Restructuring of

Power System

V Semester Balram Kasniya

Electrical Engineering Assistant Professor
Unit -1 01 Introduction to restructureing power
Industry

Reasons for restructuring / deregulation

02 of power industry

03 Understanding the restructuring process

Introduction to issues involved in

04 deregulations

05 Reasons and objectives of deregulation

of various power systems across the
world
Introduction to restructureing power Industry
What does ‘regulation’ mean?
Summary of Regulation:

Purpose: To ensure smooth and disciplined operation of a system, prevent undue advantage to any entity, and
protect consumer interests.

Imposition: Typically imposed by governments or government authorities.

Framework: A set of rules or guidelines for how a system should operate.

Monopoly: Often associated with regulated industries, particularly in the past.

Characteristics of Regulated Utilities:

 Single utility in a specific area.

 Government-imposed business framework.
 Obligation to provide power to all customers (USO).
 Regulated return on investment.

Key Goal: Controlling prices of monopolists in the absence of competition.

Reasons for restructuring / deregulation of power industry
Deregulation refers to the removal of government control over prices and entry barriers in an industry, typically introducing market competition.

Key Points: Misconception: Deregulation doesn't mean a complete absence of rules; it's about creating a new framework.
Synonyms: Re-regulation, reforms, restructuring, liberalization.

Reasons for Deregulation: Goals

 Inefficiency of monopoly utilities.  Introduce competition at various levels.

 Technological advancements (gas turbines).  Reduce electricity costs.
 Financial losses in developing countries.  Create a customer-centric industry.
 Changes in regulatory conditions.

Benefits of Deregulation: Challenges:

 Lower electricity prices.  Dealing with multiple private players.

 Customer choice.  Need for fair and transparent rules.
 Improved customer service.  Importance of market design structure.
 Innovation.
Understanding the restructuring process
Deregulation Variations and Restructuring:

Deregulation Formats:

Developed Countries: Primarily aimed at achieving social welfare through

competition.
Developing Countries: Focused on increasing capacity through private sector
involvement.
Multiple Reasons and Objectives: No single driving force or goal.

Restructuring Process:
Unbundling: Separating activities within a vertically integrated utility.
Functional Partition: Creating distinct entities for generation, transmission, and
distribution.
Competition: Introducing private players in the generation sector.
Natural Monopoly: Transmission often remains a natural monopoly, with limited
competition.

Deregulated Structure:
Multiple Entities: More participants than in vertically integrated systems.
Alternative Money Flows: Increased complexity in financial transactions.
Variations: Different possible models and configurations.
Various Entities Involved in Deregulation:
Genco (Generating Company):
Owns and operates power generators. Bids power into the competitive market. Sells energy directly to buyers.

Transco (Transmission Company):

Owns and maintains transmission facilities. Ensures system reliability. May be independent or part of a regulated entity.

Discom (Distribution Company):

Owns and operates local power delivery systems. May also retail electricity to end customers. May receive revenue through
wheeling fees.

Resco (Retail Energy Service Company):

Sells electricity directly to consumers. Does not own physical assets.

Market Operator:
Facilitates buying and selling of electricity. Matches bids and offers. Handles market settlement.

System Operator (SO):

Ensures system reliability and security. Independent authority. Procures necessary services. May also own transmission network
(TSO).

Customers:
Consume electricity. May have choice of suppliers in deregulated markets. Can purchase through spot market or direct contracts.
Introduction to issues involved in deregulations
Challenges in Deregulated Electricity Markets:

Unique Characteristics of Electricity:

 Real-time balance: Supply and demand must be constantly balanced.
 Inability to wheel freely: Electricity cannot be easily transported to desired locations.

Congestion Management:
 Transmission limits: Network constraints restrict power flows.
 Overloading: Excessive power flows can lead to congestion and blackouts.
 Complex coordination: Congestion management requires careful coordination in deregulated environments.

Ancillary Services:
 Essential functions: Supporting power transmission and ensuring reliability.
 Unbundling: Ancillary services are often priced separately from energy.
 System operator responsibility: Acquiring and managing ancillary services.

Market Design and Market Power:

 Regulatory intervention: Addressing issues like dispatch philosophies, pricing schemes, and market architecture.
 Market power: Preventing market participants from manipulating prices.
 Indirect regulation: Using market design rules to counter market power.

Overall, while deregulation offers potential benefits, it also introduces new challenges that require careful consideration and
effective solutions.
Reasons and objectives of deregulation of various power
systems across the world
General Objectives:

Increased efficiency: Improving the performance of the power sector.

