An MHRD Project

National Mission on Education through

ICT (NME-ICT)

Project proposal of e- Content for Post graduate courses

RESTRUCTURED POWER SYSTEM

Principal Investigator

A.Revethy Jemimah M.E

Assistant Professor, Electrical and Electronics Engineering

LATHAMATHAVAN ENGINEERING COLLEGE

ALAGAR KOIL, MADURAI – 625 301 , TAMILNADU.
 LATHA MATHAVAN ENGINEERING COLLEGE
Latha Mathavan Engineering College was established on 23rd September 2007 run by

Karuppiah Pillai Theivanaiammal Educational Trust and it was approved by AICTE, New Delhi

and affiliated to Anna University, Chennai. 750 students are studying in our college. The

college functions with 120 Teaching staff and 50 Non -Teaching Staff. Our college has received

ISO 9001: 2008 certification from TUV SUD, Germany. Besides the college signed MOU with

several companies. The college installed a 50 KW solar wind hybrid power Generation at the

cost of 1Crore. We have secured the department of Civil Engineering, Computer Science and

Engineering, Electronics and Communication Engineering, Mechanical Engineering and

Science and Humanities. Training and Placement cell holds a remarkable placement profile

for every year. Our institution facilitated with various ONCAMPUS & OFF-CAMPUS

PLACEMENT. Our institution started women empowerment cell on 8th March 2012. The main

objective of this cell is to empower girl students by sharing the issues – professional and

personal front and finding Solutions. The College provides good and safe hostel facilities for

both boys and girls to cater to the needs of outstation students. Two Generator facilities are

also available in our college. In addition, the college has implanted Mineral water facility at 3

locations in our college premises. The activities of the NSS and NCC unit of our college are for

the benefit of the society at large.

Biography: Ms.A.Revathy Jemimah

Ms.A.Revathy Jemimah is a Assistant Professor in the department of Electrical and

Electronics Engineering, Latha Mathavan Engineering College, Madurai. She received the
degrees B.E. (EEE) from Ultra College of Engineering, Cuddalore and M.E. (Power Systems
Engineering) from K.L.N.College of Engineering, Madurai.
She has presented 3 papers in national and international conferences. She has published 2
papers in international journals.
She has 1 year of teaching experience. She has handled various papers in the field of
Electrical and Electronics engineering in her teaching career.
 RESTRUCTURED POWER SYSTEM

ABSTRACT

This course content “Restructured Power System” comes at a time when the
deregulation process is poised to undergo further rapid advancements. It is envisaged that the
reader will benefit by way of an enhanced understanding of power system operations in the
conventional vertically integrated environment vis-a-vis the deregulated environment. The course
content is aimed at a wide range of audience- electric utility personnel involved in scheduling,
dispatch, grid operations energy trading businesses and electricity markets, institutions involved
in energy sector financing.
The deregulation of the industry has provided electrical energy with a new dimension
where it is being considered as a commodity. The „commodity‟ status given to electrical power
has attracted entry of private players in the sector. The private players make the whole business
challenging from the system operator‟s point of view, as it now starts dealing with many players
which are not under it‟s direct control. This calls for introduction of fair and transparent set of
rules for running the power business. The market design structure plays an important role in
successful deregulation of power industry.
 ANNA UNIVERSITY, CHENNAI
REGULATION – 2013

PS7254 RESTRUCTURED POWER SYSTEM

UNIT I INTRODUCTION TO RESTRUCTURING OF POWER INDUSTRY

Introduction: Deregulation of power industry, Restructuring process, Issues involved in

deregulation, Deregulation of various power systems – Fundamentals of Economics: Consumer
behavior, Supplier behavior, Market equilibrium, Short and long run costs, Various costs of
production – Market models: Market models based on Contractual arrangements, Comparison of
various market models, Electricity vis – a – vis other commodities, Market architecture, Case
study.

UNIT II TRANSMISSION CONGESTION MANAGEMENT

Introduction: Definition of Congestion, reasons for transfer capability limitation, Importance of

congestion management, Features of congestion management – Classification of congestion
management methods – Calculation of ATC - Non – market methods – Market methods – Nodal
pricing – Inter zonal and Intra zonal congestion management – Price area congestion
management – Capacity alleviation method.

UNIT III LOCATIONAL MARGINAL PRICES AND FINANCIAL TRANSMISSION

RIGHTS

Mathematical preliminaries: - Locational marginal pricing– Lossless DCOPF model for LMP
calculation – Loss compensated DCOPF model for LMP calculation – ACOPF model for LMP
calculation – Financial Transmission rights – Risk hedging functionality - Simultaneous
feasibility test and revenue adequency – FTR issuance process: FTR auction, FTR allocation –
Treatment of revenue shortfall – Secondary trading of FTRs – Flow gate rights – FTR and
market power - FTR and merchant transmission investment.

UNIT IV ANCILLARY SERVICE MANAGEMENT AND PRICING OF

TRANSMISSION NETWORK

Introduction of ancillary services – Types of Ancillary services – Classification of Ancillary

services – Load generation balancing related services – Voltage control and reactive power
support devices – Black start capability service - How to obtain ancillary service –Co-
optimization of energy and reserve services - International comparison Transmission pricing –
Principles – Classification – Rolled in transmission pricing methods – Marginal transmission
pricing paradigm – Composite pricing paradigm – Merits and demerits of different paradigm.

UNIT V REFORMS IN INDIAN POWER SECTOR

Introduction – Framework of Indian power sector – Reform initiatives - Availability based tariff
–Electricity act 2003 – Open access issues – Power exchange – Reforms in the near future

TOTAL: 45PERIODS
TEXT BOOKS

1. Mohammad Shahidehpour, Muwaffaq Alomoush, Marcel Dekker, “Restructured electrical

power systems: operation, trading and volatility” Pub., 2001
2. Kankar Bhattacharya, Jaap E. Daadler, Math H.J. Boolen,” Operation of restructured power
systems”, Kluwer Academic Pub., 2001.

REFERENCES

1. Sally Hunt,” Making competition work in electricity”, , John Willey and Sons Inc. 2002
2. Steven Stoft,” Power system economics: designing markets for electricity”, John Wiley &
Sons, 2002.

SYLLABUS COPY LINK:

https://www.annauniv.edu/academic_courses/WSA/03.%20Electrical/03.%20Pow%20sys%20E.pdf
 COURSE DELIVERY PLAN
Subject Name : Restructured Power System:

Name Of Faculty : Ms.A.Revathy Jemimah

S.NO TOPIC
Introduction: Deregulation of power industry, Restructuring process and Issues involved in

deregulation, Deregulation of various power systems

UNIT‐I Fundamentals of Economics: Consumer behavior, Supplier behavior, Market equilibrium,
Short and long run costs, Various costs of production
Market models: Market models based on Contractual arrangements

Comparison of various market models, Electricity vis – a – vis other commodities, Market
architecture ‐ Case study.
UNIT‐II Importance of congestion management, Features of congestion management, Classification of

congestion management methods, Calculation of ATC ‐ Non – market methods – Market methods
Nodal pricing, Inter zonal and Intra zonal congestion management, Price area congestion
management, Capacity alleviation method.
Mathematical preliminaries: Locational marginal pricing, Lossless DCOPF model for LMP
calculation, Loss compensated DCOPF model for LMP calculation, ACOPF model for LMP
calculation
UNIT- III Financial Transmission rights, Risk hedging functionality ‐ Simultaneous feasibility
test and revenue adequacy
FTR issuance process: FTR auction, FTR allocation, Treatment of revenue shortfall, Secondary
trading of FTRs, Flow gate rights, FTR and market power FTR and merchant transmission
investment
Introduction of ancillary services ‐ Types of Ancillary services, Classification of Ancillary
services, Load generation balancing related services
UNIT-IV Voltage control and reactive power support devices, Black start capability service
ancillary service –Co‐optimization of energy and reserve services, International comparison ‐

Transmission pricing – Principles

Classification – Role in transmission pricing methods, Marginal transmission pricing paradigm,
Composite pricing paradigm, Merits and demerits of different paradigm.
Reform initiatives, Availability based tariff,

UNIT-V
Electricity act 2003,Open access issues, Power exchange, Reforms in the near future
Case Study California ISO
REFERENCE BOOKS

1. Mohammad Shahidehpour, Muwaffaq Alomoush, Marcel Dekker, “Restructured

electrical power systems: operation, trading and volatility” Pub., 2001.
2. Kankar Bhattacharya, Jaap E. Daadler, Math H.J. Boolen, “Operation of
restructured power systems”, Kluwer Academic Pub., 2001.
3. Sally Hunt, “Making competition work in electricity”, John Willey and Sons Inc. 2002.
4. Steven Stoft, “Power system economics: designing markets for electricity”, John
Wiley & Sons, 2002.

WEBSITE REFERENCES:
1. www.ferc.fed.us
2. www.nordpool.no
3. www.caiso.com
4. www.natinalgrid.com
5. www.elexon.co.uk
6. www.fingrid.fi
7. www.svk.se
 UNIT I - INTRODUCTION TO RESTRUCTURING OF POWER INDUSTRY

1. Introduction
The major difference between regulation and competition emanates from the debate as to who
takes responsibility for various risks. In respect of electricity supply industry the risks could be any of
the following:
Cost and time overruns during construction.
Fuel supply: availability and price.
Technological changes: Obsolescence
Management decisions about manpower, investments and maintenance.
Market demand and pr-ices.
Credit risk.
Risk of payment default by off takers.
In the regulated regimes many of the old, inefficient or obsolete plants may continue to function and
recover investments while in the competitive regimes they may be out of the market. During regulated
regimes, overcapacity causes prices to increase as consumers do pay for the stranded capacity, whereas, in
a competitive environment, excess capacity causes prices to fall. Under competition, most of these risks
are borne at least initially by owners - they would be responsible for bad decisions as also for profits from
sound decision and managements practices. Investors also have strong urge to devise methods to hedge
these risks taking advantage of various instruments available in financial markets. Competition also
improves transparency adding significant value to the customers.
1.1 Challenges of making competition work in electricity
Introducing competition in electricity is based on the premise that the electricity can be treated as any
other commodity. There are, however, important differences between electric energy and other
commodities, which pose serious challenges in making it amenable to competition. These challenges
arise from the following:
a. Electricity cannot be stored:
Electrical energy is linked with a physical system where demand and supply must be balanced in
real time. This is because electricity cannot be economically stored. If this balance is not maintained,
the system collapses with catastrophic consequences.
b. Demand of electricity varies intra-day and between seasons:
Demand for electricity fluctuates widely within the hours of the day as also from season to season.
Since the electricity can not be stored, it has to be generated when it is needed. Not all generating units
will be producing throughout the day. When demand is low only most efficient plants will get
dispatched. Since the marginal producers change as the load increases or decreases, the prices also vary
over the course of the day. Such rapid cyclical variation in cost and price of a commodity are unusual.
c. Electricity travels in accordance with laws of Physics:

Electricity, not being a commodity in the conventional sense, there is no defined path for
delivery. Energy generated from a generator cannot be directed to a specific customer. A customer
simply gets whatever electricity was flowing in the wires he is connected to. Power produced by all
generators is pooled on its way to the load. Pooling has beneficial effects of economics of scale.
However, the downside is that any breakdown in a system affects everybody, not just the parties to a
specific transaction.
d. Electricity travels at the speed of light:
 The consequence of this property is that it requires advance planning and split second decision-
making and control by the load dispatcher to co-ordinate the generation and consumption. Speed of
decision making by market is often much slower than the speed of electricity. Balancing of supply and
demand of electricity is therefore difficult to be left to the market.
e. Electricity has demand side flaws:
Important demand side flaws in electricity are:-

(i) Lack of elasticity of demand - Electricity being essential for modern life, its demand responds only
minimally to price. Even in a country like India, the demand is becoming less elastic to price.
(ii) Ability of a load to draw power- from the grid without a prior agreement with supplier. Because

of this, it is often impossible to enforce bilateral contracts, as customers who exceed their contracted
demand cannot be disconnected. In such an event, some other supplier becomes the default supplier.
In an organized power market, the system operator often discharges this responsibility.

