Preface xix

Acknowledgements xxi

Introduction 1

1 The Basics 7

1.1 How electricity works 7

1.2 Early development of the Electricity Supply Industry (ESI) 10

1.3 The lifecycle of electric power 12

1.4 Development, structure, coordination, legislation of the ESI 14

1.5 New ownership structure 15

1.6 Selected country examples 16

[...]ope 16

1.6.2 Development in the Americas 18

1.6.3 Australasia 19

1.6.4 Asia 20

1.6.5 Africa and the Middle East 20

2 Structure, Operation and Management of the Electricity Supply Chain 21

2.1 Energy sources 21

2.1.1 Fossil fuel 22

2.1.2 Nuclear 26

2.1.3 Renewable combustible matter 26

2.1.4 'Hot' natural energy 26

2.1.5 'Cold' natural energy 27

2.1.6 Hydrogen 27

2.1.7 Stored 27

2.1.8 Consumables 28

2.1.9 Integration of energy sourcing and power generation 28

2.2 Power generation 29

2.2.1 Turbine generation 30

2.2.2 Open cycle 31

2.2.3 Conventional thermal generation 31

2.2.4 Combined cycle 34

2.2.5 Combined heat and power (CHP) 34

2.2.6 Turbines driven by water 34

2.2.7 Wind 36

2.2.8 Non turbine generation 36

2.2.9 Distributed power generation 36

2.2.10 The production of environmental and amenity impact factors 37

2.2.11 Abating the production of environmental impact factors 40

2.2.12 Constructing the emission abatement stacks 44

2.2.13 Stock management 49

2.2.14 Flexibility 50

2.2.15 Reliability and availability 55

2.2.16 Reactive power 55

2.2.17 Three phase 55

2.2.18 Efficiency 56

2.2.19 Cost 58

2.2.20 Generation mix 59

2.2.21 Requirements for ancillary services 60

2.2.22 Plant dynamics 60

2.2.23 The relative value of the different forms of plant service 60

2.2.24 Generator hedging 61

2.3 High voltage transmission, network operation, system operation 62

2.3.1 Electrical networks 62

2.3.2 Functions associated with network operation 72

2.3.3 Coordinated planning of generation and transmission build 74

2.3.4 Signals to build 76

2.3.5 Interconnection 78

2.3.6 Charging mechanisms available to the grid and system operators 79

2.4 Distribution 81

2.4.1 The roles of the distribution network operator 82

2.4.2 Entry connection cost 83

2.5 Metering 84

2.5.1 Metering and the consumer experience 85

2.5.2 The metering lifecycle 85

2.5.3 Meter types 86

2.6 Supply 87

2.6.1 Billing 88

2.6.2 Consumer segmentation 89

2.6.3 Regulatory requirements 89

2.6.4 Consumer agreements 90

2.6.5 Supplier profit and loss profile in relation to wholesale price 93

2.6.6 Retail pricing 93

2.6.7 Hedging 95

2.6.8 Supplier risk and supplier charges 101

2.6.9 Swing in industrial and commercial contracts 102

2.6.10 Demand side management 102

3 Policy - Issues, Priorities, Stakeholders, Influencers 105

3.1 Agendas and policy formation 106

3.2 Policy issues and drivers 107

3.3 Policy outcomes and instruments 110

3.4 Energy policies 112

3.4.1 Policy trends 112

3.4.2 Formation of policy 115

3.5 Framework 116

3.6 Domestic institutional players 117

3.7 The role and influence of international players 118

4 Liberalisation, Deregulation and Regulation 121

4.1 The liberalisation paradigm 122

4.2 Steps 122

4.2.1 Unbundling (and de-integration) 123

4.2.2 Corporatisation 125

4.2.3 Ring fence some activities under state control 126

4.2.4 Forced divestment and fragmentation of the incumbents 127

4.2.5 Privatisation 127

4.2.6 Deregulation 127

4.2.7 Reregulation 128

4.2.8 Further fragmentation 128

4.2.9 Cross industry horizontal integration 128

4.2.10 Re-consolidation 128

4.2.11 Entry of financial institutions 128

4.2.12 Pressure on retail deregulation 128

4.2.13 Further deregulation of networks and metering 129

4.2.14 Revise model 129

4.3 Conditions for reform 129

4.4 The role of the state 130

4.4.1 The national macroeconomy 131

4.4.2 Mechanisms of government influence 131

4.5 Measures of liberalisation and deregulation 132

4.6 Regulation 134

4.6.1 Quid pro quo model for regulatory change 135

4.6.2 Prescriptive model for regulation 135

4.6.3 Regulatory engagement 137

4.6.4 Economic regulation 137

4.7 Regulators 137

4.7.1 Regulatory indicators 139

4.7.2 Market monitoring by the regulator 139

4.7.3 Price regulation 139

4.7.4 Rate of return regulation 140

4.8 Industry key performance indicators 140

5 Market Structures for Electricity 141

