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# EE E710 POWER SYSTEM ECONOMICS

## UNIT I: ECONOMIC CONSIDERATIONS

Cost of electrical energy - Expressions for cost of electrical energy Capital-interest Depreciation Different methods - Factors affecting cost of operation - Number and size of generating units - Importance
of high load factor - Importance of power factor improvement- Most economical power factor - Meeting the
KW demand on power stations Power system tariffs Regions and structure of Indian Power System.
UNIT II: ECONOMIC DISPATCH
Modeling of Cost Rate Curves Economic Dispatch Calculation - Losses neglected, with generator Real
and Reactive power limits; Losses included - Losses of economy in incremental cost data - Problems Generator Capability Curve Effect of Ramping rates Prohibited Operating Zones - Automatic Load
dispatch in Power Systems.
UNIT III: ECONOMIC OPERATION
General loss formula - Evolution of incremental transmission loss rate - Method of calculation of loss
coefficients Systematic development of transmission loss formula -Transmission loss as a function of
plant generation Participation Factor - Non Smooth Fuel Functions (Quadratic, Valve point loading,
CCCP, Multiple Fuel) Problems -Introduction to Artificial Intelligence Techniques for solving ELD
problems.
UNIT IV: INTERCONNECTED SYSTEMS
Interconnected operation - Economic operation of hydro thermal power plants Iteration scheme Gradient approach Newtons method - Modeling and solution approach to short term and long term
Hydro-Thermal scheduling problem using Dynamic Programming.
UNIT V: OPTIMAL POWER FLOW AND FUNDAMENTALS OF MARKETS
Problem formulation - Cost minimization - Loss minimization - Solution using NLP and successive LP
methods Constraints - DC and AC OPF (Real and Reactive Power Dispatch) Effect of Contingencies Voltage and Phase angle - Transient Voltage Dip/Sag Criteria. Fundamentals of Markets Introduction to
Efficiency and Equilibrium - Modeling of consumers and producers Single and Double Auction
mechanism - Global welfare Dead Loss Spot and Forward Markets.
TEXT BOOKS
1. Allen J Wood and B F Wollenberg, "Power Generation, Operation and Control", John Wiley & Sons,
New York, 2004.
2. D. P. Kothari and I. J. Nagrath ," Modern Power System Analysis ", Tata McGraw Hill Publishing
Company, New Delhi, 2006.
REFERENCE BOOKS
3. Kirchmayer. L.K,"Economic operation of power system, John Wiley & Sons, 1953.
4. Steven Stoft, Power System Economics, John Wiley & Sons, 2000.
5. Daniel S. Kirschen and Goran Strbac, Power System Economics, John Wiley & Sons, Ltd, 2004.
6. Hadi Saadat, Power System Analysis, Second Edition, McGraw Hill Publishers, ScholarlyTransaction
Papers, 2002.

CONTENTS
UNIT NO.
1

TITLE
1.1 Economics of Power Generation

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## 2.2 CO-ORDINATION EQUATIONS WITH LOSSES NEGLECTED.

SOLUTION BY ITERATION
2.3 CO-ORDINATION EQUATION WITH LOSS OR EXACT COORDINATION EQUATION
2.4 SOLUTION OF COORDINATION EQUATION USING BMN
COEFFICIENT BY ITERATION METHOD

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2.6 Economic

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3.1 INTRODUCTION

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## 3.4 Economic schedule including limits on generator (neglecting

losses)
3.5 Base point and participation factor

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PROBLEM

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operating zones

PAGENO.

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22

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## 4.6 HYDRO-UNITS IN SERIES (HYDRAULICALLY COUPLED)

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4.7
DYNAMIC-PROGRAMMING
SOLUTION
HYDROTHERMAL SCHEDULING PROBLEM
5.1 Optimal power flow

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TO

THE

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## 5.2 Solution of the optimal power flow

5.3 Linear sensitivity analysis

## UNIT- I ECONOMOIC CONSIDERATIONS

1.1 Economics of Power Generation
The art of determining the per unit (i.e., one kWh)cost of production of electrical energy is known as
economics of power generation. A consumer will use electric power only if it is supplied at reasonable
rate. Therefore, power engineers have to find convenient methods to produce electric power as cheap as
possible so that consumers are tempted to use electrical methods.
Terms much used in the economics of power generation :
Interest:
The cost of use of money is known as interest.
Depreciation:
The decrease in the value of the power plant equipment and building due to constant use is known as
depreciation. If the power station equipment were to last forever, then interest on the capital investment
would have been the only charge to be made.
Annual depreciation
Every power station has a useful life ranging from fifty to sixty years. From the time the power station is
installed, its equipment steadily deteriorates due to wear and tear so that there is a gradual reduction in
the value of the plant. This reduction in the value of plant every year is known as annual depreciation.
1.2 Cost of Electrical Energy
The total cost of electrical energy generated can be divided into three parts, namely
Fixed cost
It is the cost which is independent of maximum demand and units generated.
Semi-fixed cost
It is the cost which depends upon maximum demand but is independent of units generated.
Running cost
It is the cost which depends only upon the number of units generated.
1.3 Expressions for Cost of Electrical Energy
The overall annual cost of electrical energy generated by a power station can be expressed in two
forms viz three part form and two part form.
Three part form:
In this method, the overall annual cost of electrical energy generated is divided into three parts viz fixed
cost, semi-fixed cost and running cost (i.e.)
Total annual cost of energy = Fixed cost + Semi-fixed cost + Running cost
= Constant + Proportional to max. demand + Proportional to kWh generated.
=Rs (a+ b kW + c kWh)
where
a = annual fixed cost independent of maximum demand and energy output.
b = constant which when multiplied by maximum kW demand on the station gives the annual semi-fixed
cost.
c = a constant which when multiplied by kWh output per annum gives the annual running cost.
Two part form.
It is sometimes convenient to give the annual cost of energy in two part form. In this case, the annual cost
of energy is divided into two parts viz., a fixed sum per kW of maximum demand plus a running charge
per unit of energy.
Total annual cost of energy = Rs. (A kW + B kWh)
where

A = a constant which when multiplied by maximum kW demand on the station gives the annual cost of the
first part.
B = a constant which when multiplied by the annual kWh generated gives the annual running cost.
1.4 Methods of Determining Depreciation
There is reduction in the value of the equipment and other property of the plant every year due to
depreciation. Therefore, a suitable amount (known as depreciation charge) must be set aside annually so
that by the time the life span of the plant is over, the collected amount equals the cost of replacement of
the plant. The following are the commonly used methods for determining the annual depreciation charge .
Straight line method.
In this method, a constant depreciation charge is made every year on the basis of total depreciation and
the useful life of the property. Obviously, annual depreciation charge will be equal to the total depreciation
divided by the useful life of the property. Thus, if the initial cost of equipment is Rs 1,00,000 and its scrap
value is Rs 10,000 after a useful life of 20 years, then,

In general, the annual depreciation charge on the straight line method may be expressed as :

Fig. 1.1

The straight line method is extremely simple and is easy to apply as the annual depreciation charge can
be readily calculated from the total depreciation and useful life of the equipment. Fig. 1.1 shows the
graphical representation of the method. It is clear that initial value P of the equipment reduces uniformly,
through depreciation, to the scrap value Sin the useful life of the equipment. The depreciation curve (PA)
follows a straight line path, indicating constant annual depreciation charge.
DRAWBACKS:
Firstly, the assumption of constant depreciation charge every year is not correct. Secondly, it does not
account for the interest which may be drawn during accumulation.
Diminishing value method.
In this method, depreciation charge is made every year at a fixed rate on the diminished value of the
equipment. In other words, depreciation charge is first applied to the initial cost of equipment and then to
its diminished value.
As an example, suppose the initial cost of equipment is Rs 10,000 and its scrap value after the useful life
is zero. If the annual rate of depreciation is 10%, then depreciation charge for the first year will be 01
10,000 = Rs 1,000. The value of the equipment is diminished by Rs 1,000 and becomes Rs 9,000. For
the second year, the depreciation charge will be made on the diminished value (i.e.Rs 9,000) and
becomes 01 9,000 = Rs 900. The value of the equipment now becomes 9000 900 = Rs 8100. For the
third year, the depreciation charge will be 01 8100 = Rs 810 and so on.
Mathematical treatment
Let
P = Capital cost of equipment
n = Useful life of equipment in years
S = Scrap value after useful life
Suppose the annual unit depreciation is x. It is desired to find the value of x in terms of P, n and S.

