POWER SYSTEM OPERATIONS and ELECTRICITY MARKETS © 2002 by CRC Press LLC ThThee E ELLEECCTTRRIICC PPOOWWEERR EENNGGIINNEEEERRIINNGG SSeerireises Sseerriieess Eeddiittoorr LLeeoo GGrriiggssbyy Published Titles Electromechanical Systems, Electric Machines, and Applied Mechatronics Sergey E. Lyshevski Electrical Energy Systems Mohamed E. El-Hawary Electric Drives Ion Boldea and Syed Nasar Distribution System Modeling and Analysis William H. Kersting Linear Synchronous Motors: Transportation and Automation Systems Jacek Gieras and Jerry Piech The Induction Machine Handbook Ion Boldea and Syed Nasar Power Quality C. Sankaran Power System Operations and Electricity Markets Fred I. Denny and David E. Dismukes Forthcoming Titles Computational Methods for Electric Power Systems Mariesa Crow © 2002 by CRC Press LLC POWER SYSTEM OPERATIONS and ELECTRICITY MARKETS FRED I. DENNY DAVID E. DISMUKES CRC PR ESS Boca Raton London New York Washington, D.C. Library of Congress Cataloging-in-Publication Data Denny, Fred I. Power system operations and electricity markets / Fred I. Denny, David E. Dismukes. p. cm. Includes bibliographical references and index. ISBN 0-8493-0813-5 1. Electric power production. 2. Electric utilities—United States. 3. Electric power—United States—Marketing. I. Dismukes, David E. II. Title. TK1001 .D45 2002 333.793'2'0973—dc21 2002276807 CIP This book contains information obtained from authentic and highly regarded sources. Reprinted material is quoted with permission, and sources are indicated. A wide variety of references are listed. Reasonable efforts have been made to publish reliable data and information, but the author and the publisher cannot assume responsibility for the validity of all materials or for the consequences of their use. 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Visit the CRC Press Web site at www.crcpress.com © 2002 by CRC Press LLC No claim to original U.S. Government works International Standard Book Number 0-8493-0813-5 Library of Congress Card Number 2002276807 Printed in the United States of America 1 2 3 4 5 6 7 8 9 0 Printed on acid-free paper Preface Prior to the 1970s, the U.S. electric power industry was technology driven. Engineers were trained to focus on specific technologies and work in spe- cialized areas. However, dramatic changes began taking place in the 1970s, and an “energy crisis” ushered in a new era of tighter regulation. By the early 1990s, two decades of intense regulation were replaced by a new policy of promoting open access and competition. The Energy Policy Act of 1992, followed by several significant Notices of Proposed Rulemakings and Orders from the U.S. Federal Energy Commission, required utilities to compete for markets that were previously guaranteed. As a consequence, there were many mergers and acquisitions. Marketers with little or no power industry experience moved into positions of influence. Engineering organi- zations were downsized, and the engineers who were left behind had to find ways to prevent power systems from becoming less reliable. Today the transition in industry structure is nearly complete. The U.S. electric power industry is no longer technology driven. It is public policy and market driven. Just as utility companies have to change to survive in the new competitive environment, engineers who choose to work in the industry must learn a new set of skills and accommodate new disciplines. This book is intended to help educate new engineers for the new business environment. We explain how new methods for power systems operations and energy marketing relate to public policy, regulation, economics, and engineering science. This book can serve as a textbook for an undergraduate elective course for engineering students. Alternatively, it can be used for the continuing education of industrial power engineers and energy industry employees. © 2002 by CRC Press LLC About the Authors Dr. Fred I. Denny is currently associate professor of electrical engineering at McNeese State University, Lake Charles, LA. He took a leave of absence from the university in the spring and summer of 2001 to work for the North American Electric Reliability Council (NERC) in Princeton, NJ. From 1995 to 2000, he served as an associate professor of electrical engineering at Louisiana State University in Baton Rouge. From 1979 to 1995, he was vice president of engineering for Edison Electric Institute (EEI) in Washington, D.C. Before joining EEI, he was manager of the operating services support department at Southern Company Services in Birmingham, AL. He also served as a captain in the United States Army Reserve. Dr. Denny is an IEEE Fellow and a licensed professional engineer in Louisiana, Alabama, and Georgia. He is a member of the National Society of Professional Engineers, the Louisiana Engineering Society, and the IEEE Power Engineering Educa- tion Committee. He serves on the editorial board for IEEE computer appli- cations in Power Magazine and is secretary of the CIRED U.S. National Com- mittee. Dr. Denny earned a Ph.D. in electrical engineering from Mississippi State University, specializing in power systems engineering. He is the author of many publications and articles on power systems engineering issues and technologies. Dr. David E. Dismukes is currently associate professor at the Center for Energy Studies (CES), Louisiana State University (LSU). His primary research interests are related