1.2 Electricity Market: Concepts & Fundamentals

1.2.1 Market defined
The Oxford Dictionary of Economics defines market as "A place or institution in which buyers
and sellers of a good or asset meet". A market to an economist means the entire set of conditions
surrounding production, transport and distribution of a product. Electricity markets are far more complex
as compared to other commodity markets because electricity market does not deal with one homogeneous
product but has to simultaneously take care of trading of ancillary services such as frequency response,
reactive power etc.
1.2.2 Fundamentals of market
A market must have the following elements to be effective and competitive
a. Many buyers and many sellers - neither to have market power to distort the functioning of
the market.
b. Buyers and sellers should be responsive to price.
c. Liquid and efficient market places.
d. Equal non-discriminatory access to essential facilities.
e. Treatment of subsidies and environmental controls so that they do not interfere with the working of
market.
Usually, commodity markets evolve themselves as time passes without a need for an institutional way to
design them. However, electricity has a long history of regulation leading to concentration of generation,
and customers are used to fixed and averaged prices, complexities in use and pricing of transmission
service. These reasons call for a deliberate effort to design electricity markets with rules governing such
markets. The market system decides what shall be produced, how resources shall be allocated in the
production process, and to whom various products will be distributed. The market relies on the consumer
to decide what and how much will be produced and which of the competitor; will produce it.
1.2.2.1 Demand
Demand indicates the behavior of buyers. The amount of an item that a person will purchase
cannot be determined without considering its price. A demand curve plotted in two dimensional
price/quantity graphs will be downwardly sloped reflecting the law of diminishing value. The value,
which a consumer will attach to successive units of a particular commodity, diminishes as his total
consumption of that commodity increases
1.2.2.2 Shifts in demand curve
 Whenever any determinant of demand changes, other than, the good's price, the demand curve
shifts. Any change that increases the quantity demanded at every price shifts the demand curve to the
right. Similarly any change that reduces the quantity demanded at every price shifts the demand curve to
the left.
1.2.2.3 Supply
Supply indicates the behavior of producers/ sellers. The quantity supplied of any good or service
is the amount that sellers are willing and able to sell. When price of a good is high, producing/ selling
more of it is profitable. Conversely when prices are low, business is less profitable and production
will be cut. Because quantity supplied rises as the prices rises and falls as the price falls, it is
said that quantity supplied is positively related to the price of the good. Supply curve therefore is
upwardly sloping.
1.2.2.4 Shifts in supply curve
Whenever there is any change in any determinant of supply, other than the good‟s price, the
supply curve shifts. Any change that raises quantity supplied at every price level shifts the
Supply curve to the right. Similarly, any change that reduces the quantity supplied at every price
level shifts the Supply curve to the left.
1.2.2.5 Market equilibrium
The price at which these two curves cross is the equilibrium price and the quantity is the
equilibrium quantity. At the equilibrium price, the quantity of the good that buyers are willing and able
to buy exactly balances the quantity that sellers are willing and able to sell. The equilibrium price is also
called market clearing price because at this point everyone in the market has been satisfied:
buyers have bought all that they want to buy and sellers have sold all that they want to sell.
1.2.2.6 Consumer's surplus
Consumer's surplus is the amount buyer is willing to pay for a good minus the amount the
buyer actually pays for it. Consumer's surplus represents the extra value that a consumer gets from

being able to buy all the pieces of a good at the same market price even though the value he
attaches to them is higher than the market price.
1.2.2.7 Producer's surplus
Producer's surplus measures the benefit sellers receive from participating in a market. Producer's
surplus is the amount a seller is paid minus the cost of production. Producer's surplus arises from the fact
that all the goods (except for the marginal production) are traded at a price that is higher than their
opportunity cost. Producers with a low opportunity cost capture a proportionately larger share of the
profit than those who have a higher opportunity cost.
1.2.2.8 Global welfare
The sum of the consumer's surplus and the producer's surplus is called global welfare. It
quantifies the overall benefit that arises from the trading.
1.3 Models Based on Contractual Arrangements
1.3.1 Pool Model
The Pool model is comprised of competitive power providers as obligatory members of an
independently owned regional power pool, vertically integrated distribution companies, vertically
integrated transmission companies and a single and separate entity responsible for: establishing bidding
procedures, scheduling and dispatching generation resources, acquiring necessary ancillary services to
assure system reliability, administering the settlements process and ensuring non-discriminatory access to
the transmission grid. The Pool operator does not own any generation or transmission components and
centrally dispatches all generating units within the service jurisdiction of the pool. PoolCo controls the
maintenance of transmission grid and encourages an efficient operation by assessing non-discriminatory
fees to generators and distributors to cover its operating costs.
In a Pool model, sellers and buyers submit their bids to inject their power into and out of the Pool.
Sellers compete for the right to inject power into the grid, not for specific customers. If a power provider
bids too high, it may not be able to sell its power, as his bid may not get selected. On the other hand,
buyers compete for buying power and if their bids are too low, they may not be getting any power. In this
arrangement, low cost generators would essentially be rewarded. Power pools would implement the
Optimal Power Flow (OPF) and produce a single (spot) price for electricity, giving participants a clear
signal for consumption and investment decisions.
Winning bidders are paid the spot price that is equal to the highest bid of the winners. Since the
spot price may exceed the actual running of selected bidders, bidders are encouraged to expand their
market share, which will force high cost generators to exit the market. Market dynamics will drive the
spot price to a competitive level that is equal to the marginal cost of most efficient firms.
Pool model is practiced in Chile, by the National Grid Company (NGC) in England and Wales till
2000, and in Argentina and stands at the core of all deregulated systems so far.
1.3.2 Bilateral Contracts Model
Bilateral contracts model has two characteristics that would distinguish it from the Pool model.
These are: The ISO‟s role is more limited; and buyers and sellers could negotiate directly in the
marketplace.
This model permits direct contracts between customers and generators without entering into
pooling arrangements. By establishing non-discriminatory access and pricing rules for transmission and
distribution systems, direct sales of power over a utility‟s transmission and distribution systems are
guaranteed. Wholesale suppliers would pay transmission charges to a transmission company to acquire
access to the transmission grid and pays similar charges to a distribution company to acquire access to the
local distribution grid. In this model, a distribution company may function as an aggregator for a large
number of retail customers in supplying a long-term capacity.
Also, the generation portion of a former integrated utility may function as a supplier or other
independent generating companies, and transmission system would serve as a common carrier to
contracted parties that would permit mutual benefits and customer‟s choice. Any two contracted parties
would agree on contract terms such as price, quantity and locations, and generation providers would
inform the ISO on how its hourly generators would be dispatched.
The ISO would make sure that sufficient resources are available to finalize the transactions and
maintain the system reliability. If there is no violation of static and dynamic security, the ISO simply
dispatches all requested transactions and charges for the service.
1.3.3 Hybrid Model
The hybrid model combines various features of the previous two models. The hybrid model
differs from the Pool model as utilizing the Power Exchange (PX) in not obligatory and customers are
allowed to sign bilateral contracts and choose suppliers from the Pool. The Pool would serve all
participants (buyers and sellers) who choose not to sign bilateral contracts. The California model is an
example of this model. This structure has advantages over a mandatory pool as it provides end users with
maximum flexibility to purchase from either the pool or directly from suppliers.
As in the Pool case, if generators opt to compete through the pool, they would submit competitive
bids to Power Exchange (PX). All bilateral contracts would be scheduled to meet their loads unless they
would constrain transmission lines. Loads not provided bilaterally would be supplied by economic
dispatch of generating units through bids in the pool.
The existence of the pool can efficiently identify individual customer‟s energy requirements and
simplify the balancing process of energy supply. The hybrid model would enable the participants to
choose between the two options based on provided prices and services. The hybrid model is very costly to
set up because of separate entities required for operating the power exchange (PX) and the transmission
system.

New York ISO

The eight members of New York Power Pool (NYPP) decided to break down the pool and
proposed to form a substitute represented by an ISO and other institutions such as the PX to comply with
FERC rules, maintain reliability in the competitive environment and facilitate a competitive wholesale
electricity market. The ISO is responsible for bulk power system operations, including coordination of
maintenance outage schedules and provision of transmission services on non-discriminatory basis. The
ISO will also administer and maintain an OASIS (Open Access Same time Information System) for the
New York state bulk power system. What distinguishes NYPP is the highly meshed characteristics and
frequent congestion, and what distinguishes this model is its clearing energy and ancillary service markets
at the same time, which is an advantageous feature over other proposals where separation of markets is
implemented. Participants choosing bilateral contracts are required to submit decremental price bids for
congestion purpose.
A real time (balancing) market is operated by the ISO using a centralized five-minute security
constrained optimal dispatch, where buyers and sellers can participate in this market up to 90 minutes
ahead with flexible bids or submit bilateral schedules for energy as well as some ancillary services.
Interaction of the New York ISO with other entities is shown in Figure.

Figure New York ISO

 UNIT II - TRANSMISSION CONGESTION MANAGEMENT

2.1 Definition of Congestion

Whenever the physical or operational constraints in a transmission network become active, the system is
said to be in a state of congestion. The possible limits that may be hit in case of congestion are: line
thermal limits, transformer emergency ratings, bus voltage limits, transient or oscillatory stability, etc.
These limits constrain the amount of electric power that can be transmitted between two locations through
a transmission network. Flows should not be allowed to increase to levels where a contingency would
cause the network to collapse because of voltage instability, etc.