But the value of equipment after nyears (i.e.,useful life) is equal to the scrap value S.

From exp. (i), the annual depreciation can be easily found. Thus depreciation to be made for thefirst year
is given by :

Fig. 1.2
Similarly, annual depreciation charge for the subsequent years can be calculated. This method is more
rational than the straight line method. Fig. 1.2 shows the graphical representation of diminishing value
method. The initial value P of the equipment reduces, through depreciation, to the scrap value S over the
useful life of the equipment. The depreciation curve follows the path PA. It is clear from the curve that
depreciation charges are heavy in the early years but decrease to a low value in the later years.
DRAWBACKS:
Firstly, low depreciation charges are made in the late years when the maintenance and repair charges
are quite heavy. Secondly, the depreciation charge is independent of the rate of interest which it may
draw during accumulation. Such interest moneys, if earned, are to be treated as income.
Sinking fund method.
In this method, a fixed depreciation charge is made every year and interest compounded on it annually.
The constant depreciation charge is such that total of annual installments plus the interest accumulations
equal to the cost of replacement of equipment after its useful life.
Let
P = Initial value of equipment
n = Useful life of equipment in years
S = Scrap value after useful life
r = Annual rate of interest expressed as a decimal
Cost of replacement =P S
Let us suppose that an amount of q is set aside as depreciation charge every year and interest
compounded on it so that an amount of P S is available after n years. An amount q at annual interest
rate of r will become

at the end of n years. Now, the amount q deposited at the end of first

year will earn compound interest for n 1 years and shall become
the end of first year becomes

Amount q deposited at

## 1.5 Importance of High Load Factor

Load factor:
The ratio of average load to the maximum demand during a given period is known as load factor i.e.,

The load factor plays a vital role in determining the cost of energy. Some important advantages of high
load factor are listed below :
(i) Reduces cost per unit generated :A high load factor reduces the overall cost per unit generated. The
higher the load factor, the lower is the generation cost. It is because higher load factor means that for a
given maximum demand, the number of units generated is more. This reduces the cost of generation.
(ii) Reduces variable load problems: A high load factor reduces the variable load problems on the power
station. A higher load factor means comparatively less variations in the load demands at various times.
This avoids the frequent use of regulating devices installed to meet the variable load on the station.
1.6 Number and size of generating units
While making the selection of number and sizes of the generating units, the following points should
be kept in view :

(i) The number and sizes of the units should be so selected that they approximately fit the annual load
curve of the station.
(ii) The units should be preferably of different capacities to meet the load requirements. Although use of
identical units (i.e., having same capacity) ensures saving* in cost, they often do not meet the load
requirement.
(iii) The capacity of the plant should be made 15% to 20% more than the maximum demand to meet the
future load requirements.
(iv) There should be a spare generating unit so that repairs and overhauling of the working units can be
carried out.
(v) The tendency to select a large number of units of smaller capacity in order to fit the load curve very
accurately should be avoided. It is because the investment cost per kW of capacity increases as the size
of the units decreases.
1.7 Importance of Power Factor Improvement
The improvement of power factor is very important for both consumers and generating stations as
discussed below :
(i) For consumers: A consumer*has to pay electricity charges for his maximum demand in kVA plus the
units consumed. If the consumer imporves the power factor, then there is a reduction in his maximum
kVA demand and consequently there will be annual saving due to maximum demand charges. Although
power factor improvement involves extra annual expenditure on account of p.f. correction equipment, yet
improvement of p.f. to a proper value results in the net annual saving for the consumer.
(ii) For generating stations: A generating station is as much concerned with power factor improvement
as the consumer. The generators in a power station are rated in kVA but the useful output depends upon
kW output. As station output is kW = kVA cos , therefore, number of units supplied by it depends upon
the power factor. The greater the power factor of the generating station, the higher is the kWh it delivers
to the system. This leads to the conclusion that improved power factor increases the earning capacity of
the power station.
1.8 Most Economical Power Factor
If a consumer improves the power factor, there is reduction in his maximum kVA demand and hence
there will be annual saving over the maximum demand charges. However, when power factor is
improved, it involves capital investment on the power factor correction equipment. The consumer will
incur expenditure every year in the shape of annual interest and depreciation on the investment made
over the p.f. correction equipment. Therefore, the net annual saving will be equal to the annual saving in
maximum demand charges minus annual expenditure incurred on p.f. correction equipment. The value to
which the power factor should be improved so as to have maximum net annual saving is known as the
most economical power factor. Consider a consumer taking a peak load of P kW at a power factor of cos
1and charged at a rate of Rs x per kVA of maximum demand per annum. Suppose the consumer
improves the power factor to cos 2 by installing p.f. correction equipment. Let expenditure incurred on
the p.f. correction equipment be Rs y per kVAR per annum. The power triangle at the original p.f. cos 1is
OAB and for the improved p.f. cos 2, it is OAC[See Fig. 1.3].

Fig. 1.3

In this expression, only 2is variable while all other quantities are fixed. Therefore, the netannual saving
will be maximum if differentiation of above expression w.r.t. 2 is zero
i.e.

It may be noted that the most economical power factor (cos 2) depends upon the relative costs of supply
and p.f. correction equipment but is independent of the original p.f. cos 1
1.9 Meeting the Increased kW Demand on Power Stations
The useful output of a power station is the kW output delivered by it to the supply system. Sometimes, a
power station is required to deliver more kW to meet the increase in power demand. This can be
achieved by either of the following two methods :(i) By increasing the kVA capacity of the power station at
the same power factor (say cos 1).Obviously, extra cost will be incurred to increase the kVA capacity of
the station.(ii) By improving the power factor of the station from cos 1to cos 2without increasing the
kVA capacity of the station. This will also involve extra cost on account of power facto correction
equipment. Economical comparison of two methods. It is clear that each method of increasing kW
capacity of the station involves extra cost. It is, therefore, desirable to make economical comparison of
the two methods. Suppose a power station of rating P kVA is supplying load at p.f. of cos 1 . Let us
suppose that the new power demand can be met either by increasing the p.f. to cos 2 at P kVA orby
increasing the kVA rating of the station at the original p.f. cos 1. The power*triangles for the whole
situation are shown in Fig. 6.14.
Cost of increasing kVA capacity of station.
Referring to Fig. 6.14, the increase in kVA capacity of the station at cos 1 to meet the new demand is
given by:

Fig 1.4

## Cost of p.f. correction equipment

Referring to Fig.1.4, the new demand in kW can be met by increasing the p.f. from cos 1 to cos 2 at
the original kVA of the station. The leading kVAR to be taken by the p.f. correction equipment is given by
ED i.e.

## 1.10 Power system Tariff

The rate at which electrical energy is supplied to a consumer is known as tariff.
Objectives of tariff.
Like other commodities, electrical energy is also sold at such a rate so that it not only returns the cost but
also earns reasonable profit. Therefore, a tariff should include the following items :
(i) Recovery of cost of producing electrical energy at the power station.
(ii) Recovery of cost on the capital investment in transmission and distribution systems.
(iii) Recovery of cost of operation and maintenance of supply of electrical energy e.g., metering
equipment, billing etc.
(iv)A suitable profit on the capital investment
Desirable Characteristics of a Tariff
A tariff must have the following desirable characteristics :
(i) Proper return :The tariff should be such that it ensures the proper return from each consumer. In other
words, the total receipts from the consumers must be equal to the cost of producing and supplying
electrical energy plus reasonable profit. This will enable the electric supply company to ensure continuous
and reliable service to the consumers.
(ii) Fairness : The tariff must be fair so that different types of consumers are satisfied with the rate of
charge of electrical energy. Thus a big consumer should be charged at a lower rate than a small
consumer. It is because increased energy consumption spreads the fixed charges over a greater number
of units, thus reducing the overall cost of producing electrical energy. Similarly, a consumer whose load
conditions do not deviate much from the ideal (i.e., non variable) should be charged at a lower*rate than
the one whose load conditions change appreciably from the ideal.
(iii) Simplicity: The tariff should be simple so that an ordinary consumer can easily understand it. A
complicated tariff may cause an opposition from the public which is generally distrustful of supply
companies.
(iv) Reasonable profit : The profit element in the tariff should be reasonable. An electric supply company
is a public utility company and generally enjoys the benefits of monopoly. Therefore, the investment is
relatively safe due to non-competition in the market. This calls for the profit to be restricted to 8% or so
per annum.