to policy issues in regulated and energy indus- tries. He serves as a policy adviser to government agencies and private industry, and speaks regularly before professional and civic associations on electric restructuring issues. He has published many articles on energy and regulated industries issues. Prior to joining the CES faculty in 1995, Dr. Dismukes served as a staff economist at the Florida Public Service Commis- sion and as a research associate with a nationally recognized economic consulting firm located in Tallahassee, FL. Dr. Dismukes is a member of Omicron Delta Epsilon, the American Economic Association, the American Statistical Association, The Econometric Society, The Southern Economic Association, the Western Economic Association, and the International Asso- ciation of Energy Economists. In addition to his CES faculty appointment, Dr. Dismukes is a member of the LSU graduate faculty and is an adjunct © 2002 by CRC Press LLC associate professor in the department of economics in the E.J. Ourso College of Business Administration at LSU. He earned his B.A. from the University of West Florida in Pensacola, and his M.S. and Ph.D. degrees (economics) from Florida State University in Tallahassee. © 2002 by CRC Press LLC Contents Chapter 1 The evolution of the electric power industry 1.1 Energy conservation in the pre-energy crises environment 1.2 The energy crisis and its impact on the electric power industry 1.2.1 Economic factors influencing the electric power industry 1.2.2 Technological factors influencing the electric power industry 1.2.3 Public policy factors influencing the electric power industry 1.2.3.1 Federal public policy initiatives 1.2.3.2 State public policy initiatives Chapter 2 Restructuring and the transition to more competitive power markets 2.1 The fundamentals and terminology of power industry change 2.2 Historic and future structure of the electric power industry 2.3 The mechanics of restructuring power markets 2.3.1 Unbundling the utility system 2.3.2 Transmission independence 2.3.3 Market equilibrium and trading regimes Chapter 3 The first major challenges to the system: the California restructuring experience 3.1 Introduction 3.2 Background on the creation of the competitive California market 3.3 The capacity availability dilemma 3.3.1 Thin market generation ownership 3.4 Transactional limitations for buyers and sellers 3.5 Failure of analysis 3.6 Conclusions Chapter 4 Power marketers in a restructured power industry 4.1 Introduction 4.2 What is a power marketer? © 2002 by CRC Press LLC 4.3 Opening the door to power marketers 4.4 Who are power marketers? 4.5 The power markets 4.6 Services offered by power marketers 4.6.1 Risk management 4.6.2 Hedging 4.6.3 Basis contracts 4.6.4 Options 4.6.4.1 Put option 4.6.4.2 Call option 4.6.4.3 No-cost collar 4.6.4.4 Price swaps 4.6.5 Facilities management 4.6.6 Total energy services 4.6.7 Tolling services 4.7 Conclusion Chapter 5 The role of distributed energy resources in a restructured power industry 5.1 Introduction 5.2 A definition of DER 5.3 UDC disincentives associated with developing DER applications 5.4 Interconnection issues 5.5 Rate design issues 5.6 Wheeling power at the distribution level 5.7 Conclusions Chapter 6 Independent power generation 6.1 Introduction 6.2 The origins of competitive wholesale markets 6.3 Who are independent power developers? 6.4 Analyzing the investment opportunity 6.5 Transmission issues associated with IPP development 6.6 Conclusions Chapter 7 Understanding both technical and business factors 7.1 A brief history 7.2 The current situation 7.3 Industry standards relating to electrical safety 7.4 NERC reliability practices and standards 7.5 Laws and regulations relating to competition and open access 7.6 The business environment and NERC business practice standards 7.7 End-of-chapter questions © 2002 by CRC Press LLC Chapter 8 The North American bulk electric system 8.1 The evolution of system operations and control 8.2 The big machines 8.3 End-of-chapter questions Chapter 9 Methods for economically operating a power system 9.1 Operating economics, control systems, and power systems reliability 9.2 A single generating unit 9.3 Two generating units 9.4 End-of-chapter questions Chapter 10 Power generation control 10.1 The definition of automatic generation control 10.2 Changing automatic generation control objectives 10.3 Control performance criteria 10.4 End-of-chapter questions Chapter 11 New reliability and control concepts 11.1 The layman’s definition of reliability 11.2 The academic and traditional definitions of reliability 11.3 North American Electric Reliability Council reliability definitions 11.4 Traditional power system operations in control areas 11.5 The new paradigm: operating and service functions 11.6 End-of-chapter questions Chapter 12 Available transfer capability 12.1 A new methodology for assessing transmission line limitations 12.2 Guiding principles for ATC calculations 12.3 End-of-chapter questions Chapter 13 Network congestion and transmission loading relief 13.1 The network congestion problem 13.2 The transmission loading relief approach 13.3 Criticisms of the TLR approach 13.4 Network congestion data 13.5 End-of-chapter questions Chapter 14 The use of power flow and stability analysis tools 14.1 Operating security limit (OSL) violations 14.2 Tools for determining OSL violations 14.3 End-of-chapter questions © 2002 by CRC Press LLC