2.2 Transfer capability limits

Congestion, as used in deregulation parlance, generally refers to a transmission line hitting its limit. The
ability of interconnected transmission networks to reliably transfer electric power may be limited by the
physical and electrical characteristics of the systems including any or more of the following:
Thermal Limits: Thermal limits establish the maximum amount of electrical current that a transmission
line or electrical facility can conduct over a specified time period before it sustains permanent damage by
overheating.
Voltage Limits: System voltages and changes in voltages must be maintained within the range of
acceptable minimum and maximum limits. The lower voltage limits determine the maximum amount of
electric power that can be transferred.
Stability Limits: The transmission network must be capable of surviving disturbances through the
transient and dynamic time periods (from milliseconds to several minutes, respectively). Immediately
following a system disturbance, generators begin to oscillate relative to each other, causing fluctuations in
system frequency, line loadings, and system voltages. For the system to be stable, the oscillations must
diminish as the electric system attains a new stable operating point. The line loadings prior to the
disturbance should be at such a level that its tripping does not cause system-wide dynamic instability.
2.3 Importance of congestion management in the deregulated environment
In real life, however, the power carrying capacity of a line is limited by various limits as explained earlier.
These power system security constraints may therefore necessitate a change in the generator schedules
away from the most efficient dispatch. In the traditional vertically integrated utility environment, the
generation patterns are fairly stable. From a short term perspective, the system operator may have to
deviate from the efficient dispatch in order to keep line flows within limits. However, the financial
implication of such re-dispatch does not surface because the monopolist can easily socialize these costs
amongst the various participants, which in turn, are under his direct control. From planning perspective
also, a definite approach can be adopted for network augmentation.

In such situations, it becomes necessary to have a congestion management scheme in place to ensure that
the system stays secure. However, being a competitive environment, the re-dispatch will have direct
financial implications affecting most of the market players, creating a set of winners and losers.
Moreover, the congestion bottlenecks would encourage some strategic players to exploit the situation.

2.4 Desired Features of Congestion Management Schemes

Any congestion management scheme should try to accommodate the following features:
i. Economic Efficiency: Congestion management should minimize its intervention into a competitive
market. In other words, it should achieve system security, forgoing as little social welfare as possible. The
scheme should lead to both, short term and long term efficiency. The short term efficiency is associated
with generator dispatch, while long term efficiency pertains to investments in new transmission and
generation facilities
ii. Non discriminative: Each market participant should be treated equally. For this, the network operator
should be independent of market parties and he should not derive any kind of benefit from occurrence of
congestion. Otherwise it provides perverse signals for network expansion.
iii. Be transparent: The implementation should be well defined and transparent for all participants.
iv. Be robust: Congestion management scheme should be robust with respect to strategic manipulation by
the market entities. This again refers back to principle of economic efficiency
2.5 Classification Of Congestion Management Mechanisms
The congestion management schemes are strongly coupled with the overall market design. Efficient
allocation of scarce transmission capacity to the desired participants of the market is one of the main
objectives of congestion management schemes. Classification of congestion management schemes on
these lines is shown in Table.

Table 2.1: Classification of congestion management schemes

Non - market Methods Market Based Methods
1 Type of contract 1 Explicit Auctioning of network capacity
2 First come first serve 2 Nodal pricing (OPF based congestion management)
3 Pro - rata methods 3 Zonal pricing
4 Curtailment 4 Price area congestion management
5 Re - dispatch
6 Counter trace
It should be noted that the capacity allocation methods usually allocate the transmission capacity in ex-
ante manner before physical delivery of energy. On the other hand, congestion alleviation methods are
termed as remedial actions. The procedure of capacity allocation starts with the calculation of Available
Transfer Capability (ATC). Let us see some details of ATC calculation in the next section
2.6 Calculation Of Available Transfer Capability (ATC)
It is a measure of the transfer capability remaining in the physical transmission network for further
commercial activity over and above already committed uses. Mathematically, ATC is defined as the Total
Transfer Capability (TTC) less the Transmission Reliability Margin (TRM), less the sum of existing
transmission commitments (which includes retail customer service) and the Capacity Benefit Margin
(CBM)
ATC = TTC - TRM - Existing Transmission Commitments (including CBM)
Total Transfer Capability (TTC)
It is defined as the amount of electric power that can be transferred over the interconnected transmission
network in a reliable manner while meeting all of the specific set of defined pre and post contingency
system conditions.
Transmission Reliability Margin (TRM)
It is defined as the amount of transmission transfer capability necessary to ensure that the interconnected
transmission network is secure under a reasonable range of uncertainties in system conditions.
Capacity Benefit Margin (CBM)
It is defined as the amount of transmission transfer capability reserved by load serving entities to ensure
that the interconnected systems do meet generation reliability requirements.
2.6.1 ATC Calculation using PTDF and LODF based on DC Model
Power Transfer Distribution Factor (PTDF) can be used to calculate the maximum allowable flow for a
given pair of injection and take-off points. It is also necessary to consider the effects of contingencies like
line outages. This can be achieved using Line Outage Distribution Factor (LODF). Let us first see the
details of DC load flow model.
DC Load Flow Model
Following are the assumptions when DC model is employed instead of AC model:
1. Voltage magnitudes are constant.
2. Only angles of complex bus voltages vary.
3. The variation in angle is small.
4. Transmission lines are lossless.
These assumptions create a model that is a reasonable first approximation for the real power system, which
is only slightly nonlinear in normal steady state operation. The model has advantages for speed of
computation, and also has some useful properties like linearity and superposition.
With these assumptions, power flows over transmission lines connecting bus i and bus j is given as:

(1)
Where,

line inductive reactance in per unit

phase angle at bus l

phase angle at bus m

The total power flowing into the bus i, Pi, is the algebraic sum of generation and load at the bus and is
called a bus power injection. Thus,

(2)
This can be expressed in a matrix form as:

(3)
Where, the elements of the susceptance matrix BX are functions of line reactances . One node is assigned
as a reference node by making its angle zero and deleting corresponding row and column in matrix.

Thus,
(4)

The dimension of obtained is . Let us augment it by adding zero column and row

corresponding to reference bus. The angles in equation 4.3 can be found out as
 (5)
2.6.2 Power Transfer Distribution Factor (PTDF)
From the power transfer point of view, a transaction is a specific amount of power that is injected into the
system at one bus by a generator and drawn at another bus by a load. The coefficient of linear relationship
between the amount of a transaction and flow on a line is represented by PTDF. It is also called sensitivity
because it relates the amount of one change - transaction amount - to another change - line power flow.
PTDF is the fraction of amount of a transaction from one bus to another that flows over a transmission

line. is the fraction of a transaction from bus i to bus j that flows over a transmission line
connecting buses l and m.

(6)
2.6.3Calculation of PTDF Using DC Model
Suppose there exists only one transaction in the system. Let the transaction be of 1 MW from bus i to bus
j.
Similarly,

(7)
Thus,

(8)

(9)

(10)

Reactance of transmission line connecting buses l and m

Entry lth row and ith column of the bus reactance matrix X
The change in line flow associated with a new transaction is then

(11)
Where,
l and m buses at the ends of the line being monitored
i and j from and to bus numbers for the proposed new transactions
 (12)
New transaction MW amount
2.6.4 ATC calculation Using PTDF
ATC is determined by recognizing the new flow on the line from node l to node m, due to a transaction

from node i to node j. The new flow on the line is the sum of original flow and the change.

(13)

Where, is the base case flow on the line and is the magnitude of proposed transfer. If the limit on

line lm, the maximum power that can be transferred without overloading line lm, is , then,

(14)

is the maximum allowable transaction from node i to node j constrained by the line from node l to
node m. ATC is the minimum of the maximum allowable transactions over all lines.

Using the above equation, any proposed transaction for a specific hour may be checked by calculating
ATC. If it is greater than the amount of the proposed transaction, the transaction is allowed. If not, the
transaction must be rejected or limited to the ATC.