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(v) Attractive: The tariff should be attractive so that a large number of consumers are encouraged to use
electrical energy. Efforts should be made to fix the tariff in such a way so that consumers can pay easily.
Types of Tariff
There are several types of tariff. However, the following are the commonly used types of tariff :
Simple tariff.
When there is a fixed rate per unit of energy consumed, it is called a simple tariff or uniform rate tariff.
Disadvantages
(i) There is no discrimination between different types of consumers since every consumer has to pay
equitably for the fixed*charges.
(ii) The cost per unit delivered is high.
(iii) It does not encourage the use of electricity.
Flat rate tariff.
When different types of consumers are charged at different uniform per unit rates, it is called a flat rate
tariff. In this type of tariff, the consumers are grouped into different classes and each class of consumers
is charged at a different uniform rate. For instance, the flat rate per kWh for lighting load may be 60 paise,
whereas it may be slightly less (say 55 paise per kWh) for power load. The different classes of consumers
are made taking into account their diversity and load factors. The advantage of such a tariff is that it is
more fair to different types of consumers and is quite simple in calculations.
Disadvantages
(i) Since the flat rate tariff varies according to the way the supply is used, separate meters are required for
lighting load, power load etc. This makes the application of such a tariff expensive and complicated.
(ii) A particular class of consumers is charged at the same rate irrespective of the magnitude of energy
consumed. However, a big consumer should be charged at a lower rate as in his case the fixed charges
per unit are reduced.
Block rate tariff.
When a given block of energy is charged at a specified rate and the succeeding blocks of energy are
charged at progressively reduced rates, it is called a block rate tariff. In block rate tariff, the energy
consumption is divided into blocks and the price per unit is fixed in each block. The price per unit in the
first block is the highest and it is progressively reduced for the succeeding blocks of energy. For example,
the first 30 units may be charged at the rate of 60 paise per unit ; the next 25 units at the rate of 55 paise
per unit and the remaining additional units may be charged at the rate of 30 paise per unit.
Advantages
The consumer gets an incentive to consume more electrical energy. This increases the load factor of the
system and hence the cost of generation is reduced.
Disadvantages
it lacks a measure of the consumers demand. This type of tariff is being used for majority of residential
and small commercial consumers.
Two-part tariff
When the rate of electrical energy is charged on the basis of maximum demand of the consumer and the
units consumed, it is called a two-part tariff. In two-part tariff, the total charge to be made from the
consumer is split into two components viz., fixed charges and running charges. The fixed charges depend
upon the maximum demand of the consumer while the running charges depend upon the number of units
consumed by the consumer. Thus, the consumer is charged at a certain amount per kW of
maximumdemand plus a certain amount per kWh of energy consumed i.e.,

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This type of tariff is mostly applicable to industrial consumers who have appreciable maximum demand.
Advantages
(i) It is easily understood by the consumers.
(ii) It recovers the fixed charges which depend upon the maximum demand of the consumer but are
independent of the units consumed.
Disadvantages
(i) The consumer has to pay the fixed charges irrespective of the fact whether he has consumed or not
consumed the electrical energy.
(ii) There is always error in assessing the maximum demand of the consumer.
Maximum demand tariff.
It is similar to two-part tariff with the only difference that the maximum demand is actually measured by
installing maximum demand meter in the premises of the consumer. This removes the objection of twopart tariff where the maximum demand is assessed merely on the basis of the rate able value. This type
of tariff is mostly applied to big consumers. However, it is not suitable for a small consumer (e.g.,
residential consumer) as a separate maximum demand meter is required.
Power factor tariff
The tariff in which power factor of the consumers load is taken into consideration is known as power
factor tariff. In an a.c. system, power factor plays an important role. A low*power factor increases the
rating of station equipment and line losses. Therefore, a consumer having low power factor must be
penalised. The following are the important types of power factor tariff :
(i)k VA maximum demand tariff :
It is a modified form of two-part tariff. In this case, the fixed charges are made on the basis of maximum
demand in kVA and not in kW. As kVA is inversely proportional to power factor, therefore, a consumer
having low power factor has to contribute more towards the fixed charges. This type of tariff has the
advantage that it encourages the consumers to operate their appliances and machinery at improved
power factor.
(ii) Sliding scale tariff :
This is also know as average power factor tariff. In this case, an average power factor, say 08 lagging, is
taken as the reference. If the power factor of the consumer falls below this factor, suitable additional
charges are made. On the other hand, if the power factor is above the reference, a discount is allowed to
the consumer.
(iii) kW and kVAR tariff :
In this type, both active power (kW) and reactive power (kVAR) supplied are charged separately. A
consumer having low power factor will draw more reactive power and hence shall have to pay more
charges.
Three-part tariff:
When the total charge to be made from the consumer is split into three parts viz., fixed charge, semi-fixed
charge and running charge, it is known as a three-part tariff. i.e.,

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## UNIT-II ECONOMIC DISPATCH

2.1 INCREMENTAL COST CURVE
The input/output curve of generating units of a plant is important to describe the efficiency of the
plant. Such a curve for thermal power plant is shown. The input/output curve for a hydro plant is also
similar except that the input will correspond to water discharge.

Where,

## The empirical equation of the fuel cost curve is

Where,
Incremental fuel cost

Incremental cost is the slope of cost curve. Incremental cost curve for a typical thermal plant is
shown.

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Figure 2.2 Incremental cost curve for the thermal power plant
The following assumptions are made for incremental rate theory
1. Input output curves are continuous
2. First derivations of the input-output curves are linear
3. The value of Incremental rate increase with the increase in output
The Input-output curve and Incremental cost curve for a hydro power plant is shown.

## Figure 2.3 Incremental cost curve for a hydro power plant

The incremental fuel cost of all the generating units must be the same. The common value of
incremental fuel cost is called the system Incremental cost. In same case, some of the units operate at
their upper or lower limits. The IC of all other machines which have not hit their limit must be equal to
called as system or Incremental cost of received power.
The fuel cost curve and the Incremental cost curve may have a number of discontinuous as shown.

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is

## Figure 2.4 Fuel cost curve.

The discontinuous occur when the output power has to be extended by using additional boilers,
steam condenser or other equipments.
Discontinuous also appear is the cost represent the operation of an entire power station. So that
cost has discontinuous on paralleling of generators.
Real power generation as
The discontinuous of fuel cost curve may be approximated as straight line as shown.

## Figure 2.5 Incremental cost curve

When the economical load distribution between a number of generator units is considered. The
optimum generating schedule is effected when an Incremental cost increase at one of the units replace a
compensating decrease at every other unit in turn at the same Incremental cost. The economic optimum
load distribution is obtained when all the generator units operate at the equal Incremental rate.
When two areas are operating at different Incremental costs, there is a possibility to improve the
overall economy. Consider the two area system shown.

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## Figure 2.6 Two area system.

Three possible cases are
1. The area A is generating power at a lower Incremental cost than area B and possesses extra
spinning reserve.
2. Area B will save money simply by purchasing extra MW from area A which is generating
power at a lower cost than area B.
3. Area A would benefit economically from selling power to area B as long as area B is selling in
pay a price.
2.2 CO-ORDINATION EQUATIONS WITH LOSSES NEGLECTED. SOLUTION BY ITERATION
Let
Ft -Total fuel input of the system
Fn -Fuel input to the nth unit
Pd -Total load demand
Pn -Generation of n unit
The economic dispatch problem is defined as
Subjected to
Use of lagrangian multiplier the auxiliary function is obtained as
Where,

Differentiating F w.r.t generation Pn and equating to zero gives the condition for optimal operation of the
system.

Where,

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## Analytical solution for (no generation limit)

Cost function C =
Using incremental cost
=

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## Procedure (losses neglected)

Step 1: compute using the equation

Step 2: compute

## The economic schedules

Step 3: if the computed PGi satisfy the operating limits
Then the optimum solution is obtained, otherwise go to next step
Step 4: if PGi violates the operating limit, then fix the generation at the respective limit

## Step 5: redistribute the remaining system load

Step 6: compute new using PD new and compute the remaining generations using
Step 7: check whether the optimality condition is satisfied

If the condition is satisfied, then stop. Otherwise release the generation schedule fixed at
Of these units not satisfying optimality condition. Include these units in the remaining
units and modify the new power demand PDnew
And go to step 6.