5.1 The basics of plant dispatch 143

5.1.1 Acquiring the information on demand 143

5.1.2 Management of variation in demand in the centrally managed system 145

5.1.3 Acquiring the basic information on generation capability 146

5.1.4 Construction of the first trial schedule 149

5.1.5 Schedule feasibility and adjustment 150

5.1.6 Ancillary services 158

5.1.7 Profiles within commitment periods 158

5.1.8 Generator failure 159

5.2 The centrally managed model 160

5.2.1 Information and behaviour in centrally managed systems 160

5.2.2 Introduction of Independent Power Producers (IPP's) 163

5.2.3 Consumers in the centrally managed system 164

5.3 The single buyer 164

5.4 The pool model 165

5.4.1 The trial schedule in the pool 166

5.4.2 Subsequent trial schedules and final initial schedule 167

5.4.3 Demand 168

5.4.4 Power capacity 168

5.4.5 Penalty for failure 169

5.4.6 Pool index 169

5.4.7 Contracts for difference 169

5.4.8 Supplier price 170

5.4.9 Fixed cost recovery in the pool 171

5.4.10 Price caps in static schedule 171

5.4.11 Market power in the pool 171

5.4.12 Information and communication in the pool 172

5.4.13 Renewable and other generation with special treatment 172

5.4.14 Offering and contracting strategy for generation plant in the pool 172

5.4.15 Interpool relationships 175

5.5 The bilateral model 176

5.5.1 Contracting in the bilateral system 176

5.5.2 Physical notification in the bilateral system 176

5.5.3 The market operator in the bilateral market 177

5.5.4 Operational strategy for contracted plant in the bilateral market 177

5.5.5 Hybrid pool/bilateral markets 178

5.6 Imbalance and balancing 178

5.6.1 Market structure for balancing and imbalance 178

5.6.2 Imbalance charging 179

5.6.3 Provision of balancing 179

5.6.4 Transmission effects in balancing 180

5.6.5 Profile effects within the balancing period 180

5.6.6 Transaction strategy 181

5.6.7 Transaction cost minimisation 181

5.6.8 Imbalance revenue distribution 181

5.6.9 Auction choices 181

5.6.10 Issues with balancing mechanisms 182

5.7 Reserve contracts 182

5.8 Wholesale markets 183

5.9 Power exchanges 184

5.9.1 The journey to power exchanges 184

5.9.2 Specifics of power exchanges 187

5.10 Advanced pool markets 189

6 Power Capacity 191

6.1 The definition of capacity 191

6.2 Requirements for Capacity 193

6.2.1 Generator failure 193

6.2.2 Demand variation 196

6.2.3 Network failure 196

6.3 The basic economics of provision of capacity and reserve by generators 197

6.3.1 Representation of generation capacity on the power stack 197

6.3.2 Provision of capacity by a unit 197

6.4 Modelling the capability of generation capacity 200

6.4.1 Capacity effect of take or pay fuel supply contracts 200

6.4.2 Capacity effect of annual emission limits 202

6.4.3 Capacity effect of port and other infrastructure contracts 203

6.4.4 Capacity effect of coal stocking 203

6.4.5 Capacity effect of plant life usage optimisation 204

6.4.6 The role of outage management in capacity 205

6.4.7 Generation above normal maximum capacity 205

6.4.8 Long term capacity 206

6.4.9 Hydro 207

6.4.10 Pumped storage 207

6.5 Modelling capacity capability from the consumer side 208

6.5.1 Modelling value of lost load as a capacity capability 209

6.6 Commercial mechanisms - the generator perspective 209

6.6.1 Day ahead capacity payments in pool markets 210

6.6.2 Fixed cost subsidy, marginal cost energy provision 214

6.6.3 Traded options and capacity contracts 214

6.6.4 Self insurance for generator shortfall 217

6.6.5 Mutual insurance 218

6.6.6 Value from rare but highly priced energy contracts 219

6.6.7 Reserve contracts 220

6.7 Capacity provision - the supplier's perspective 220

6.7.1 Requirements to secure capacity by load serving entities 220

6.8 Capacity provision - the network operator's perspective 223

6.9 The system operator's perspective 224

6.9.1 Cost to consumers 224

6.9.2 Placing capacity obligation with the system operator 226

6.9.3 Placing the capacity obligation with the regulator or ministry 226

6.10 Capacity facilitation - contractual instruments 226

6.10.1 Generator cover 227

6.10.2 Insurance and reinsurance 227

6.10.3 Traded options 235

6.11 Use of options to convey probability information 235

6.12 Effect of price caps on capacity and prices 237