(15)
Using the above equation, any proposed transaction for a specific hour may be checked by calculating
ATC. If it is greater than the amount of the proposed transaction, the transaction is allowed. If not, the
transaction must be rejected or limited to the ATC.
2.7 Non-Market Methods Of Congestion Management
The non-market methods of congestion management essentially refer to network capacity allocation based
on some pre-defined set of rules that neglect the ability or the willingness of a player to pay for the
transmission capacity. For such schemes and also for explicit market based methods, the system operator is
required to know the capacity remaining with the grid, after accommodating the transactions which is
nothing but ATC.
2.7.1 Capacity Allocation on First Come First Serve Basis
There are some systems in which the bilateral contracts are awarded for transmission network access on
first come first served basis. The calculation of ATC facilitates a participant to determine whether there is
enough capacity available for him to do the transaction between two nodes of concern. If enough capacity
is left on the network so as to make a transaction, the participant books his transaction with the system
operator. After this, the system operator updates the ATC. The next transaction in line again checks
whether there is enough corridor capacity available to do the transaction. The drawback associated with
this mechanism is that the willingness to pay for transmission usage is not taken into account. Those
participants with high valuation of transmission network may not get scheduled.
2.7.2 Capacity Allocation based on Pro-rata Methods
Various norms can be set to assign network capacities on pro-rata basis. The capacities can be allocated on
average load or generation, or percentage of long term transactions or maximum demand, etc. In other
words, all participants receive an equal percentage of the total amount of capacity they apply for. These
norms are used for capacity allocation as well as for congestion alleviation, which is used in real time. This
scheme also has same limitations as in first come first served method.
Another limitation of this method is possible strategic behavior of the market participants. The system of
pro-rata distribution of capacity can lead to market parties applying for transmission capacity much more
than what they want, knowing that the actual amount that they will receive is physically limited.
2.7.3 Capacity Allocation based on Type of Contract
In this type of capacity allocation, network capacity is allocated to a particular type of transactions. For
example, capacity is first allocated to firm or long term transaction and in the rest of capacity, maximum
possible number of short term transactions are accommodated. If in the real time operation, the re-
dispatching of injections is required to be done, the short term transactions are curtailed first ahead of long
term or firm transactions.
2.7.4 Explicit Auctioning
The principle of explicit auctioning is based on selling the available capacity of the tie line to the highest
bidder through auction. This is nothing but auctioning of the tie line capacity. The explicit auctioning
separates the energy market from transmission capacity market.
A limitation of this mechanism is the increased complexity which may complicate trading activities of
market participants. Another limitation is that the mechanism fails to account for parallel flows in meshed
networks. In this context, a new method has been proposed called coordinated auctioning.
2.7.5 Coordinated Auctioning
The coordinated auctioning splits the markets into energy market and transmission capacity market.
Participants have to ensure that they own sufficient transmission rights to conclude their energy exchanges.
However, coordinated auctioning tries to overcome problems associated with explicit auctioning by
accounting for the effects of loop flows in the network. A central auctioneer is introduced who manages
capacity allocation at all borders included in the Internal European Market (IEM). For coordinated
auctioning, three steps are necessary:
Market participants may value their willingness to pay for transmission rights by comparing the different
zonal prices. Hence, rational bidders for transmission rights will submit bids equal to the zonal difference
in energy prices, as savings for cheaper energy are traded off against the transmission costs. With perfect
foresight and all information available, a coordinated auction will lead to the same allocation as the nodal
pricing approach, which in turn is considered as an economically efficient decision.
2.7.6 Nodal Pricing: OPF Based Congestion Management
The general idea of nodal pricing is to model an electricity market with its various economical and
technical specifications, such as generators' cost functions, demand elasticity, generation limits, line power
flow limits and optimize the system for maximizing social welfare. This problem represents one of the
commonly employed formulations of Optimal Power Flow (OPF).
The practical OPF uses a formulation wherein ac power flow equations are added to the economic dispatch
as equality constraints with inequality constraints involving the flow MW, MVA or current on a
transmission line and voltages at a substation bus. A version of OPF is developed that takes into account
various contingencies referred to as a security constrained OPF or SCOPF.
The concept of inter-zonal/ intra-zonal congestion management can be explained with the help of a simple
illustrative example. Figure 4.3 shows a simple 3 bus, 2 zone system in a certain hour, with two scheduling
coordinators (QSEs).
2.8 Inter-zonal and Intra-zonal congestion management.
In some systems, there exist only a few lines where frequent congestion occurs. The rest of the lines
are less likely to be congested. This practicality has given birth to the concept of inter-zonal and intra-zonal
congestion management. The main objective is to reduce the complexity of readjustment process with a
large power network, and to avoid price deviation within a portion of the system where congestion is less
frequent.
At the first stage, an economically significant readjustment and pricing mechanism is utilized in order to
remove congestion on the potentially congested inter-zonal line. This stage is called inter-zonal congestion
management.
The next stage is intra-zonal congestion management. During intra-zonal congestion management
stage, the flows on the inter-zonal channels are set fixed to the values which are the outcomes of the inter-
zonal congestion management stage. The main goal is to minimize the absolute MW of re-dispatch by
taking into account the net cost of re-dispatch, determined by the adjustment bids of the participants. Inter-
zonal and intra-zonal congestion management scheme is employed in ERCOT market.
2.8.1 Generic Formulation
In the ERCOT Zonal Congestion Management Market, Qualified Schedule Entities (QSEs) , (a term used
for Scheduling Coordinators in ERCOT) submit balanced energy schedules that include physical schedules,
bilateral transactions, and Balancing Energy bids. QSEs balance their schedules through bilateral
transactions. After conducting an evaluation of congestion conditions using generation schedules submitted
by QSEs and short-term load forecast by ERCOT, ERCOT purchases Balancing Energy up bids and
Balancing Energy down bids from different zones to resolve zonal congestions while maintaining the
balance between generation and load. To minimize system cost and maximum system welfare, the
following objective function is used to calculate zonal Market Clearing Price, Shadow Price of Zonal
Congestion, and Balancing Energy bid deployment.
2.8.2 Rescheduling Generation- This leads to generation operation at an equilibrium point away from the
one determined by equal incremental costs. Mathematical models of pricing tools may be incorporated in
the dispatch framework and the corresponding cost signals obtained. These cost signals may be used for
congestion pricing and as indicators to the market participants to rearrange their power
injections/extractions such that congestion is avoided.
2.8.3 Security-Constrained Generation Re-dispatch: One of the most common approaches to alleviate
congestion in the network is to re-schedule of the generation by the optimal power flow model with
transmission constraints as well as bus-voltage constraints to maintain the system security..
2.9 Price Area Congestion Management
When congestion is predicted, the system operator declares that the system is split into areas at predicted
congestion bottlenecks. Spot market bidders must submit separate bids for each price area in which they
have generation or load. If no congestion occurs during market settlements, the market will settle at one
price, which will be the same as if no price areas existed. Market income from this price difference is paid
to the SO and he further uses it for grid enhancement. Bilateral contracts that span price areas must
purchase the load‟s energy in its price area in order to account for the contribution to congestion and to
expose the contract to the financial consequences of congestion.
An advantage about the market splitting method is that on a long-term basis, new gencos may decide
to add capacity in deficit zones, attracted by high sale prices, and thus introduce more competition and
cause overall prices to decrease. A limitation associated with this type of system is that it can be used only
when physical zones are connected in radial fashion. In a meshed system, clear cut boundaries of physical
zones can not be established. This type of congestion management system is used in Norway.
2.10. Capacity Alleviation Methods
Some of the common congestion alleviation methods are discussed below. Re-dispatching: Re-dispatching
is exercised as a command and control scheme, i.e., ISO curtails or increases injections without market
based incentives. As generators have to be reimbursed, the ISO has an incentive to keep re-dispatch cost
low.
Counter Trade: Counter trading is based on the same principles as re-dispatching, however, it may be
considered market oriented. Rather than applying command and control, the ISO will buy and sell
electricity at prices determined by a bidding process.
Curtailment: As mentioned earlier, a transaction-based curtailment approach is another methodology that
is used for congestion management. An example is NERC‟s TLR procedure (Transmission Loading
Relief). In real-time operation, the ISO monitors the system for possible security violations. In the event of
such violations occurring or being imminent, the TLR method of curtailing transactions is exercised.
 UNIT III LOCATIONAL MARGINAL PRICES AND FINANCIAL TRANSMISSION
RIGHTS

3.1 Locational Marginal Price (LMP)

LMP is the marginal cost of supplying the next increment of electric energy at a specific bus considering
the generation marginal cost and the physical aspects of the transmission system. LMP is given as

LMP = generation marginal cost + congestion cost + cost of marginal losses

Mathematically, LMP at any node in the system is the dual variable (sometimes called a shadow price) for
the equality constraint at that node (sum of injections and withdrawals is equal to zero). Or, LMP is the
additional cost for providing one additional MW at a certain node. Using LMP, buyers and sellers
experience the actual price of delivering energy to locations on the transmission systems. The difference
in LMPs appears when lines are constrained. However, if any line is constrained, LMPs will vary from
bus to bus or from zone to zone, which may cause possible congestion charges.

3.2 Lossless Model – DC OPF

This is the most simplistic form of DCOPF, where the transmission line losses are completely neglected.
The solution of lossless DCOPF is the starting point for some of the approaches that incorporate losses
since it provides a good initial estimate. The formulation of lossless DCOPF is given below.

(1)

(2)
(3)
(4)
Equation (1) is the objective function. (2) is the global power balance equation. (3) ensures that the
transmission line flows don't exceed the limits. (4) is the constraint on individual generator limits.
The Lagrangian for the above optimization problem can be written as follows.

(5)
For the sake of simplicity, the flow constraints are considered for only one direction of power flow. To
obtain the LMP at any bus i, the partial derivative of the Lagrangian w.r.t. the demand at that bus i is
evaluated, given as follows:

(6)
As seen from equation (6), the LMP obtained from lossless DCOPF consists of two components. The first
term is referred to as the energy component), since it is the Lagrangian multiplier of the global power
balance equation. The second term is known as the congestion component as it is a function of the
Lagrangian multiplier of the in-equality constraint that corresponds to line power flows. It must be noted
here that in the absence of congestion (µ=0), the LMP at all buses will turn out to be same. This holds
true only in case of DCOPF. When we use ACOPF, the LMP at all buses will be different because of the
presence of transmission losses, even in the absence of congestion. The following observations about
LMP can be made from the results:
The energy component will always be equal to the LMP at the reference/slack bus.

1. The energy component at the reference/slack bus also consists of its congestion component and
loss component (if any). The energy component has been named so just for representation and
does not indicate the cost of supplying only energy.
2. Even if the reference bus is changed, the energy and congestion components will change, but the
total LMP will remain the same.
3. In the absence of congestion, LMP at all buses will be same, and equal to that of the marginal
generator.

The availability of LMP components is an inherent feature of DCOPF. D e-composition of LMP into its
components is required for the settlement of risk-hedging tools like financial transmission right (FTRs)
[12]. FTRs are basically risk hedging instruments whose objective is to guard forward contracts from the
uncertain congestion charges.
The lossless model always yields a reference node independent solution. This is one the desired features
of LMP calculation because there shouldn't be inconsistency in financial settlements. Financial
consistency mainly implies non-negativity of net congestion collection or adequacy of net congestion
collection to make full payments towards a set of simultaneously feasible FTRs; whichever is of interest.
Some desirable features of LMP calculation are the financial consistency, refer¬ence node independency,
accurate modeling of power flow, and the model simplic¬ity. The reference node independency of LMP
calculation is desired in order to obtain an undisputed solution of each quantity of interest. Both, reference
node dependent and independent loss-compensated models are available in the literature for DCOPF
formulations.
Even though the lossless DCOPF model is simple to formulate, it has certain disadvantages. For large
systems, the losses are not negligible and hence can't be neglected in the dispatch because the mismatch
will be quite large. This has forced researchers to improve upon the lossless DCOPF model such that
losses are considered in the dispatch.
3.3 Lossless Model – AC OPF
The ACOPF model involves solving a linear/non-linear objective function with linear and non-linear
equality and in-equality constraints. The objective function can be cost minimization or social welfare
maximization. Unlike DCOPF, it is required to solve the non-linear power flow equations, and hence a
non-linear optimization solver is required to obtain a solution. For large systems, the dimension is quite
high and it is generally performed as an offline study
The mathematical formulation is as follows:

(7)
(8)
(9)
(10)
 (11)
(12)
(13)
(7) and (8) are the real and reactive power balance equations for all buses in the system. (9) models the
line flow limit in-equality constraints. (10) and (11) enforce generations limits on real and reactive power
for all generators. Voltage limits are enforced using (12). Additional constraints pertaining to taps and
shunts may also be added to the optimization problem. For a practical system, the problem size is quite
large and hence obtaining a converged solution sometimes becomes difficult.The LMP at a bus is the
lagrangian multiplier corresponding to the equality constraint. Unlike in DCOPF, where the LMP
components are readily available, additional de-composition techniques are required to obtain LMP
components [4-11]. Moreover, there exists no unique solution to this decomposition. Perhaps, this is one
the driving factors for DCOPF to be preferred over ACOPF
3.4 Loss Factors

3.4.1 DC loss factors

In some of the methods discussed earlier, loss factors are estimated using DC approximation. Since
voltages are assumed to be 1 p.u., the losses can approximated as:

(14)
The loss factor (LF) at a bus i is defined as the partial derivate of the above expression w.r.t. power
injection at bus i(Ploss). Hence,

(15)

Transmission line flow can be written as:

(16)

LF can be further expanded as:

(17)
 (17) is the expression for loss factor using DC approximation. The offset is required since product of
LF and Pi over estimates the losses

2 AC Loss Factors

The loss factors using ACPF makes use of the NRLF Jacobian to obtain sensitivities. Additional
sensitivity of Ploss with load angle (d) and voltage magnitude (V) needs to be obtained.

(18)

Where, S is the inverse of NRLF jacobian (J). From the above equation, we can write LF as:

(19)

The offset in this case is calculated as follows.

(20)
3.5 Financial Transmission Rights FTR
Stochastic locational prices create a demand by risk-averse market players for locational price hedging
instruments. One of such instruments is a Financial Transmission Right FTR. An FTR gives the holder a
right (or/and obligation) to a share of congestion rents received by the System Operator during
transmission congestion. The allocation of FTRs typically occurs as an auction, where the benefit of the
buyer or seller is maximized. The auction determines the amount of FTRs allocated to market players and
market clearing prices. The design of the auction is decided by the System Operator and depends on the
market structure. However, FTRs may also be allocated to transmission service customers who pay the
embedded costs of the transmission system.
TRs are typically longer term and may have duration from months to years. They can take different forms
such as point-to-point FTRs and flowgate FTRs, both of the obligation and option type.
Point-to-point Financial Transmission Right
Point-to-point FTRs entitle (or obligate) the holder to the difference in locational prices times the
contractual volume. The mathematical formulation for the payoff is:
FTR = QPij(Pj -Pi) (21)

where:

Pj is the bus price at location j,

Piis the bus price at location i

QPij is the quantity of active power scheduled on the path from ito j.
An FTR obligation may be viewed as an injection of quantity of active power QPijat bus iand a
withdrawal of the same QPij at bus j. If the contractual volume matches the actual traded volume
between two locations, an FTR is a perfect hedge against volatile locational prices.