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## 2.3 CO-ORDINATION EQUATION WITH LOSS OR EXACT CO-ORDINATION EQUATION:

Let
Ft-Total fuel input of the system
Fn-Fuel input to n unit
Pd-Total load demand
Pn-Generation of n unit
PL -Total system loss
The optimal load dispatch problem including transmission losses is defined as

Subjected to

## and equating to 0 gives the condition for optimal operation of the

system

Where,

Where,

Equation (5) is called an exact coordination equation when transmission losses are considered or
modified Incremental cost.

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## 2.4 SOLUTION OF COORDINATION EQUATION USING BMN COEFFICIENT BY ITERATION METHOD

Consider a two bus system

## Figure 2.8 Two bus system

Transmission loss

Since

matrix is symmetrical

## Incremental transmission loss differentiate equation (2) by

Incremental transmission loss
Incremental transmission loss
For optimum operating conditions, coordination equation is

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## Solving equation (5) & (6) , we get

For N bus system,

Equality constraint is

We have N non-linear equation, the solution of which gives the optimum generations

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## 2.5 SOLUTION OF ITERATION METHOD WITH LOSS

Step 1: Choose lagrange multiplier

Compute

## Step 2: Assume PGi = 0 i=1,2,.N

Step 3: Solve for PGi using

Where,
C=

Step 7:

## Repeat from step 3 till the optimum solution is achieved.

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Problem 1

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Problem 2

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2.6 Economic dispatch with ramp rate limits and prohibited operating zones
(I)Prohibited operating zone (POZ) :
It gives the performance of a thermal unit can be due to vibrations in a shaft bearing caused by a steam
value or can be due to faults in the machines themselves or the associated auxiliary equipments such as
boilers, feed pumps etc.
For the units with POZ, constraints on the operating range are given by,operating cost characteristics with
POZ,
min
L
(i=1,2,.n)
Pi Pi Pi,1
U
L
Pi,J-1 Pi Pi,J
(J=2,3,..NZi) (i=1,2,.n)
U
max
(i=1,2,.n)
Pi,NZI Pi Pi
Where,

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th

## NZi = No of POZ of i generator.

th
th
L
Pi,J = Lower bound of j POZ of i generator.
U
th
th
Pi,J-1 = Upper bound of j POZ of i generator.
(II) Ramp rate limit:
The operating range of all online units restricted by their ramp rate limits for forcing the units operation
continually between two adjacent specific operating operation periods.
Inequality constraints due to ramp rate limits that can be imposed one described below.
(a) Generation increases
0
Pi - Pi URi
Where,
th
URi = Upper ramp limit of i generator (MW/h)
th
Pi = Previous output power of i generator.
(b) Generation decreases
0
Pi - Pi DRi
Where,
th
DRi = Down ramp limit of i generator (MW/h)
Generator ramp rate inequality constraints is given by,
min
max
max(Pi , Pi-DRi) Pi min (Pi , Pi+URi) i=1,2,.N
Mathematically the economic dispatch problem considering ramp rate limits and POZ is defined as,
2
Minimize operating cost F(Pi) = (ai Pi +bi Pi+ci)
Subjected to:
(i) Economic dispatch problem
2
F(Pi) = (ai Pi +bi Pi+ci)
(ii) Generator ramp rate inequality constraint is undertaken as constant.
(iii) POZ constraints.
2.7 Automatic load dispatch of power system
Economic load dispatching is that aspect of power system operation where it is required to distribute the
load among the generating units actually parallel with the system in such manner as to minimize the cost.
In a large interconnected system it is impossible to calculate and adjust such generations manually and
hence the help of digital computer system along with analoguse device is carried out automatically. The
chosen control system is based on digital computer.
Computer:
It predicts the load and suggests economic loading. It transmits information to machine controllers.
Data input:
Computer receives a lot of essential data from the telemetering system.
Console:
The console has the facilities of security checking and load flows for network calculations.
Machine controllers:
The computer sends instructions regarding the optimal generation to the machine controller at regular
intervals. Control on each machine is applied by a closed loop system.
In the power frequency loop an error signal proportional to the difference between derived and actual
frequency and power is developed. The pulses are applied as raise or lower command to the speeder

29

motor in accordance with the error signal and thus output of the generator is increased or decreased
accordingly.
2.8 Generator capability curve
The continuous reactive power capability is limited by 3 considerations
(i) Armature current limit.
(ii) Field current limit.
(iii) End region heating limit.
These limitations are explained with the help of the generator capability curve.

30

## UNIT- III ECONOMIC OPERATION

3.1 INTRODUCTION
One of the earliest applications of on-line centralized control was to provide a central facility, to operate
economically, several generating plants supplying the loads of the system. Modern integrated systems
have different types of generating plants, such as coal fired thermal plants, hydel plants, nuclear plants,
oil and natural gas units etc. The capital investment, operation and maintenance costs are different for
different types of plants. The operation economics can again be subdivided into two parts.
i) Problem of economic dispatch, which deals with determining the power output of each plant to meet the
specified load, such that the overall fuel cost is minimized.
ii) Problem of optimal power flow, which deals with minimum loss delivery, where in the power flow, is
optimized to minimize losses in the system. In this chapter we consider the problem of economic
dispatch.
During operation of the plant, a generator may be in one of the following states:
i) Base supply without regulation: the output is a constant.
ii) Base supply with regulation: output power is regulated based on system load.
iii) Automatic non-economic regulation: output level changes around a base setting as area control error
changes.
iv) Automatic economic regulation: output level is adjusted, with the area load and area control error,
while tracking an economic setting.
Regardless of the units operating state, it has a contribution to the economic operation, even though its
output is changed for different reasons. The factors influencing the cost of generation are the generator
efficiency, fuel cost and transmission losses. The most efficient generator may not give minimum cost,
since it may be located in a place where fuel cost is high. Further, if the plant is located far from the load
centers, transmission losses may be high and running the plant may become uneconomical. The
economic dispatch problem basically determines the generation of different plants to minimize total
operating cost.
3.2 Optimum generation scheduling
The objective is to minimize the overall cost of generation

at any time under equality constraint of meeting the load demand with transmission loss, i.e.

31

It will be shown later in this section that, if the power factor of load at each bus is assumed to remain
constant, the system loss P, can be shown to be a function of active power generation at each plant,

Rearranging equation and recognizing that changing the output of only oneplant can affect the cost at
only that plant, we have

The Lagrangian multiplier is in rupees per megawatt-hour, when fuel cost is in rupees per hour. Equation
impiies that minimum fuel cost is obtained, when the incremental fuel cost of each plant multiplied by its
penalty factor is the same for all the plants. The partial derivative is referred to as the incremental
transmission loss associated with the generating plant.

Thus it is clear that to solve the optimum lead scheduling problem; it is necessary to compute ITL for each
plant, and therefore we must determine the functional dependence of transmission loss on real powers of
generating plants. There are several methods, approximate and exact, for developing a transmission loss
model. A full treatment of these is beyond the scope of this book. One of the most important, simple but
approximate, methods of expressing transmission loss as a function of generator powers is through Bcoefficients. This method is reasonably adequate for treatment of loss coordination in economic
scheduling of load between plants. The general form of the loss formula using B-coefficients is

32

## It may be noted that B is a symmetric matrix.

For a three plant system, we can write the expression for loss as

33

34

35

36

## 3.5 Base point and participation factor

The economic dispatch problem has to be solved repeatedly by moving the generators from one
economically schedule to another as the load changes by a reasonably small amount we start from a
schedule obtained from equal Incremental cost as base point. Next, the scheduler assumes a load
change and investigates how much each generating unit needs to be moved. i.e. participate in the load
change in order that the new load be served at the most economic operating cost. Assume that both the
1
11
first and second derivatives in the cost versus power output function are available. i.e. both Fi and Fi
th
exist. The incremental cost curve for the i unit is given in figure

th

## Figure : The incremental cost curve for the i unit

As the unit load is changed by an amount Pi the system Incremental cost moves from
For a small change in power output on the single unit

## Let PD be the total demand on the generation

The total change in generation=change in total system demand

37

to

## Participation factor for each unit

Divide (1) by (2)

Suppose
increases to
The new value of generation is calculated

Where,
Advantages of using participation factor
1. Computer implementation of economic dispatch is straight forward
2. Execution time for the economic dispatch is short
3. It will always give consistent answers when units reach limits.
4. It gives linear incremental cost functions or have non- convex cost curves.

