5.2 Achieving Optimal Dispatch Through Competitive Bidding 121

5.3 Variation in Wholesale Market Design 123

5.3.1 Compulsory Gross Pool or Net Pool? 124

5.3.2 Single Price or Pay-as-Bid? 125

5.4 Day-Ahead Versus Real-Time Markets 126

5.4.1 Improving the Quality of Short-Term Price Forecasts 127

5.4.2 Reducing the Exercise of Market Power 129

5.5 Price Controls and Rationing 129

5.5.1 Inadequate Metering and Involuntary Load Shedding 131

5.6 Time-Varying Demand, the Load-Duration Curve and the Price-Duration Curve 133

5.7 Summary 135

Questions 137

Further Reading 137

6 Representing Network Constraints 139

6.1 Representing Networks Mathematically 139

6.2 Net Injections, Power Flows and the DC Load Flow Model 141

6.2.1 The DC Load Flow Model 144

6.3 The Matrix of Power Transfer Distribution Factors 145

6.3.1 Converting between Reference Nodes 146

6.4 Distribution Factors for Radial Networks 146

6.5 Constraint Equations and the Set of Feasible Injections 147

6.6 Summary 151

Questions 152

7 Efficient Dispatch of Generation and Consumption Resources in the Presence of Network Congestion 153

7.1 Optimal Dispatch with Network Constraints 153

7.1.1 Achieving Optimal Dispatch Using a Smart Market 155

7.2 Optimal Dispatch in a Radial Network 156

7.3 Optimal Dispatch in a Two-Node Network 157

7.4 Optimal Dispatch in a Three-Node Meshed Network 159

7.5 Optimal Dispatch in a Four-Node Network 161

7.6 Properties of Nodal Prices with a Single Binding Constraint 162

7.7 How Many Independent Nodal Prices Exist? 163

7.8 The Merchandising Surplus, Settlement Residues and the Congestion Rents 163

7.8.1 Merchandising Surplus and Congestion Rents 163

7.8.2 Settlement Residues 164

7.8.3 Merchandising Surplus in a Three-Node Network 165

7.9 Network Losses 166

7.9.1 Losses, Settlement Residues and Merchandising Surplus 167

7.9.2 Losses and Optimal Dispatch 168

7.10 Summary 169

Questions 170

Further Reading 170

8 Efficient Network Operation 171

8.1 Efficient Operation of DC Interconnectors 171

8.1.1 Entrepreneurial DC Network Operation 173

8.2 Optimal Network Switching 173

8.2.1 Network Switching and Network Contingencies 174

8.2.2 A Worked Example 174

8.2.3 Entrepreneurial Network Switching? 176

8.3 Summary 177

Questions 178

Further Reading 178

PART IV EFFICIENT INVESTMENT IN GENERATION AND CONSUMPTION ASSETS 179

9 Efficient Investment in Generation and Consumption Assets 181

9.1 The Optimal Generation Investment Problem 181

9.2 The Optimal Level of Generation Capacity with Downward Sloping Demand 183

9.2.1 The Case of Inelastic Demand 185

9.3 The Optimal Mix of Generation Capacity with Downward Sloping Demand 186

9.4 The Optimal Mix of Generation with Inelastic Demand 189

9.5 Screening Curve Analysis 191

9.5.1 Using Screening Curves to Assess the Impact of Increased Renewable Penetration 192

9.5.2 Generation Investment in the Presence of Network Constraints 193

9.6 Buyer-Side Investment 193

9.7 Summary 195

Questions 196

Further Reading 197

10 Market-Based Investment in Electricity Generation 199

10.1 Decentralised Generation Investment Decisions 199

10.2 Can We Trust Competitive Markets to Deliver an Efficient Level of Investment in Generation? 201

10.2.1 Episodes of High Prices as an Essential Part of an Energy-Only Market 201

10.2.2 The 'Missing Money' Problem 202

10.2.3 Energy-Only Markets and the Investment Boom-Bust Cycle 203

10.3 Price Caps, Reserve Margins and Capacity Payments 203

10.3.1 Reserve Requirements 204

10.3.2 Capacity Markets 205

10.4 Time-Averaging of Network Charges and Generation Investment 206

10.5 Summary 207

Questions 207

PART V HANDLING CONTINGENCIES: EFFICIENT DISPATCH IN THE VERY SHORT RUN 209

11 Efficient Operation of the Power System in the Very Short-Run 211

11.1 Introduction to Contingencies 211

11.2 Efficient Handling of Contingencies 212

11.3 Preventive and Corrective Actions 213

11.4 Satisfactory and Secure Operating States 215

11.5 Optimal Dispatch in the Very Short Run 216

11.6 Operating the Power System Ex Ante as though Certain Contingencies have Already Happened 218

11.7 Examples of Optimal Short-Run Dispatch 219

11.7.1 A Second Example, Ignoring Network Constraints 221

11.7.2 A Further Example with Network Constraints 222

11.8 Optimal Short-Run Dispatch Using a Competitive Market 223

11.8.1 A Simple Example 224

11.8.2 Optimal Short-Run Dispatch through Prices 227

11.8.3 Investment Incentives 228

11.9 Summary 229

Questions 230