The difference between the congestion rent and payments to FTR holders may be positive,
resulting in a surplus to the SO. The surplus is redistributed to FTR holders and transmission
service customers. On the contrary, if payments to FTR holders exceed the congestion rent, the
SO proportionally reduces payments to FTR holders or requires that the transmission owners
make up the deficit.
Point-to-point FTRs obligations are considered to be the most feasible hedging instrument in
practice. However, for point-to-point FTRs options the computational demands are more
substantial. Nonetheless, it is still technically possible, as they have been introduced in PJM in
2003.

3.5.1 Flowgate Financial Transmission Rights

Flowgate Financial Transmission Rights are constraint-by-constraint hedges that give the right to
collect payments based on the shadow price associated with a particular transmission constraint called
a flowgates. Flowgates FTR, often abbreviated as FGR, is based on a decentralized market design.
This approach results from a belief that the point-to-point FTR markets may work inefficiently in
practice and therefore, are not able to provide effective hedging. The payoff from the FGRs can be
negative, zero or positive and is determined by taking the associated flowgate shadow price times the
amount of FTG, totaling them for all lines k affected by the transaction between buses m and n (9).
ηkrepresents the shadow price associated with flowgatek, and Qk is the
contracted volume of FGR.

FGRη−=Σηk.PTDFk,m-nQ(k) (22)

In the AC transmission network, the power flows are determined by the line impedances, and
therefore cannot be effectively controlled. A given transaction may thus affect more than one
flowgate (transmission constraint). Parties that want to be fully hedged against congestion should
purchase a mix of flowgate FGRs that matches the distribution of flows from its transaction.

In practice, the assumptions of a limited set of commercially significant flowgates and relatively
unchanging PTDFs might be difficult to ensure in a dynamic power system, where unanticipated
transmission constraints may become binding. Furthermore, the flowgate approach assumes that
all constraints that are binding in the dispatch have been previously designated as flowgates, and
therefore the SO have made FGRs available for them. If some constraints are designated, but not
become binding, there is no mechanism that could allow market parties to purchase a
perfecthedge. Not charging for the non-predicted constraints and socializing costs instead can
however be a solution here.
3.5.2 Hedging
Hedge is a transaction that may consist of cash instruments or derivativesand is used to offset
risks associated with certain positions byestablishing opposing positions. A hedge could offset an
exposure tochanges in financial prices of other contracts or business risks. In general, hedge is
defined as a position or combination of positions, which could reduce some types of risk. Hedge
often indicates partially offsetting a long position in one security with a short or short equivalent
position in a related security.
Hedging is an operation undertaken by a trader or dealer who wishes to protect an open
position, especially a sale or a purchase ofa commodity currency, security, etc., that is likely to
fluctuate in price over the period that the position remains open. This process could be
implemented by a purchase or a sale of derivative securities, such as options, to reduce or
neutralize all or part of the risk of holding another security. For example, undertaking forward
sales or purchases in the futures market, or taking out an option which would limit the exposure
toprice fluctuations is regarded as hedging.
Hedger is a participant who would enter the market with the specific intent of protecting an
existing or anticipated physical market exposure from unexpected or adverse price fluctuations.
For example, a generation company may contract to sell a large quantity of energy for delivery
over the next six months. Electricity products would depend on raw material such as natural gas
that could fluctuate in price. If the generation company would not have sufficient raw material in
stock, an open position could result.

Two-way hedge and one-way hedge are hedging contracts which are dependent on the
contract‟s strike price and spot price. In a two-way hedge contract, buyer and seller would agree
on a payment from one to the other when the strike price is either higher or lower than the spot
price

Market participants can use insurance packages offered by insurance companies to hedge
risks such as hedging the expensive cost of replacement power when an outage takes place,
hedging counter party risks or hedging extreme price spikes due to unexpected weather
conditions or due to similar reasons. Weather-related derivatives are implemented in electric
industry restructuring as risk hedging tools to hedge risks associated with unpredictable weather
conditions. Weather derivatives are the only contracts that offer energy providers a procedure to
hedge volumetric risk. As an example, a weather derivative can be used in the form of an options
contract with a strike point set at a specified number of degree-days (DDs) or set based on
maximum minimum temperatures.
 UNIT IV ANCILLARY SERVICE MANAGEMENT AND PRICING OF
TRANSMISSION NETWORK

4.1 Ancillary Services Introduction

Markets for electrical energy can function only if they are supported by the infrastructure of a
power system. One of the differences with other commodities is that the market participants have no
choice: they must use the service provided by the existing system to buy or sell energy. Service
interruptions hurt producers to a lesser extent by depriving them of the ability to sell the output of their
plants. Users of the system therefore have the right to expect a certain level of continuity in the service
provided by the power system. On the other hand, the cost of providing this security of supply should
match the value it provides to users.
On a basic level, security means that the power system should be kept in a state in which it can
continue operating indefinitely if external conditions do not change. This implies that no component
should function outside its safe operating range. For example, no transmission line should be loaded to
such an extent that the temperature rise in the conductors due to ohmic losses causes the line to sag low
enough to create a fault.
Describing the Needs
Let us first consider the security issues caused by a global imbalance between load and
generation. We will then discuss security problems that arise from the transmission network. This
distinction is far from perfect, and on several occasions, we will have to highlight interactions between
balancing and network issues.
Balancing issues
When discussing the global balance between load and generation, we can assume that all the
loads and generators are connected to the same busbar. In an interconnected system, this busbar is also the
terminal of all the tie lines with other regions or countries. At this level of abstraction, the only system
variables that remain are the generation, the load, the frequency and the interchanges. As long as the
production is equal to the consumption, the frequency and the interchanges remain constant.
Large frequency deviations can lead to a system collapse. Generating units are indeed designed to
operate within a relatively narrow range of frequencies. If the frequency drops too low, protection devices
disconnect the generating units from the rest of the system to protect them from damage. Such
disconnections exacerbate the imbalance between generation and load, causing a further drop in
frequency and additional disconnections.
Minor imbalances between load and generation do not represent an immediate security threat
because the resulting frequency deviations and inadvertent interchanges are small. However, these
imbalances should be eliminated quickly because they weaken the system. A system that is operating
below its nominal frequency or in which the tie lines are inadvertently overloaded is indeed less able to
withstand a possible further major incident.
Several phenomena create imbalances between load and generation in a competitive electricity
market. Since each of these phenomena causes a component of imbalance with a different “time
signature”, it is better to treat them separately. The system operator can then tailor the different ancillary
services it needs to cope with a specific component of the total imbalance.
The regulation service is designed to handle rapid fluctuations in loads and small unintended
changes in generation. This service helps maintain the frequency of the system at or close to its nominal
value and reduce inadvertent interchanges with other power systems. Generating units that can increase or
decrease their output quickly will typically provide this service. These units must be connected to the
grid and must be equipped with a governor. They will usually be operating under automatic generation
control.
Generating units providing the load-following service handle the slower fluctuations, in
particular, the intra period changes that the energy market does not take into account. These units
obviously must be connected to the system and should have the ability to respond to these changes in
load.
Regulation and load-following services require more or less continuous action from the
generators providing these services. However, regulation actions are relatively small and load-following
actions are fairly predictable. By keeping the imbalance close to zero and the frequency close to its
nominal value, these services are used as preventive security measures. On the other hand, reserve
services are designed to handle the large and unpredictable power deficits that could threaten the stability
of the system.
Reserve services are used to provide corrective actions. Obtaining reserve services, however, can
be considered as a form of preventive security action Reserve services is usually classified into two
categories. Units that provide spinning reserve must start responding immediately to a change in
frequency, and the full amount of reserve capacity that they are supposed to contribute must be available
very quickly. On the other hand, generating units providing supplemental reserve services do not have to
start responding immediately.
It would be nice if we could draw a clear distinction between balancing ancillary services and
balancing energy, which is traded in the spot energy market. Unfortunately, the wide variety of designs
among electricity markets makes an unambiguous classification impossible. In general, if the time that
elapses between the closure of the open market and the real time is short, the system operator is able to
buy a substantial portion of its balancing needs in the spot energy market. On the other hand, if the market
operates on a day-ahead basis, a complex mechanism is likely to be needed for the procurement of
balancing services.
4.2 Types of Ancillary Services
A large number of activities on the interconnected grid can be termed as ancillary services. During the
process of defining the ancillary services, some proposals tried to define 60 different ancillary services! In
order to remove this large discrepancy, the North American Electric Reliability Council (NREC) along
with Electric Power Research Institute (EPRI) has identified 12 functions as ancillary services. These are:
1. Regulation: The use of generation or load to maintain minute-to-minute generation-load balance
within the control area.
2. Load Following: This service refers to load-generation balance towards end of a scheduling
period.
3. Energy Imbalance: The use of generation to meet the hour-to-hour and daily variations in load.
4. Operating Reserve (Spinning): The provision of unloaded generating capacity that is
synchronized to the grid and can immediately respond to correct for generation-load imbalances,
caused by generation and /or transmission outages and that is fully available for several minutes.
5. Operating Reserve (Supplemental): The provision of generating capacity and curtailable load
to correct for generation-load imbalances, caused by generation and /or transmission outages, and
that is fully available for several minutes. However, unlike spinning reserves, supplemental
reserve is not required to respond immediately.
6. Backup Supply: This service consists of supply guarantee contracted by generators with other
generators or with electrical systems, to ensure they are able to supply their consumers in case of
scheduled or unscheduled unavailability.
 7. System Control: This activity can be compared with the functions of the brain in the human
body. System control is all about control area operator functions that schedule generation and
transactions and control generation in real time to maintain generation load balance.
8. Dynamic Scheduling: It includes real-time metering, tele-metering along with computer
software and hardware to virtually transfer some or all of generator‟s output or a customer‟s load
from one control area to another.
9. Reactive Power and Voltage Control Support: The injection or absorption of reactive power
from generators or capacitors to maintain system voltages within required ranges.
10. Real Power Transmission Losses: This service is necessary to compensate for the difference
existing between energy supplied to the network by the generator and the energy taken from the
network by the consumer.
11. Network Stability Services from Generation Sources: Maintenance and use of special
equipment (e.g., PSS, dynamic braking resistances) to maintain secure transmission system.
12. System Black Start Capability: The ability of generating unit to proceed from a shutdown
condition to an operating condition without assistance from the grid and then to energize the grid
to help other units start after a blackout occurs.