38

## 3.6 Non smooth fuel functions

(i)Valve point loading:
Economic dispatch with smooth cost function can be represented as,

39

C = Fi (PGi)
I = 1,2N
2
Fi (PGi) = Ci + bi PGi + ai PGi
Where,
C = Total generation cost.
Fi = Cost function of generator i.
Ci ,bi, ai = Cost coefficients of generator i.
PGi = Electrical output of generator.
i = set for all generators.
In reality the objective functions of an ED problem has non differentiable points according to valve point
effects and change of fuels. Therefore the objective function should be composed of a set of non smooth
cost functions. So the objective function is described as the superposition of sinusoidal functions and
quadratic functions.
The generator with multivalve steam turbines has very different input output curves compared with
smooth cost function. Typically the valve point results in, as each steam valve starts to open, the ripples
are produced. To take into account for the valve point effects sinusoidal functions are added to the
quadratic cost functions as follows.
2
Fi (PGi) = Ci + bi PGi + ai PGi +| eisin(fi (PGimin - PGi )|
Where ei , fi are the coefficients of generator I reflecting valve point effects.
(ii) Multiple fuels:
Because of the change in fuels, with the multiple fuel problem where the objective function is expressed
as the piecewise quadratic cost function.
The piecewise quadratic cost function is described as
2
Fi (PGi) = Ci1 + bi1 PG1 + ai1 PG1 if PGimin PGi PG1
2
Ci2 + bi2 PG2 + ai PG2 if PG1 PGi PG2

2
Cin + bin PGn + ain PGn if PG (n-1) PGi PGimax
(iii) Combined cycle cogeneration plants (CCCP):
CCCP are defined as simultaneous generation of combined heat and power by sequential use of energy
from one source of fuel.
All thermal power plants emit a certain amount of heat during electricity generation. This can be released
into the natural environment through cooling towers or by other means. By contrast combined heat and
power or cogeneration) captures some or all of the byproduct heat for heating purposes.
Recently it have shown their importance in both developing and developed countries in order to improve
the efficiency of generation. The fuel cost characteristics of CCCP is non-smooth and non-differentiable.
Thus non-linearity in the problem is further increased.
3.7 Artificial intelligence techniques for ELP problems
The objective of the ELP problem is to calculate the output power of every generating unit so that all
demands are satisfied at minimum cost, while satisfying different technical constraints of the network and
generators.

40

In this problem the generation cost are represented as curves and the overall calculation minimizes the
operating cost by finding the point where the total output of generators equals the total power that must
be delivered.
Several optimization techniques have been applied to solve ED problem. To obtain accurate dispatch
results, the approaches without restriction on the shape of fuel functions are necessary. AI techniques are
finding popularity these include tabu search, particle swam etc. Recently GA particle swarm optimization
(PSO) techniques appeared as promising algorithm for handling optimization problems.
GA maintains a set of candidate solutions called population and repeatedly modifies them. At each step,
the GA select individuals from the current population to be parents and uses them to produce the children
for the next generation. In general the fittest individuals of any population tend to reproduce and survive
to the next generation, thus improving successive generations. GA is well suited to and has been
extensively applied to solve complex design problem because it can handle both discrete and continuous
variables, non linear objective and constraint functions.
In PSO technique a set of randomly generated solutions propogates in the design space towards the
optimal solution over a number of iterations based on large amount of information about the design
space. Both PSO and GA techniques can be used for optimization problems giving almost similar results.

41

## UNIT IV INTERCONNECTED SYSTEMS

4.1 Long-Range Hydro-Scheduling
The long-range hydro-scheduling problem involves the long-range forecasting of water availability
and the scheduling of reservoir water releases (i.e., drawdown) for an interval of time that depends on
the reservoir capacities. Typical long-range scheduling goes anywhere from 1 wk to 1 yr or several
years. Long-range scheduling involves optimization of statistical variables. Useful techniques include:
I. Dynamic programming, where the entire long-range operation time
2. Composite hydraulic simulation models, which can represent several reservoirs.
3. Statistical production cost models.
4.2 Short-Range Hydro-Scheduling
Short-range hydro-scheduling (1 day to I wk) involves the hour-by-hour scheduling of all generation
on a system to achieve minimum production cost for the given time period. In such a scheduling
problem, the load, hydraulic inflows, and unit availabilities are assumed known. A set of starting
conditions (e.g., reservoir levels) is given, and the optimal hourly schedule that minimizes a desired
objective, while meeting hydraulic steam, and electric system constraints, is sought.
4.3. Scheduling Energy
Suppose, as in Figure 7.3, we have two sources of electrical energy to supply a load, one hydro
and another steam. The hydro plant can supply the load FIG. 1 Two-unit hydrothermal system.

FIG. 1
by itself for a limited time. That is, for any time period j,

However, the energy available from the hydro plant is insufficient to meet the load.

We would like to use up the entire amount of energy from the hydro plant in such a way that the
cost of running the steam plant is minimized. The steam-plant energy required is

42

We will not require the steam unit to run for the entire interval of T

max

hours. Therefore.

subject to

## and the Lagrange function is

This means that the steam plant should be run at constant incremental cost for the entire period it
is on. Let this optimum value of steam-generated power be P:, which is the same for all time
intervals the steam unit is on. This type of schedule is shown in Figure 2 .The total cost over the
interval is

where

then

43

FIG. 2
Then

and

## 4.4 THE SHORT-TERM HYDROTHERMAL SCHEDULING PROBLEM

Basic short-term hydrothermal scheduling problem requires that a given amount of water be used in
such a way as to minimize the cost of running the thermal units. We assume that the hydro plant is not
sufficient to supply all the load demands during the period and that there is a maximum total volume of
water that may be discharged throughout the period of Tmax hours. In setting up this problem and
the examples that follow, we assume all spillages, sj, are zero. The only other hydraulic constraint
we will impose initially is that the total volume of water discharged must be exactly as

44

FIG. 3
Problem:

Subject to:

where

and the loads are constant in each interval. Other constraints could be imposed, such as:

Assume constant head operation and assume a q versus P characteristic is available, as shown in
Figure 4, so that

45

FIG. 4
We now have a similar problem to the take-or-pay fuel problem. The Lagrange function is

Suppose we add the network losses to the problem. Then at each hour,

## with resulting coordination equations (hour k):

46

FIG. 5
4.5 SHORT-TERM HYDRO-SCHEDULING:
A GRADIENT APPROACH
We assume a single equivalent thermal unit with a convex input-output curve and a single
hydroplant. Let:

47

Next, we let the discharge from the hydroplant be a function of the hydro-power output only. That
is, a constant head characteristic is assumed.

## so that to a first order,*

The total cost for fuel over the j = 1, 2, 3,. . . , jmax intervals is

This may be expanded in a Taylor series to give the change in fuel cost for a change in steamplant schedule.

## In any given interval, the electrical powers must balance:

48

The variables are the incremental water values in the various intervals and give an indication of
how to make the moves in the application of the first-order technique. That is, the steepest
descent to reach minimum fuel cost (or the best period to release a unit of water) is the period with the
maximum value of variable.
4.6 HYDRO-UNITS IN SERIES (HYDRAULICALLY COUPLED)
Consider now, a hydraulically coupled system consisting of three reservoirs in series (see Figure 6).
The discharge from any upstream reservoir is assumed to flow directly into the succeeding downstream

FIG. 6
plant with no time lag. The hydraulic continuity equations are

49

in either case, convergence to the optimal solution can be slow. For these reasons, hydroscheduling for such systems is often done with dynamic programming or linear programming.

## 4.7 DYNAMIC-PROGRAMMING SOLUTION TO THE HYDROTHERMAL SCHEDULING PROBLEM

Dynamic programming may be applied to the solution of the hydrothermal scheduling problem.
The multiplant, hydraulically coupled systems offer computational difficulties that make it difficult to use
that type of system to illustrate the benefits of applying DP to this problem. Instead we will illustrate
the application with a single hydroplant operated in conjunction with a thermal system. Figure 7
shows a single, equivalent steam plant, Ps, and a hydroplant with storage, PH, serving a single series of
loads, PL. Time intervals are denoted by j, where j runs between 1 and jmax.

