3. Electricity Market Design Models

Question 1

How has generation management and scheduling changed over time?

Answer 1

1. From central dispatch to whole sale markets
   (Wholesale markets based on audited costs)
2. From cost-based prices to the bid-based prices

Question 2

What does the liberalisation of generation investment mean?

Answer 2

Opening the door to wholesale markets

from central dispatch?

Question 3

Why can’t the exchange of electricity be fully left to the free market alone?

Answer 3

1. Technical restriction
   (Infrastructure / network industry)
   - delivering electricity requires a transmission network
   - the operation of this network is a technically complex task
   - this requires the coordination of both generationand demand resources
2. Business restriction
   - The liberalization started in an environment characterized by
   - fully regulated and vertically integrated monopolistic utilities

Question 4

What does PURPA stand for?

Answer 4

Public Utilities Regulatory Policies Act, 1978

Question 5

What is PURPA?

Answer 5

• enables a
• certain kind of non-utility electricity power producers “qualifying facilities” (e.g. RE)
• to become alternative electricity suppliers
• by requiring electric utilities
• to buy power from these facilities
• at the “avoided cost rate”

Question 6

What’s the avoided cost rate?

Answer 6

The cost the electricity utility would incur where it to generate or purchase from another source.

Question 7

Which are acts that opened the electricity market in the US?

Answer 7

1. PURPA (Public Utilities Regulatory Act), 1978

2. Electricity Act, 1992

Question 8

What does the Electricity Act state?

Answer 8

• It allowed independent power producers
• to trade freely in
• the power system and sell wholesale power
• to any vertically integrated utility or distribution company

(In PURPA, trading between IPP and any other parties except the verticcally integrated utility were banned/limited.)

Question 9

What’s the main difference between PURPA and the Electricity Act?

Answer 9

Trading between IPP and any other parties except the vertically integrated utility were banned in PURPA.

Question 10

How did PURPA affect customers?

Answer 10

The cost involved were passed on to consumers and laid down in PPAs.

Question 11

Principles of the Chilean reform

Answer 11

1. Deregulation of generation investment = free entry principle
2. Replace cost-of-service remuneration with market prices for the generated electricity

Question 12

Which country was the first to make progress toward the liberalisation of the generation expansion in the 80s?

Answer 12

Chile

Question 13

What did the Chilean reform establish?

Answer 13

• An electric system,
• in which private investors
• could freely install new plants
• and sell the electricity generated at market prices

Question 14

What’s the unit commitment?

Answer 14

• A mathematical optimization problem
• used to determine which units should be in operation or remain disconnected
• at every hour interval,
• to match the energy demand
• at minimum cost

Question 15

How did investment decisions change under the Chilean model?

Answer 15

• They were no longer incumbent upon the regulator

- Generators are remuenrated on the grounds of system marginal cost

Question 16

Which where the 2 new entitites created in Latin America in the context of the deregulation?

Answer 16

1. System Operator

2. Market Operator

Question 17

Which characteristics does the system operator have?

Answer 17

1. Must be independent of generators and marketers

2. Responsible for managing the transmission network

Question 18

Which characteristics does the market operator have?

Answer 18

1. Obtains the unit commitment on the basis of the generators’s bids
2. Calculates the system marginal cost for each time block

Question 19

In which way were England & Wales as well as Norway pioneers?

Answer 19

The system marginal price was not based on costs but on bids submitted by the generating units

Question 20

How do the bidding formats differ in the US and Europe?

Answer 20

US
- multi-part offers with operational costs & technical constraints

EU

• price-quantity pair
  (opt. more complex formats available)

Question 21

What are the main differences between the market in the EU and that in the US?

Answer 21

1. In the EU, system operation is decoupled from the market, while in the US the ISOhas both market and system operation
2. In the US physical constraints are included

Question 22

How is the EU clearing algorithm called?

Answer 22

EUPHEMIA

Pan-European Hybrid Electricity Market Integration Algorithm

Question 23

What’s the exchange for Spain/Portugal, central Europe & Nordic-Baltic region called?

Answer 23

• OMIE
• EPEX SPOT
• Nord Pool

Question 24

What is LMP?

Answer 24

Locational Marginal Prices

Question 25

What’s the difference between zonal and nodal pricing?

Answer 25

• Zonal pricing: you look at the different zone within a market
• Nodal pricing: you look at different markets (see Texas)

Question 26

What is the primary purpose of long-term markets?

Answer 26

To provide hedging mechanisms for producer and consumer entities