4.3 Classification of Ancillary Services

There can be various ways of classifying the above ancillary services. One common approach would be
to identify when and how frequently these services are required by the system operator [23]. Thus, three
groups can be formed:
4.3.1. Services required for routine operation:
These are the services which the system operator requires quite frequently. Some of these may be
required to provide corrective action on minute-to-minute basis. Following services can be grouped under
this category:
(a) System control
(b) Reactive power support
(c) Regulation
(d) Load following
(e) Energy imbalance
(f) Real power loss displacement
4.3.2. Services required to prevent an outage from becoming a catastrophe:
These services prevent the system from going out of step even if a major event occurs. These do not come
into picture on daily basis, or rather; no proactive measures are required to be taken either by the system
operator or the service provider on daily basis. Their effectiveness is sensed only under contingent
situation. Following services fall under this category:
(a) Spinning reserve
(b)Supplemental reserve
(c)Network stability services
4.3.3. Services needed to restore a system after blackout:
Re-energizing the system after complete blackout requires support from certain generating stations, which
can pickup generation even in the absence of external electricity support. Such generating units provide
the system black start capability. These services are very rarely used.
4.4 Voltage control and reactive support services
It shows that how the operator can use reactive power resources to increase the amount of power
that can be transferred from one part of the network to another. Some of these reactive resources and
voltage control devices (e.g. mechanically switched capacitors and reactors, static VAR compensators,
tap-changing transformers) are typically under the direct control of the operator and can be used at will.
Generating units, however, provide the best way to control voltage. A voltage control service therefore
needs to be defined to specify the conditions under which the system operator can make use of the
resources owned by the generating companies. Generators providing this service produce or absorb
reactive power in conjunction with their active power production. It is also conceivable that businesses
might be setup for the sole purpose of selling reactive support or voltage control.
The definition of a voltage control service must consider not only the operation of the system
under normal conditions but also the possibility of unpredictable outages.Under normal operating
conditions, operators use reactive power resources to maintain the voltage at all buses within a relatively
narrow range around the nominal voltage. Typically, this range is
0.95 p.u. ≤ V ≤ 1.05 p.u.
Keeping transmission voltages within this range is partially justified by the need to facilitate
voltage regulation in the distribution network. It also makes the operation of the transmission system
more secure. Maintaining the voltage at or below the upper limit reduces the likelihood of insulation
failures. The lower limit is more arbitrary. In general, keeping voltages high under normal condition
makes it more likely that the system would avoid a voltage collapse if an unpredictable outage does occur.
A good voltage profile, however, does not guarantee the voltage security of the system. The outage of a
heavily loaded transmission line increases the reactive losses in the remaining lines. If these losses cannot
be supplied, the voltage collapses. The amount of reactive power needed following an outage is therefore
much larger than what is required during normal operation. Voltage control services should therefore be
defined not only in terms of the ability to regulate the voltage during normal operation but also to provide
reactive power in case of emergency. The voltage control service is in fact often called reactive support
service.
4.5 Obtaining Ancillary Services
In the previous section, we saw that the system operator needs some resources to maintain the
security of the system and that some of these resources must be obtained from other industry participants
in the form of ancillary services. At this point, we need to examine the two mechanisms that can be used
to ensure that the system operator obtains the amount of ancillary services that are required. The first
approach consists in making the provision of some ancillary service compulsory. The second entails the
creation of a market for ancillary services. As we will see, both approaches have advantages and
disadvantages. The choice of one mechanism over the other is influenced not only by the type of ancillary
service but also by the nature of the power system and historical circumstances.
4.5.1 Buying Ancillary Services
We argued at the beginning of this chapter that the purpose of ancillary services is to maintain the
security of the system in the face of unpredictable events. Security is a “system” concept that must be
centrally managed. The system operator is thus responsible for purchasing security on behalf of the users
of the system. If we assume that a market mechanism has been adopted for the procurement of ancillary
services, then this system operator will have to pay the providers of these services. It will then have to
recover this cost from the users. Since the amount of money involved is not negligible, these users are
likely to scrutinize this purchasing process. They need to be convinced that the optimal amount of
services is purchased, that the right price is paid and that each user pays its fair share of the cost of
ancillary services.
4.5.2 Quantifying the needs
Ideally, the level of security provided through the purchases of ancillary services should be
determined through a cost/benefit analysis. This analysis would set this level at the optimal point where
the marginal cost of providing more security is equal to the marginal value of this security. While the
marginal cost is relatively easy to calculate, the marginal value, which represents mostly the expected cost
to consumers of load disconnections that are avoided through the provision of system security, is much
harder to compute. Since performing a cost/benefit analysis in every case is not practical, security
standards that approximate the optimal solution have been developed. These standards usually specify the
contingencies that the system must be able to withstand. Sophisticated models and computational tools
have been developed to help system operators manage the power system in accordance with these
standards and to quantify the ancillary services that they need to achieve this goal. It is therefore desirable
to develop an incentive scheme that encourages the system operator not only to minimize the cost of
purchasing ancillary services but also to limit the amount of services purchased to what is truly necessary
to maintain security.
4.5.3 Selling Ancillary Services
Selling ancillary services represents another business opportunity for generating companies.
Technical limitations and cost considerations, however, inextricably link the sale of reserve and voltage
control services and the sale of energy. For example, a generator cannot sell spinning reserve or reactive
support if the unit is not running and producing at least its minimum power output. Conversely, a unit
operating at maximum capacity cannot sell reserve capacity because it does not have any. If it decides to
reduce its power output to be able to sell reserve, then it forgoes an opportunity to sell energy. Since the
cost of this opportunity can be significant, the generating company must jointly optimize the sale of
energy and reserve services. Rather than attempting to develop a general formulation of this obviously
complicated problem, let us explore these interactions using a simple example.In an actual application,
the optimization would be carried out over a day or longer, and all these issues would have to be taken
into account.
4.6 Transmission pricing in open access system
Transmission Open Access refers to the regulatory structure which includes rights, obligations,
operational procedures and economic conditions which enable two or more parties to use the
transmission network belonging to another party for electric power transfer.
The competitive market for electricity has developed at two ends, the generation end and the retail supply
end, while the transmission sector remains a monopoly business and therefore regulated. The transco
facilitates the trading between parties and has therefore played a vital role in the restructuring of the
power industry in all countries. The basic parameters that characterize the electric power transmission
sector are:
 large sunk and lumped investments
 need for redundancies to meet security requirements
 economics of scale in the construction cost in terms of the capacity of the transmission line
economics of scope given by the interconnection of electric systems
In order to prevent the Transco from overcharging for the service, there is a need for the transmission
systems to be regulated. The need for regulation is all the more important when the transmission grid is
the nucleus of competition among geographically dispersed generators. The trend of establishing new
legal and regulatory frameworks offering third parties open access to the transmission network may be
seen as a logical outcome in this context.
According to the IEEE Task Force on Transmission Access, the term 'transmission access' refers to the
requirement that the transmission network owners make their systems available to the other players in the
system. That may include independent generators, customers, or other utilities, that may desire to use the
network for power transactions between themselves. A set of comprehensive surveys carried out by the
IEEE Task Force provides the large volume of work available in the literature on issues pertaining to
transmission open access- operational, planning, reliability, costing, pricing and regulatory,
The implications of transmission open access could be varied and may span over a wide range right
from those pertaining to ancillary services, such as participation of independent generators as ancillary
service providers, up to the opening up of the distribution networks to competition, the so called retail
competition. It also impacts the operations planning activities of the ISO, more so in case of the pool
model in which all generation scheduling is centralized.

4.6.1 Types of Transmission Services in Open Access

In a competitive market environment, there are various types of transmission transactions and the cost of
a transaction will depend on the type of transaction carried out and the cost components considered.
Based on an understanding of the costs, pricing for these services can be subsequently analyzed.
The basic categories into which transmission services can be classified are (a) point-to-point services and
(b) network services. While the point-to point services are those with specified delivery and receipt
points, the network services allow the transmission user a complete access to the system with no
specification on the points of delivery or receipt, nor any additional charge for change of schedules.
4.6.1.1 Firm transactions- these transactions are not subject to discretionary interruptions and are
specified in terms of MW of transmission capacity that must be reserved for the transaction. The transco
makes arrangements for enough capacity on the network to meet these transaction needs. These could
either be on a long-term basis, in the order of years, in which case the charges for such transactions can be
designed to incorporate capacity investment needs of the network, or on short-term contracts (up to one
year).
4.6.1.2 Non-firm transactions- these transactions are not firm and hence are subject to curtailment from
the transco in times of network congestion, outages and overloads, or even on the basis of economic
opportunities to the transmission provider. These available transactions are basically isolated contracts on
a short term basis as per availability of transmission capacity while curtailable transactions may be
regular transactions with a different pricing policy since these would not be charged for the capacity
investment components.
4.7 Cost Components In Transmission
In this section we briefly discuss those costs that a transco incurs in order to fulfill the transmission
contracts satisfactorily. A comprehensive analysis of the costs incurred and methods on how to determine
such costs have been provided in
Operating Cost: These costs are incurred by a transco in carrying out the transactions generally relating
to the cost of rescheduling of generation as well as those related to maintaining the system voltages,
reactive power support and line flow limits. This would require a series of two OPF simulations, one
without the transactions and one with the transactions and the cost difference incurred is then calculated.
Another approach is to use the bus marginal costs.
Opportunity Cost: These costs are associated with the benefits, which the transco has to for go in order
to provide a transmission service. The unrealized benefits can be because the transco could not use
cheaper generation resources due to transmission overloads.
Reinforcement cost : This is the capital cost of new transmission facilities needed to accommodate a
transmission transaction. This component applies only to firm transactions.
Existing Cost: This is the cost of existing facilities associated with the investment already made in the
system. This cost needs to be allocated to the transmission transactions on a rational basis.
4.8 Pricing Of Power Transactions
The objective of any transmission-pricing scheme is to allocate all or part of the existing and new cost of
transmission system to the customers. However. tariffs for transmission services are more often set by
government regulations. and are based on its policy directives. In spite of this, any transmission pricing
strategy should seek to achieve the following basic goals:
Recover costs: The tariff charged for use of transmission services must produce enough revenue to cover
all the expenses made in investment, operation and maintenance of the transmission network. as well as
provide a small (regulated) level of profit for the owners.
Encourage efficient use: The price structure should give incentives for using the transmission system
efficiently. Efficient use could mean ensuring both. economic efficiency by maximizing social benefits
and technical efficiency by minimizing losses.
Encourage efficient investment: The price structure and the way money is paid to the owners should
provide an incentive for investment in new facilities. when and where they are needed. Fair: Must be fair
and equitable to all users.
Understandable: All users must be able to understand the pricing structure.
Workable: The pricing scheme should be implementable in the actual system.
The pricing of power transactions has always been an important topic and the theory of marginal cost was
exploited to develop pricing mechanisms for wheeling transactions. Therefore an ideal wheeling rate was
defined as ,
Ideal wheeling rate = Marginal cost of wheeling
To this effect, pricing schemes for transmission have evolved around three basic philosophies
(a) the embedded-cost based paradigms
(b) those based on incremental costs and
(c) schemes which use a combination of (a) and (b).
The embedded cost based pricing schemes are based on the total transmission cost allocation to various
transactions while the incremental cost based pricing seeks to identify the additional burden on a
transmission system from one particular transaction The following discussions on pricing paradigms are
based on the unifying concepts developed.
4.9 Embedded Cost Based Transmission Pricing
This is calculated using the replacement cost, average service life and depreciation reserve of the line
capital investment. Subsequently, the annual fixed charge rate is calculated for each year. Based on these
calculations, four different cost allocation methods are discussed namely, the rolled-in embedded cost (or
postage stamp method), contract path, boundary flow and line-by-line (or MW-Mile) method. The first
two do not require any power flow simulation, and are thus simple to handle. Two of the broadly used
schemes within this paradigm, viz., the postage stamp method and the MW-mile method, are discussed
below.
4.9.1 Postage Stamp Method
The name of this scheme has understandably, evolved from the basis on which postage stamps are priced,
i.e. the customer only pays according to the weight of the package, not on the basis of distance of delivery
point, or how the package will contribute to the postal transport requirement, etc. This method is simple
to handle, though not very sound economically. Postage stamp rates are charged at a flat rate on per MW
basis. Mathematically the transaction price in this scheme can be written as given : Rl =TC Pt /Ppeak;