50

Both starting and ending storage volumes, V0 and Vjmax, are given, as are the period loads. The
steam plant is assumed to be on for the entire period. Its input-output characteristic is

Fig: 7
The coefficients a through h are constants. We will take the units of water flow rate as acre-ft/h. If
each interval, j, is nj hours long, the volume in storage changes as

51

where qj must be nonnegative and is limited to some maximum flow rate, qmax, which corresponds to
the maximum power output of the hydro-unit. The scheduling problem involves finding the
minimum cost trajectory (i.e., the volume at each stage). As indicated in Figure 8, numerous feasible
trajectories may exist.
The DP algorithm is quite simple. Let:

We must be given the loads and natural inflows. The discharge rate through the hydro-unit is, of
course, fixed by the initial and ending storage levels and this, in turn, establishes the values of PH
and Ps. The computation of the thermal production cost follows directly. There may well be volume
states in the set Vk, that are unreachable from

52

Fig: 8
some of the initial volume states 6 because of the operating limits on the hydroplants. There are
many variations on the hydraulic constraints that may be incorporated in the DP computation. For
example, the discharge rates may be fixed during certain intervals to allow fish ladders to operate or
to provide water for irrigation.
Using the volume levels as state variables restricts the number of hydro- power output levels that
are considered at each stage, since the discharge rate fixes the value of power. If a variable-head
plant is considered, it complicates the calculation of the power level as an average head must be
used to establish the value of PH. This is relatively easy to handle.

53

## UNIT- V Optimal power flow and fundamentals of markets

5.1 Optimal power flow
1. If the entire set of power flow equations are solved simultaneously with the generation cost
minimization, the representation of incremental losses is exact. Further, with an objective function that
minimizes the losses themselves, the power flow equations are quite necessary.
2. The economic dispatch solutions observed the generation limits
With all of the
power flow constraints included in the formulation, many more of the power system limits can be included.
These include limits on the generator reactive power,
at generation and load buses,

## , limits on the voltage magnitude

, and flows on transmission lines or transformers

## . This set of operating

expressed in either MW, amperes or MVA
constraints now allows the user to guarantee that the dispatch of generation does not, in fact, force the
transmission system into violating a limit, which might put it in danger of being damaged.
3. The OPF can also include constraints that represent operation of the system after contingency
outages. These security constraints allow the OPF to dispatch the system in a defensive manner. That
is, the OPF now forces the system to be operated so that if a contingency happened, the resulting
voltages and flows would still be within limit. Thus, constraints such as the following might be
incorporated:

which implies that the OPF would prevent the post-contingency voltage on bus k or the post-contingency
flow on line ij from exceeding their limits for an outage of line nm. This special type of OPF is called a
security-constrained OPF, or SCOPF.
4. In the dispatch calculation developed in Chapter 3, the only adjustable variables were the generator
M W outputs themselves. In the OPF, there are many more adjustable or control variables that be be
specified. A partial list of such variables would include:
a. Generator voltage.
b. LTC transformer tap position.
c. Phase shift transformer tap position.
d. Switched capacitor settings.
e. Reactive injection for a static VAR compensator.
f. Load shedding.
g. DC line flow.
Thus, the OPF gives us a framework to have many control variables adjusted
in the effort to optimize the operation of the transmission system.
5. The ability to use different objective functions provides a very flexible analytical tool.
Applications of opf
1. The calculation of the optimum generation pattern, as well as all control variables, to achieve the
minimum cost of generation together with meeting the transmission system limitations.

54

2. Using either the current state of the power system or a short-term load forecast, the OPF can be set
up to provide a preventative dispatch if security constraints are incorporated.
3. In an emergency, that is when some component of the system is overloaded or a bus is
experiencing a voltage violation, the OPF can provide a corrective dispatch which tells the operators
of the system what adjustments to make to relieve the overload or voltage violation.
4. The OPF can be used periodically to find the optimum setting for generation voltages, transformer
taps and switched capacitors or static VAR compensators
5. The OPF is routinely used in planning studies to determine the maximum stress that a planned
transmission system can withstand. For example, the OPF can calculate the maximum power that can
safely be transferred from one area of the network to another.
6. The OPF can be used in economic analyses of the power system by providing bus incremental costs
(BICs). The BICs are useful to determine the marginal cost of power at any bus in the system. Similarly,
the OPF can be used to calculate the incremental or marginal cost of transmitting power from one
outside company-through its system-to another outside company.
5.2 Solution of the optimal power flow
The optimal power flow is a very large and very difficult mathematical programming problem. Almost
every mathematical programming approach that can be applied to this problem has been attempted and
it has taken developers many decades to develop computer codes that will solve the OPF problem
reliably. We shall review all of these here and introduce two new techniques, the linear programming
(LP) method and the interior point method. The attributes of these methods are summarized next.
Lambda iteration method :
Losses may be represented by a [B] matrix, or the penalty factors may be calculated outside by a power
flow. This forms the basis of many standard on-line economic dispatch programs.
Gradient methods:
Gradient methods are slow in convergence and are difficult to solve in the presence of inequality
constraints.
Newtons method:
Very fast convergence, but may give problems with inequality constraints.
Linear programming method (LPOPF):
One of the fully developed methods now in common use. Easily handles inequality constraints.
Nonlinear objective functions and constraints handled by linearization.
Interior point method:
Another of the fully developed and widely used methods for OPF. Easily handles inequality constraints.
The objective function in the OPF is usually minimized. In some cases, such as power transfers, it may
be maximized. We shall designate the objective function as f. The equations that guarantee that the
power flow constraints are met will be designated as
Note that here we shall only be concerned with a variable vector z. This vector contains the adjustable
controls, the bus voltage magnitudes, and phase angles, as well as the fixed parameters of the system,
Later, we shall break the variables up into sets of state variables, control variables, and fixed parameters.
The OPF can also solve for an optimal solution with inequality constraints on dependent variables, such
In addition, limits may be placed

## as line MVA flows. These will be designated

directly on state variables or control variables:

55

The OPF problem then consists of minimizing (or maximizing) the objective function, subject to the
equality constraints, the inequality constraints, and the state and control variable limits.
The Gradient Method
In this section, we shall consider the objective function to be total cost of generation (later examples will
demonstrate how other objectives can be used). The objective function to be minimized is:

where the sum extends to all generators on the power system, including the generator at the reference
bus. We shall start out defining the unknown or state vector x as:

## another vector, y, is defined as:

Note that the vector y is made up of all of the parameters that must be specified. Some of these
parameters are adjustable (for example, the generator output, and the generator bus voltage). Some of
the parameters are fixed, as far as the OPF calculation is concerned, such as the P and Q at each load
bus.
To make this distinction, we shall divide the y vector up into two parts, u and p:

where u represents the vector of control or adjustable variables, and p represents the fixed or constant
variables. Note also that we are only representing equality constraints at this point.
Finally, we shall define a set of m equations that govern the power flow:

We must recognize that the reference-bus power generation is not an independent variable. That is,
the reference-bus generation always changes to balance the power flow; we cannot specify it at the

56

beginning of the calculation. We wish to express the cost or objective function as a function of the control
variables and of the state variables. We do this by dividing the cost functionas follows:

where the first summation does not include the reference bus, The Pi are all independent, controlled
variables whereas Cref is a dependent variable. We say that the pi are in the vector u and the Pref is a
function of the network voltages and angles:

## then the cost function becomes:

We can now set up the Lagrange equation for the OPF as follows:

## This Lagrange equation is perhaps better seen when written as:

We now have a Lagrange function that has a single objective function and m Lagrange multipliers, one
for each of the m power flow equations. To minimize the cost function, subject to the constraints, we set
the gradient of the Lagrange function to zero:

To do this, we break up the gradient vector into three parts corresponding to the variables :

57

Some discussion of the three gradient equations above is in order. First, Equation consists of a vector
of derivatives of the objective function with respect to the state variables, x. Since the objective function
itself is not a function of the state variable except for the reference bus, this becomes:

The [dg/ax] term in Equation actually is the Jacobian matrix for the Newton power flow

58

The vector
variables:

