Power System Economics

Daniel Kirschen

Money© 2012 D. Kirschen & University of Washington 2

• Minimizing costs– Operating costs• Fuel, personnel, maintenance

– Investment costs• Generators, lines, transformers, switching devices, …

• Maximizing profits– Competitive electricity markets

• Maximizing utility or benefits– Consumer’s perspective

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What about money?

Reliability© 2012 D. Kirschen & University of Washington 4

• Operational reliability– Withstand faults, failures, forecasting errors and

other common operational problems– Operate with a security margin

• Planning reliability– Ability to handle long term problems• Units on long-term maintenance• Droughts

– Build enough spare capacity

Reliability© 2012 D. Kirschen & University of Washington 5

What about reliability?

• Providing a security margin and spare capacity costs money– Run additional generating units to have some

operating reserve– Limit production of some generating units to avoid

problems in case of a sudden outage– Build additional generators and transmission lines

to improve long term reliability

Cost of reliability

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Value of reliability

• Poor reliability cause consumer outages• Outages cause a loss of revenue or comfort • Measured using surveys– Estimate of cost of latest outages or– Willingness to pay extra to avoid outages

• Value of Lost Load (VoLL)– Average value of a MWh not delivered– Estimates range from $2,400 to $20,000• ~ 100 times larger than the cost of energy

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Balancing the greed and the fear

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How do we model this balance?

• Mathematical optimization problem– Cost minimization or profit maximization– Reliability introduced through constraints• Explicit costing of reliability is still controversial

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Environmental impact

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Three-way balancing

• More complex optimization problems• Some environmental effects can be monetized– Operating cost of renewable generation is

essentially zero– Carbon tax or carbon trading to reflect the effect

of CO2 emissions

• Others cannot be monetized– Effect of hydro generation on salmons– Modeled using additional operating constraints

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Government energy policy

• Not “pure” economics– Markets and companies take a short term view

• Long term or strategic considerations– Reduce dependence on imports

• Introduction of competitive electricity markets• Choice of primary energy sources– Promotion of wind and photovoltaic in Germany– Nuclear power in France– Energy conservation in the Pacific Northwest

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Course outline (1)

• Organization of the electricity supply industry– What are the major economic functions?– Who does what?

• Introduction to optimization– Optimization with continuous variables– Optimization with discrete variables

• Traditional power system economics problems– Economic dispatch– Unit commitment– Optimal power flow

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Course outline (2)

• Basic concepts from economics• Organization of electricity markets• Participating in electricity markets• System security and ancillary services• Effect of transmission networks on markets

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Textbook

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• A. Wood and B. Wollenberg, “Power Generation, Operation and Control”, Second Edition, Wiley-Interscience, 1996

• D. Kirschen and G. Strbac, “Fundamentals of Power System Economics”, Wiley, 2004