Rt transmission price for transaction t in $

TC total transmission charges in $ (3)
PI transaction load at the time of system peak load condition in MW
Ppeak is system peak load in MW
4.9.2 MW-Mile Method
In this method, the basic concept is that the power flow-mile on each transmission line due to a
transaction is calculated by multiplying the power flow and distance of the line. The total transmission
system use is then the sum of all the power flow-miles and this provides a measure of how much each
transaction uses the grid. This may be expressed mathematically as follows

R Ti is the price charged for transaction Tj in $/MW

PJ;Ti; is the loading of line j due to transaction Tj ,MW
Lj is the length of the line j. mile
Fj is a pre - determined unit cost reflecting the cost per unit capacity of the line, $/MW – mile
A transmission-pricing scheme has been developed that accounts for the cost recovery of both embedded
costs and reliability benefits from transmission system. Incremental Cost Based Transmission Pricing

4.9.3 Short-Run Marginal Cost (SRMC) Based Pricing

The short run marginal cost of a transco is the cost incurred in supplying an additional I MW of power in
a transaction. This can be calculated from the difference in marginal costs at the supply bus and the
delivery bus. The transaction price can be determined by multiplying the power transaction with the
marginal cost to evolve the SRMC based price.
4.9.4 Long Run Marginal Cost (LRMC) Based Methods
In these methods, a long-term transmission planning analysis is included within the transactions. The
models simultaneously determine the new transmission line additions over a period of time (about few
years) and how and which power transaction brought about these additions. In case of multiple power
transactions taking place, this long-term marginal cost needs to be allocated fairly to all the transactions.
Four methods of long run marginal cost allocations have been suggested namely, dollar per MW, dollar
per MW-mile, interface flow allocation by regions and one-by-one allocations.
4.10 Revenue Reconciliation
It is well known that short run marginal cost based pricing does not provide the revenue reconciliation to
the transco and does not provide for cost recovery of capital investments made in transmission or capital
costs of providing for transmission reinforcements. It was suggested that the ideal wheeling rate obtained
from marginal costs be modified using a capital recovery term as follows
Revenue Reconciled Wheeling Rate = Ideal Wheeling Rate + Revenue Reconciliation Adjustment
However, determining how much of capital should be recovered by the wheeling utility from the
wheeling rate, either to recover its network investments or to allocate incentive for future investments, is
very difficult. Such revenue reconciliation may also result in large price distortions and gross departures
from the basic marginal cost principle. In this context, a load flow based method works out the allocation
of long run cost of transmission capacity. A distinction is made between incremental and marginal cost
based methods in that the former identifies new facilities specifically attributable to specific transmission
transactions.
 UNIT V REFORMS IN INDIAN POWER SECTOR

5.1 Framework of Indian power sector

Any generating company may establish, operate and maintain a generating station without
obtaining a license if it complies with the technical standards related to the connectivity of grid as
specified by CEA. The generating company should establish, operate and maintain generating stations,
tie-lines, substations and dedicated transmission lines.
According to the 16th Electric Power survey conducted by CEA, the country has energy shortage
of 7.8 % and peaking shortage of 13 %. The capacity addition required by the end of 11th plan (by year
2012) to meet these shortages is nearly 100 GW. Therefore, in July 2001 Ministry of Power suggested to
liberalize the framework for setting up of CPPs and utilize their surplus output for the benefit of
consumers. Previously as per Electricity (Supply) Act 1948 all these plants required clearance certificate
from the utility.
After the enactment of Electricity Act 2003 any one can construct, maintain and operate the CPP
and dedicated transmission lines, provided that the supply of electricity from the plant shall be regulated
in the same manner as that of a generating station. Every CPP owner has a right to open access for
transmission of electricity provided that there is an availability of adequate transmission facility, which
should be determined by central/state transmission utility. Any dispute regarding availability of
transmission lines shall be resolved upon by the Regulatory Commission.
5.2 Transmission of Electricity
In case of Inter-State transmission, the Act proposes region-wise demarcation of the country and
the central government should establish National Load Dispatch Centre (NLDC) for optimum scheduling
and dispatch of electricity amongst the RLDCs. The NLDC and RLDC will not be involved in the
business of power trading. The RLDC will work as per the Indian Electricity Grid Code (IEGC) to ensure
integrated operation of the power system in the concerned regions.
It has to monitor grid operations, keep accounts of the quantity of electricity transmitted through
the regional grids, exercise supervision and control over the Intra-State transmission and it will be
responsible for carrying out real time operations for grid control and dispatch of electricity within the
state through secure and economic operation of the state grid in accordance with grid standards and the
state grid code.
The possible tariff for transmission services can be divided into three parts. The proposed
components reflecting the cost of various activities will be:
Use of network charges – This will reflect costs of capital investments and the maintenance and
operation of a transmission system to transfer bulk power to and from different locations.
The use of network charges would be worked out on distance slabs to reflect the distance traveled by the
energy transmitted. System operation charges – This is meant for accommodating the costs associated
with operating the LDC.
The costs of owning and maintaining the LDC should be included.
The system operation charges shall be charged to the users based on total transacted energy. Reactive
power charges – This is a variable charge depending upon the voltage related drawl of reactive power.
Reactive power drawl by beneficiaries is to be priced as per the voltage level of the system i.e. beneficiary
pays for reactive power drawl when voltage at the metering point is below 97 % and beneficiary gets paid
when the voltage is above 103 %.
5.3 Distribution of Electricity
It shall be the duty of a distribution licensee to develop and maintain an efficient, coordinated and
economical distribution system in its area of supply and to supply electricity in accordance with the
provisions contained in this act. There may not be any exclusive monopolies in distribution circles. The
act allows non-exclusive licensing and parallel distribution networks, thus restricting the scope of
monopolies in the distribution circles.
Where the State Commission permits a consumer or class of consumers to receive supply of
electricity from a person other than the distribution licensee of his area of supply, such consumer shall be
liable to pay an additional surcharge on the charges of wheeling, as may be specified by the State
Commission, to meet the fixed cost of such distribution licensee arising out of his obligation to supply.
Distribution companies have been given mandate for achieving complete metering within two years from
the enactment of the law. Recently CERC has published the Order regarding open access in Inter-State
transmission.
5.4 Transmission system operator
A transmission system operator (TSO) is an entity entrusted with transporting energy in the form
of electrical power on a national or regional level, using fixed infrastructure. Due to the cost of
establishing a transmission infrastructure, such as main power lines and associated connection points, a
TSO is usually a natural monopoly, and as such is often subjected to regulations. In electrical power
business, a transmission system operator (TSO) is an operator that transmits electrical power from
generation plants over the electrical grid to regional or local electricity distribution operators.
The role of the System Operator in a wholesale electricity market is to manage the security of the
power system in real time and co-ordinate the supply of and demand for electricity, in a manner that
avoids fluctuations in frequency or interruptions of supply. The System Operator service is normally
specified in rules or codes established as part of the electricity market.
The System Operator function may be owned by the transmission grid company, or may be fully
independent. They are often wholly or partly owned by state or national governments. In many cases they
are independent of electricity generation companies (upstream) and electricity distribution companies
(downstream). They are financed either by the states or countries or by charging a toll proportional to the
energy they carry.
In addition to its roles of real-time dispatch of generation and managing security, the System
Operator also carries out investigations and planning to ensure that supply can meet demand and system
security can be maintained during future trading periods. Examples of planning work may include co-
coordinating generator and transmission outages, facilitating commissioning of new generating plant and
procuring ancillary services to support power system operation

5.5 Independent Power Producer

Independent power producers (IPPs) are companies which produce electricity for sale to public
utilities. An IPP is not a public utility, instead focusing on the generation of electricity, not the
transmission of it. Some may sell to end users, depending on the energy policies and industry norms in
the areas where they operate. It is not uncommon for independent power producers to pool their resources
in a collective organization which is designed to help them negotiate the best prices with the utilities they
sell to.
The prevalence of independent power producers varies around the world. In some nations, they
are very common, and include private companies, cooperatives, and industrial facilities which sell excess
power to the utilities they work with. It other regions, they are more rare, and operate on a smaller level.
Some associations of producers focus on small regions, while others may span continents. Many are
growing all the time by adding new facilities and services to their roster.
Also known as a non-utility generator (NUG), an independent power producer usually does not
have transmission facilities. It can generate power using a variety of methods, but it must lease
transmission facilities from a public utility, or the utility may construct transmission facilities and
maintain them as part of the sales contract with the power producer. These companies generally have
contracts with the utility or utilities they work with which spell out how much power they must generate,
at what rate, and so on.

5.6 Regulatory and Policy development in Indian power Sector

The broad regulatory / policy framework of the power sector is contained in Electricity Act 2003
(and also in National Electricity Policy 2005 and the National Tariff Policy 2006 as required by the Act),
which inert alia comprises regulations / policies such as provision / planning of electricity and network,
shift from the single buyer model to the multi – buyer model; delicensing of thermal generation;
harnessing captive generation / renewable energy resources, grant of open access in transmission and
distribution; identification of trading as a distinct activity; reorganization of the SEBs;
supply of subsidized electricity only on timely payment by the State Government concerned;
performance based cost of service regulation, competitive procurement of power, Merit order dispatch /
Availability based Tariff, Multi Year Tariff framework, transmission pricing framework, tariff
rationalization through the phased reduction and elimination of cross – subsidies, trading margin, etc.
Electricity Act 2003 was later amended in the year 2007, which primarily omitted the clause; „elimination
of cross subsidies‟ while retaining the provision for reduction of cross subsidies