## The solution of the gradient method of OPF is as follows:

1. Given a set of fixed parameters p, assume a starting set of control
2. Solve a power flow.
3. Solve for lambda;

4. Substitute
into equation to get the gradient of
with respect to the control variables.
The gradient will give the direction of maximum increase in the cost function as a function of the
adjustments in each of the u variables. Since we wish to decrease the objective function, we shall move
in the direction of the negative of the gradient. The gradient method gives no indication how far along
the negative gradient direction we should move. Assuming that a distance is picked that reduces the
objective, one must start at step 2 above, and repeat steps 2,3, and 4 over and over until the gradient
itself becomes sufficiently close to the zero vector, indicating that all conditions for the optimum have
been reached.
Newton's Method
The problems with the gradient method lie mainly in the fact that the direction of the gradient must be
changed quite often and this leads to a very slow convergence. To speed up this convergence, we can
use Newtons method, where we take the optimal solution becomes:

59

This matrix equation is a very formidable undertaking to compute and manipulate. It is extremely sparse
and requires special sparsity logic. Handling inequality constraints is very difficult in either gradient or
newton approaches. The usual method is to form a constraint penalty function as follows. Suppose the
voltage at a bus must meet limits:

It is possible to enforce this constraint by inventing the following exterior penalty functions:

## This penalty function is shown in Figure 1

FIG. 1
When there are few limits to be concerned with and the objective function is shallow, that is, the
variability off with adjustments in the control variables is very low, Newtons method is the best method to
use.
5.3 Linear sensitivity analysis
Before continuing with the discussion of the linear programming and interior OPF methods, we shall
develop the concept of linear sensitivity analysis. Linear sensitivity coefficients give an indication of the
change in one system quantity (e.g., MW flow, MVA flow, bus voltage, etc.) as another quantity is varied
(e.g., generator MW output, transformer tap position, etc.) These linear relationships are essential for the
application of linear programming. Note that as the adjustable variable is changed, we assume that the
power system reacts so as to keep all of the power flow equations solved. As such, linear sensitivity
coefficients can be expressed as partial derivatives for example:

60

shows the sensitivity of the flow (MVA) on line (i toj) with respect to the power generated at bus k.
Some sensitivity coefficients may change rapidly as the adjustment is made and the power flow
conditions are updated. This is because some system quantities vary in a nonlinear relationship with the
adjustment and resolution of the power flow equations. This is especially true for quantities that have to
do with voltage and MVAR flows. Sensitivities such as the variation of MW flow with respect to a change
in generator MW output are rather linear across a wide range of adjustments and lead to the usefulness
of the DC power flow equations .For this reason, the value represented by a sensitivty coefficient is only
good for small adjustments and the sensitivities must be recalculated often.
5.4 LINEAR PROGRAMMING METHODS
The gradient and Newton methods of solving an OPF suffer from the difficulty in handling inequality
constraints. Linear programming, however, is very adept at handling inequality constraints, as long as the
problem to be solved is such that it can be linearized without loss of accuracy. Figure 2 shows the type
of strategy used to create an OPF using linear programming. The power flow equations could be for the
DC representation, the decoupled set of AC equations, or the full AC power flow equations. The choice
will affect the difficulty of obtaining the linearized sensitivity coefficients and the convergence test used.
In the formulation below, we show how the OPF can be structured as an LP. First, we tackle the
problem of expressing the nonlinear input-output or cost functions as a set of linear functions. Let the
cost function be Fi(Pi) as shown in Figure 3. We can approximate this nonlinear function as a series of
straight-line segments as shown in Figure 4. The three segments shown will be represented as
, and each segment will have a slope designated:

## then the cost function itself is

The cost function is now made up of a linear expression in the Pik values. In the formulation of the OPF
using linear programming, we only have the control variables in the problem. We do not attempt to place
the state variables into the LP, nor all the power flow equations. Rather, constraints are set up
in the LP that reflect the influence of changes in the control variables only. In the examples we present
here, the control variables will be limited to generator real power, generator voltage magnitude, and
transformer taps. The control variables will be designated as the u variables (see earlier in this chapter).
The next constraint to consider in an LPOPF are the constraints that represent the power balance
between real and reactive power generated, and that consumed in the loads and losses. The real
power balance equation is:

61

## If we make the following substitution:

then, the power balance equation becomes

62

## The loss term here represents the

losses in the transmission lines and transformers. We can
take derivatives with respect to the control variables, u, and this results in

## reactors. A substitution using

, as above, can also be done here. The LP formulation, so
far, would need to restrict control variables to move only within their respective limits, but it does not yet
constrain the OPF to optimize cost within the limits of transmission flows and load bus voltages. To add
the latter type constraints, we must add a new constraint to the LP. For example, say we wish to constrain
the MVA flow on line nm to fall within an upper limit:

We model this constraint by forming a Taylor's series expansion of this flow and only retaining the linear
terms:

Other constraints such as voltage magnitude limits, branch MW limits, etc., can be added in a similar
manner. We add as many constraints as necessary to constrain the power system to remain within its
prescribed limits. Note, of course, that the derivatives of
linear sensitivity coefficient calculations presented in the previous section.

63

## are obtained from the

FIG. 3

FIG. 4
Linear Programming Method with Only Real Power Variables
As an introduction to the LPOPF, we will set up and solve a power system example which only has
generator real powers as control variables. Further, the model for the power system power balance
constraint will assume that load is constant and that the losses are constant. Finally, since the entire
model used in the LP is based on a MW-only formulation, we shall use the a and d factors to model
the effect of changes in controls on the constraints. As indicated in Figure 2, we shall solve the LP and
then make the adjustments to the control variables and solve a power flow in each main iteration. This
guarantees that the total generation equals load plus losses, and that the MW flows are updated
properly. The cost functions can be treated as before using multiple segmented piecewise linear
approximations.
The power balance equation for this case is as follows:

To constrain the power system, we need the expansion of the constraints, such as MW flows, bus
voltages, etc., as linear functions of the control variables. In this case, the linear control variables will be
represented as a vector u:

This is done with the linear sensitivity approach, as derived in the previous section. The result is a set of
constraints:

which is written as

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## However, we shall observe that the derivatives

can be replaced with thea sensitivity
coefficients.Thus, for a MW flow constraint on line rs we have:

Similar constraints are added for any power system network quantity that is to held within its limit.
5.5 Security-constrained optimal power flow

FIG. 5
security constraints or contingency constraints allow the OPF to meet pre-contingency limits as well
as post-contingency limits. There is a price to pay, however, and that is the fact as we iterate the OPF
with an AC power flow, we must also run power flows for all the contingency cases being observed. The
SCOPF shown in Figure 5 starts by solving an OPF with (n - 0) constraints only. Only when it has solved
for the optimal, constrained conditions is the contingency analysis executed. In Figure 5, the
contingency analysis starts by screening the power system and identifying the potential worstcontingency cases new contingency constraints being added to the OPF. We assume here that only the
M worst cases screened by the screening algorithm are added. It is possible to make M = 1, in which
case only the worst potential contingency is added.

65

Next, all the (n - 1) contingency cases that are under consideration must be solved by running a power
flow with that contingency reflected in alterations to the power flow model. When the power flow results in
a security violation, the power system model is used to create a contingency constraint. In fact, what is
done is to run a network sensitivity calculation on the model with the contingency outage and save the
resulting constraint sensitivities.
When all contingency power flows are complete, all the contingency constraints are added to the OPF
model and it is solved. Note, in Figure 5, there are two main loops to be executed. The loop labeled OPF
Iteration requires the OPF and each of the contingency power flows to be re-executed until the OPF
has solved with all contingency constraints met. Next, the outer loop labeled Contingency Screening
Iteration is tried. If the contingency screening algorithm does not pick up any new contingencies the
SCOPF can end; if new contingencies are found, it must add them to the list and continue.
The optimum operation conditions for a power system will often result in violation of system security.
This is especially true when a large amount of interchange power is available at a favorable price. In this
instance, the selling power system can be modeled in the OPF with its price of production set
accordingly, and the OPF will then raise the interchange up to the point where transmission system
components are limiting. Now, when the contingency analysis is run, there may be many cases which
result in contingency violations and the OPF, with contingency constraints added, will have to back off the
interchange power in order to meet the contingency limits.
It should also be noted that when some contingency constraints are added to the OPF, it will re -dispatch
generation, and adjust voltages and transformers to meet these constraints. The process of adjustments
may result in many new contingency violations when the screening algorithm and the power flows are
run. The need to iterate between the OPF and the contingency screening represents an effort to find the
most constraining contingencies.
5.6 Interior point algorithm
In 1984, Karmarkar presented a new solution algorithm for linear programming problems that did not
solve for the optimal solution by following a series of points that were on the constraint boundary but,
rather, followed a path through the interior of the constraints directly toward the optimal solution on the
constraint boundary. This solution was much faster than conventional LP algorithms.
In 1986, Gill et al. showed the relationship between Karmarkars algorithm and the so-called
logarithmic barrier function algorithm. This algorithm has become the basis for many OPF solution
algorithms . In this derivation, no distinction is made between the control variables and the state
variables; rather, all variables are considered in the x vector. The objective function will be f(x). The
constraints will be broken into equality constraints and inequality constraints. The equality constraints are
g(x) = 0 and the inequality constraints are

where the
and
vectors are the lower and upper limits on the inequality constraints, respectively.
Finally, we restrict the variables themselves to be within lower and upper bounds
The first step in transforming this problem is to add slack variables so that all the equations become
equality constraints. We then obtain the following set of equations