Reduced costs: Lowering electricity prices for consumers.
Increased competition: Promoting a more competitive market environment.

Country-Specific Factors:
US: Rising costs, low tariffs, pressure from smaller players.
UK: Unbundling, privatization, increased competition.
Nordic Pool: Efficiency gains, consumer benefits, regional cooperation.
Developing Countries: Supply shortages, inefficient practices, financial constraints.

Key Challenges and Considerations:

Market power: Preventing dominant players from controlling prices.
Regulatory framework: Establishing appropriate rules and oversight.
Social service vs. market commodity: Balancing economic objectives with social needs in developing countries.
Capacity addition: Addressing the need for increased generating capacity.
Subsidies and losses: Managing government subsidies and reducing transmission/distribution losses.

Overall, the reasons and objectives for deregulation vary across countries based on specific circumstances and priorities.
 Assignment -1

1.What is meant by vertically integrated utility?

2. What are other synonyms of the word – deregulation?

3.Expand: Genco, Transco, Discom

4.What is meant by unbundling of power system?

5.How prices are expected to go down with deregulation?

6.In US, most of the electricity utilities were privately owned. State True or False

7. What are the objectives of deregulation in developing countries?

 Fundamentals of Economics
Unit -2 • Introduction
• Consumer behaviour
• Supplier Behaviour
• Market Equilibrium
• Short-run and Long-run costs
• Various costs of production
• Perfectly competitve market
Introduction: Fundamentals of Economics
Microeconomic Concepts in Electricity Markets

Commodity Market Evolution: Market Equilibrium:

Barter system: Early form of exchange. Intersection of supply and demand: The point where quantity
Electronic trading: Modern, digitalized market. demanded equals quantity supplied.
Virtual marketplace: Eliminates physical market. Price and quantity equilibrium: The market price and quantity at
equilibrium.
Microeconomics: Shifts in supply or demand: Changes in equilibrium price and quantity.
Individual decision-making: Focuses on households and firms.
Market interactions: Analyzes how buyers and sellers interact. Key Concepts:
Electricity as a commodity: Treating electricity like other goods. Utility: Satisfaction derived from consumption.
Indifference curves: Represent combinations of goods that provide
Consumer Behavior: equal utility.
Utility maximization: Consumers aim to maximize their satisfaction. Marginal utility: Additional satisfaction from consuming one more unit.
Demand curve: Represents the relationship between price and Marginal cost: Additional cost of producing one more unit.
quantity demanded. Elasticity: Measures the responsiveness of quantity demanded or
Factors influencing demand: Income, prices of related goods, supplied to changes in price or income.
preferences, and expectations.
Understanding these microeconomic concepts is essential for analyzing
Supplier Behavior: electricity markets and making informed decisions.
Profit maximization: Producers seek to maximize their profits.
Supply curve: Shows the relationship between price and quantity
supplied.
Factors influencing supply: Production costs, technology, input
prices, and expectations.
Consumer Behaviour
Total Utility and Marginal Utility: A Visual Explanation

Total utility: The overall satisfaction a consumer derives from consuming a product.
Marginal utility: The additional satisfaction from consuming one more unit.

Example: Lighting a Room

A square room with nine incandescent lamps (C, M1, M2, M3, M4, L1, L2, L3, L4).
Lamps are arranged in a grid as shown in the figure. An interlock system requires
lamps at lower levels to be on before higher levels. Each lamp provides the same
level of illumination, Figure 2.1.

Utility Analysis:
Initial state: Complete darkness (total utility = 0).
Lamp C: Turning on lamp C provides a satisfaction of 10 units (marginal utility = 10).
Lamp M1: Adding lamp M1 increases total utility, but the marginal utility is less than
10 (e.g., 9 units).
Subsequent lamps: As more lamps are turned on, marginal utility continues to
decrease.

Key Points:
Total utility is the cumulative sum of marginal utilities.
Marginal utility diminishes as more units are consumed (law of diminishing marginal
utility).
Consumers tend to allocate their resources to maximize total utility.
In the context of electricity, this means that consumers will demand more electricity
as the price decreases, but the additional satisfaction from each unit will diminish.
Consumer Behaviour
Law of Diminishing Marginal Utility

Summary:

The Law of Diminishing Marginal Utility states that as an individual consumes more units of a good or service,
the additional satisfaction (marginal utility) they derive from each additional unit decreases. This means that
the first unit of a good typically provides the most satisfaction, while subsequent units provide less and less.