5.7 Availability Based Tariff

The Availability Based Tariff (ABT) has been implemented by Central Commission in all the five
regions of the country which has built-in mechanism for energy accounting in respect of any deviations
from the declared schedules. The Commission has recommended that same methodology and procedure
for energy accounting should also be implemented at the State level also.
The term “Availability Based Tariff” stands for a rational tariff structure for power supply from
generating stations on a contracted basis. The power plants have “fixed” and “variable” cost. The “fixed
cost elements are interest on loan, return on equity, depreciation, O&M expenses, insurance, taxes, and
interest on working capital. The “variable” cost comprises of the fuel cost, i.e. coal and oil in case of
thermal plants, and nuclear fuel in case of nuclear plants.
In the Availability Tariff mechanism, the fixed and variable cost components are treated
separately. The payment of fixed cost to the generating company is lined to an availability of the plant
that is its capability to deliver MWs on a day-by-day basis.
The total amount payable to the generating company over a year towards the fixed cost would
depend on the average availability (MW delivering capability) of the plant over the year. In case the
average actually achieved over the year is higher than the specified norm for plant availability, the
generating company would get a higher payment.
In case the average availability achieved is lower, the payment would be lower. Hence the name
Availability Tariff. This is the first component of Availability Tariff, and is termed as capacity charge.
The second component of Availability Tariff is the energy charge, and this would comprise of the
variable cost (that is fuel cost) of the power plant for generating energy as per the given schedule for the
day.
 It may be particularly noted that energy charge is not according to the actual generation and plant
output, but is for the schedule (for example if a power plant delivers 600 MW while it was scheduled to
supply only 500 MW), the energy charge payment would be for scheduled generation (500 MW) only,
and the excess generation (100 MW) would be paid for at a certain rate which would depend on the
system conditions prevailing at that time.
If the grid has surplus power at that time and frequency is above 50.0 cycles, the rate would be
small. If the excess generation is at a time of generation deficit in the system (in which condition the
frequency would be below 50.0 cycles), the payment for extra generation would be at a high rate. To
recapitulate, the Availability Tariff would comprise of three components:
(a) capacity charge, towards reimbursement of the fixed cost of plant, linked to the plant‟s capability to
supply MWs
(b) energy charge, to reimburse the fuel cost for scheduled generation
(c) a payment for deviations from schedule, at a rate dependent on system conditions.
5.7.1 Benefits of Availability Based Tariff
• Improved frequency & Voltages.
• Economic Despatch.
• Autonomy to the utilities.
• Incentive for high plant availability, but no incentive to over generate during off-peak hours.
• Technically and commercially right.
• Immediate solution for NUGs (IPPs and Captives).
• True Free market; No Regulator required.
• Pool price known ON-LINE.
• Total transparency.
• Elaborate arrangements for communication not required.
• Simple, practicable; meters already developed.
• Only, we do not aim at 50.0 ± 0.1 Hz.
Our regional grids were operating during earlier (pre-ABT) period in a very dis-satisfactory
manner. There are large deviations in frequency of 50.0 cycles. Low frequency situation results when the
total generation available in the grid is less than the consumer load connected at that time. This can be
checked by enhancing the generation and/or curtailing the consumer load. High frequency is a result of
insufficient backing down of generation when the total consumer load comes down during off-peak hours.
The Availability Based Tariff directly addresses these issues. Firstly, by giving incentives for
enhancing the output capability of the power plants, it would enable more consumer load to be met during
peak load hours.
Secondly, backing down during off-peak hours would not result in a financial loss to the
generating station, and therefore the pre-ABT period prevailing incentive for not backing down and
raising the system frequency would get neutralized.
Thirdly, the shares of beneficiaries in the Central generating stations would be given a meaning
which was not been there during pre-ABT period. The beneficiaries would have well defined
entitlements, and they would be able to draw power up to this at normal rates of the respective power
plants.
In case of over-drawls, they would have to pay at a high rate during peak load hours, which should
discourage them from overdrawing and putting down the frequency. This payment would go to the
beneficiaries who received less energy than was scheduled
 Any constituent which helps the regional grid by underdrawal from the regional grid in a deficit
situation, would get compensated at a good price for the energy under-drawn (in effect power supplied
back to the grid).
Secondly, the grid parameters would improve, and equipment damage correspondingly reduce.
The only way to improve the frequency during peak load hours is to reduce drawls, and necessary
incentives would be provided in the mechanism. High frequency situation should also get checked by
encouraging reduction in generation during off-peak hours.
Thirdly, because of clear separation between fixed and variable charges, generation according to
merit order would be encouraged and pit-head stations would normally not have to back down. The
overall generation cost would accordingly come down.
Fourthly, mechanism would be established for harnessing captive and cogeneration and for
bilateral trading between the constituents.

5.8 Reforms in the near future

In many parts of the world wherever unbundling, i.e. separation of generation, transmission and
distribution has taken place, the two models are more prevalent for system operation. The first one is
Independent System Operator (ISO) model and the other is Transmission System Operator (TSO) model.
In ISO model, transmission companies are also permitted to own, manage and control generation and
distribution companies, an independent system operator is created to facilitate open access and
competitive markets.

In TSO model, operation of the grid and ownership of the grid are integrated in a single entity,
which is responsible for development of transmission system and to provide non-discriminatory open
access to all eligible market participants. Neutrality is an important aspect of the TSO to ensure an
efficient market. In view of this, TSO model seems to be most suitable for future restructured electricity
market in India. This is because the government owned Transmission Company is merely responsible to
provide non-discriminatory open access. Some of the developed countries are also moving away from
ISO model by formation of Regional Transmission Organizations (RTO), which will finally converge as a
TSO model.
 Even though the conditions in Indian power market are not yet ripe for introducing retail
competition, the necessities in a deregulated power market can be summarized below:
- Non-discriminatory open access to transmission network is a pre-requisite for ensuring
competition in wholesale power trading.
- The system operation functions at the national level can be handled by central transmission
utility while state transmission utilities can manage State Load Dispatch Centres (SLDCs) similar
to TSO concept.
- The regional electricity boards will have the responsibility of managing the power exchanges
while the Load Dispatch Centres (RLDCs) will manage the overall integrated operation of power
system like outage planning, relay co-ordination, islanding schemes, etc.
The Government of India have notified the Electricity Regulatory Commissions Act, 1998 for
setting up CERC (Central Electricity Regulatory Commission) and SERCs (State Electricity Regulatory
Commission) policy initiatives have also been taken in the form of amendment of specific sections of ES
Act, 1948 required for regulatory sale of power by the Generating Companies to Boards, etc. As a follow
up of the major policy initiative, GOI has decided to work closely with state governments for time bound
corporatization of the State Electricity Boards. Generation, transmission and distribution of electricity will
be unbundled as separate activities. Tariff reform, privatization of transmission and distribution of power
and setting up of SERCs will be accelerated. Some of the states eg. Orissa, Haryana, Andhra Pradesh and
Uttar Pradesh are being assisted by the World Bank in the reform process. The ADB is assisting the states
of Gujarat and Madhya Pradesh. The PFC has been interacting with states of Assam, West Bengal,
Meghalaya, Tripura, Jammu & Kashmir, Punjab, Tamil Nadu, Karnataka, Maharashtra, Himachal
Pradesh, and Goa in the reform and restructuring process. The Maharashtra SEB also was asked by World
Bank to initiate measures to reach a rate of return of at least 45% to improve its current commercial and
financial operations to decrease cross-subsidization and bring about licenses in tariffs.
In order to set in to motion the reform programmes the Government of Orissa established two
committees to direct the restructuring programe. These were steering committee and the Task Force
Committee. To further facilitate reforms and to abolish the unpractical and unworkable provisions of
existing legislation, the government of Orissa passed the Orissa State Electricity Reforms Act 1995. The
legislation aims
a) to break the monopoly of the Orissa SEB
b) promote competition and private capital by encouraging competition procurement in the
generation sector
c) protect consumer interests
d) rescue the powers of the Orissa SEB in not only setting tariffs and issuing related notifications
but also in its role as planner and operator of the State's Electricity supply system and
e) enable the reforms to be carried out. For example, sanctioning the dissolution of the Orissa
SEB, achieving the transfer of assets contemplated by the reform plan and removing all potential
for legal challenges to provisions set out in earlier legislation if the reforms envisage issues that
may conflict with the provisions of the Electricity Supply Act.

The SEB responsibilities for generation were taken over by Orissa Hydro Power Corporation
(OHPC) and Orissa Power Generating Corporation (OPGC). The existing transmission and distribution
assets and duties of Orissa SEB have been taken over by GRIDCO which would procure power
competitively and supply it further. Distribution was given particular attention under the state‟s reform
programme. Distribution areas were established subject to appropriate criteria and competitive tendering
processes.
 The regulatory authority is expected to play an important role in so far as distribution of
electricity in the area is concerned. The aim of the regulatory authority is to balance the interest of the
state, the consumers and GRIDCO, to issue and enforce licenses and to monitor the quality of service.
The OERC (Orissa Electricity Regulatory Commission) highlights first order tariff

a)Determined retail tariff for 1997 - 98 with overall increase of 10.5% over existing rate against
17.5% suggested by GRIDCO
b) GRIDCO to limit the overall T & D loss to 35% as against 42%.
c) Uncovered gap more than Rs. 400 Crores (1997-98) not approved
d) Scaled down the revenue requirements of GRIflCO by Rs. 395 Crores
e) GRIDCO was directed to effect economy in purchase of power through a merit order.
Basic principles in this regard are cost based tariff - some incentive for future investment,
efficiency based rate making - only reasonable cost as pass through, subsidy, elimination of cross subsidy
- formulated and implement programme for elimination of cross
subsidy. Highlights of the Second tariff order
a) Uniform tariff approved for all distribution licensees. Additional revenue mobilization estimated
at 9.8% over previous year
b) Tariff calculated at T & D loss level of 35% Incentives proposed for licensees if they reduce
losses below 35%
c) Slab system of tariff for domestic consumers rationalized
d) Minimum energy charge contract demand less than 110 KVA now pay monthly
minimum fixed charge
e) Tariff for domestic consumers, small scale industries, street lighting and public institutions kept
well below normative level Replacement of defective meters given high priority, licenses to report
progress to OERC. The electricity boards of Bihar, Haryana, Rajasthan, UP, West Bengal, Gujarat
are expected to follow Orissa model for reform.
Orissa represents a single buyer model where all generating companies (GENCOS) are required to
sell their produce to a state owned transmission company (Transco). This implies that even if GENCOS
are willing to offer spot sales, or enter in to short term contracts there cannot be a credible market in the
absence of multiple buyers. Therefore GENCOS cannot bear the market risk and rely on long term power
purchase agreements with the Transco on a cost plus basis leading to comparatively high tariffs.
According to (Gajendra Haldea, 2001) continued adherence to the so called Orissa model of electricity
reforms which seven reforming states have adopted is likely to promote monopolies, raise tariffs, deny
consumer choice and constraint investment in the power sector.
Case study:

California ISO
The ISO, concerned with the reliability of the grid, balances the operation of grid in real time. The
real time market is operated by the ISO, which uses ancillary services bids and supplemental energy bids
submitted through Power Exchange (PX) and Schedule Coordinators (SC). The ISO also determines the
real time market price after the fact (ex-post price) based on actual metered data.
The ISO guarantees a non-discriminatory open access to transmission for all users, manages the
reliability of transmission system, acquires ancillary services as required, approves day-ahead and hour-
ahead schedules, maintains the real time balancing of load and generation, maintains frequency of the
system and does the congestion management. The ISO also stands as the operator of control area
operators, which balances inter-tie schedules with actual flows across inter-ties. The ISO balances the
system demand with the power output of local generating units, plus purchases from external electric
power systems, minus the energy sold to external systems.

Figure The California ISO

Reference: http:// www.caiso.com for California market.