Key Points:

Marginal Utility: The additional satisfaction or utility gained from consuming one more unit of a good or
service.
Diminishing Returns: As consumption increases, the marginal utility derived from each additional unit
decreases.
Natural Phenomenon: This law is considered a natural phenomenon and applies to most goods and
services.
Exceptions: There may be exceptions to this law, such as when a good is addictive or when consumption is
at very low levels.
Consumer Behaviour
Consumer Surplus:

Key Points:
Indifference and Marginal Utility: When electricity is free,
consumers are indifferent to the number of lamps turned on.
However, when a price is introduced, they consider marginal
utility (extra satisfaction from each additional unit) and
compare it to the price.

Price and Marginal Utility: Consumers will turn on lamps

until the marginal utility (in monetary terms) equals the price of
electricity.

Consumer Surplus: The difference between the total utility a

consumer derives from a good or service and the total amount
they pay for it is called consumer surplus.

Net Consumer Surplus: The shaded area in Figure 2.2

represents the net consumer surplus, which is the extra value
the consumer gains due to the price being lower than their
willingness to pay.
Consumer Behaviour
Consumer Equilibrium, Demand Curve, and Elasticity

Consumer Equilibrium
Definition: The point where a consumer maximizes their utility (satisfaction) given their income and prices.

Key conditions:
Marginal utility per dollar spent is equal across all goods.
Consumer spends all their income.
Graphical representation: Indifference curve tangent to the budget line.

Market Demand Curve

Individual demand curve: The relationship between the price of a good and the quantity demanded by a
single consumer.
Law of diminishing marginal utility: As a consumer consumes more of a good, their marginal utility
(satisfaction from the last unit) decreases.

Market demand curve: The aggregation of individual demand curves for all consumers in a market.
Downward slope: The downward slope of the demand curve reflects the law of diminishing marginal utility.
Price Elasticity of Demand

Definition: Measures the responsiveness of quantity demanded to a change in price.

Calculation: Percentage change in quantity demanded divided by percentage change in price.
Types:

Perfectly inelastic: Demand does not change with price (ε = 0).

Inelastic: Demand changes less than proportionally to price (-1 < ε < 0).
Unit elastic: Demand changes proportionally to price (ε = -1).
Elastic: Demand changes more than proportionally to price (-∞ < ε < -1).
Perfectly elastic: Demand changes infinitely with price (ε = -∞).

Graphical Representation of Elasticity

Unit elastic: Rectangular hyperbola.
Perfectly inelastic: Vertical line.
Perfectly elastic: Horizontal line.

Note: The negative sign in the elasticity calculation indicates that as price increases, quantity demanded
decreases, which is the typical relationship for most goods.
Supplier Behaviour
Supplier Behaviour
Supply Function
Suppose, the total commodity output is called as y. Let us assume that there is only one factor of production, ‘x'. Thus, the production function is given as

y = f(x).........................................................................................................................(2.2)

For almost all goods and technologies, the production y increases with x at the beginning. But as cheaper resources start depleting, costlier resources are employed for
production and for the same quantity of production, the cost starts increasing. In other words, the rate of increase of y decreases as x gets larger. The inverse of production
function will be:

x = g(y).......................................................................................................................(2.3)

This function indicates how much of the variable production factor is required to produce a specified amount of commodity. If unit cost of factor of production x is w, then,
the cost function is given as:

cos t (y)= w. g(y)...............................................................................................................(2.4)

Figure 2.6 shows cost function and the marginal cost function which is the derivative of the cost function. The convexity of the function is due to law of diminishing marginal
product.
Supplier Behaviour
Supply Function
Suppose, the total commodity output is called as y. Let us assume that there is only one factor of production, ‘x'. Thus, the production function is given as

y = f(x).........................................................................................................................(2.2)

For almost all goods and technologies, the production y increases with x at the beginning. But as cheaper resources start depleting, costlier resources are employed for
production and for the same quantity of production, the cost starts increasing. In other words, the rate of increase of y decreases as x gets larger. The inverse of production
function will be:

x = g(y).......................................................................................................................(2.3)

This function indicates how much of the variable production factor is required to produce a specified amount of commodity. If unit cost of factor of production x is w, then,
the cost function is given as:

cos t (y)= w. g(y)...............................................................................................................(2.4)

Figure 2.6 shows cost function and the marginal cost function which is the derivative of the cost function. The convexity of the function is due to law of diminishing marginal
product.
THANK
YOU