66

Note that we now have a set of equations with all equality constraints except the final consisting of
nonnegativity conditions on
and the slack variables. These nonnegativity conditions are handled
by adding what is called a logarithmic barrier function to the objective. Basically, this is a form of
penalty function which becomes very large as the function or variable gets close to zero. The new
objective function then looks like:

The parameter, , is called the barrier parameter and is a positive number that is forced to go to zero
as the algorithm converges to the optimum. This then presents us with the Lagrange equation:

The solution to this Lagrangian equation is obtained by setting its gradient to zero:

These nonlinear equations are then solved iteratively by Newtons method, and the value of p is adjusted
toward zero. The solution produces the values of the dual variables, some of which are the marginal
costs for the real and reactive power at the buses.
5.7 Voltage Dip / Sag Criteria
Voltage sags are brief reductions in voltage, typically lasting from a cycle to a second. These are caused
by abrupt increases in load such as short circuits or faults, motor starting or electric heaters turning on,
typically caused by loose connection.

67

In most cases the majority of sags are generated inside a building. At a industrial site, it is not unusual to
see several sags per year at the service entrance. Normally it occur between two conductors. For
example if we consider a sag on phase A it must be lie between the phase A and phase B or sag
between the phase A and neutral.
5.8 Various Entities Involved in Deregulation:
The introduction of deregulation has introduced several new entities in the electricity market place and
has simultaneously redefined the scope of activities of many of the existing players. Variations exist
across market structures over how each entity is particularly defined and over what role it plays in the
system. However, on a broad level, the following entities can be identified:
1. Genco (Generating Company): Genco is an owner-operator of one or more generators that runs
them and bids the power into the competitive marketplace. Genco sells energy at its sites in the
same manner that a coal mining company might sell coal in bulk at its mine.
2. Transco (Transmission Company): Transco moves power in bulk quantities from where it is
produced to where it is consumed. The Transco owns and maintains the transmission facilities,
and may perform many of the management and engineering functions required to ensure the
smooth running of the system. In some deregulated industries, the Transco owns and maintains
the transmission lines under the monopoly, but does not operate them. That is done by
Independent System Operator (ISO). The Transco is paid for the use of its lines.
3. Discom (Distribution Company): It is the owner-operator of the local power delivery system,
which delivers power to individual businesses and homeowners. In some places, the local
distribution function is combined with retail function, i.e. to buy wholesale electricity either through
the spot market or through direct contracts with Gencos and supply electricity to the end use
customers. In many other cases, however, the Discom does not sell the power. It only owns and
operates the local distribution system, and obtains its revenue by wheeling electric power through
its network.
4. Resco (Retail Energy Service Company): It is the retailer of electric power. Many of these will
be the retail departments of the former vertically integrated utilities. A Resco buys power from
Gencos and sells it directly to the consumers. Resco does not own any electricity network
physical assets.
5. Market Operator: Market operator provides a platform for the buyers and sellers to sell and buy
the electricity. It runs a computer program that matches bids and offers of sellers and buyers. The
market settlement process is the responsibility of the market operator. The market operator
typically runs a day-ahead market. The near-real-time market, if any, is administered by the
system operator.
6. System Operator (SO): The SO is an entity entrusted with the responsibility of ensuring the
reliability and security of the entire system. It is an independent authority and does not participate
in the electricity market trades. It usually does not own generating resources, except for some
reserve capacity in certain cases. In order to maintain the system security and reliability, the SO
procures various services such as supply of emergency reserves, or reactive power from other
entities in the system. In some countries, SO also owns the transmission network. The SO in
these systems is generally called as Transmission System Operator (TSO). In the case of a SO
being completely neutral of every other activity except coordinate, control and monitor the
system, it is generally called as Independent System Operator (ISO).

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## 7. Customers: A customer is an entity, consuming electricity. In a completely deregulated market

where retail sector is also open for competition, the end customer has several options for buying
electricity. It may choose to buy electricity from the spot market by bidding for purchase, or may
buy directly from a Genco or even from the local retailing service company. On the other hand, in
the markets where competition exists only at the wholesale level, only the large customers have
privilege of choosing their supplier.
5.9 Consumer Behaviour
Total Utility and Marginal Utility It is a common practice to explain concepts of microeconomics using
common consumer goods as an example. However, we will explain it by considering number of units of
electrical energy as a commodity. This would help the reader to relate things later on while studying
concepts associated with electric power markets.
Total utility and marginal utility
We begin with the notion that the consumer achieves some satisfaction from consuming a product,
electric energy in this case. If this satisfaction is absent, the consumer would not demand it at all. This
term is called total utility. Similarly, marginal utility is the utility obtained from the last unit consumed. Let
us explain these terms with the help of an example.
Let there be a square shaped room as shown in Figure 6. Small circles in the figure represent
incandescent lamps located at the same height from the ground, as a source of light for the whole room.
Suppose there are nine lamps in all, fitted in the room as per the plan shown in the figure. Let us assume
that all lamps are of the same rating and illuminance (a scientific word for brightness). When all lamps are
off, there is complete darkness in the room. Let us assume that there is an interlock arrangement in the
switchgear such that for putting lamps ON at L level, the lamps at M level should be ON. Similarly, for
putting lamps at M level ON, the central lamp - C should be ON. Now suppose a person enters the room
and puts lamp C ON. Since this lamp is at the center, it spreads even light all across the room. This light
is good enough for a person to move to each and every corner of the room. Let us assume that the
satisfaction' this person gets by putting lamp C ON is 10 units.
Now suppose the person switches the lamp - M1 ON. This bulb still adds to the brightness of the room,
but the satisfaction that it adds to the person is lesser than that provided by lamp C. For this lamp, the
person in the room may not get a satisfaction of 10 units, but it will definitely be lesser than 10 units as
room is already lit from the state of total darkness by lamp C. Let us say the person gets satisfaction
equal to 9 units. Similarly, for all lamps sequentially put ON thereafter would render diminishing
satisfaction to the person in the room. This satisfaction for each of the lamps lighted is nothing but the
marginal utility. For first lamps C, it was 10 units, for subsequent lamps it went on reducing. Let us define
total utility as the sum of marginal utilities.

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## Figure 6 Room with lamp positions

The results of marginal and total utility gained by putting lamps on sequentially are tabulated in Table 1
No. of
Lamps

Marginal
utility

Total utility

10

10

M1

19

M2

27

M3

34

M4

40

L1

45

L2

49

L3

52

L4

54

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## Law of Diminishing Marginal Utility

The above pattern of marginal utility provided by sequence of putting bulbs on is called as law of
diminishing marginal utility. It states that after consuming a certain amount of a good or service, the
marginal utility from it diminishes as more and more is consumed. This law is quite natural and should
hold for most of the products one consumes.
Consumer Surplus
The person entering the room in the previous example would have been indifferent to the number lamps
to be put ON had electricity been for free. Then the person would not have bothered about the marginal
utility and the total utility. But as soon as the person is made to pay for the usage of electric energy, he
would start thinking and would rather make a judicious choice about how many lamps to put on. The
person then would have calculated how much utility he could have obtained if he had spent same amount
of energy on other usage, for example say, air conditioner. In other words, how many lamps the person
would have put ON depends not only on the marginal and total utilities but also on the price of electricity.
Let the price of electricity be INR 4 for each lamp equivalent rating. We now define marginal utility of one
INR as the extra utility when additional one INR is spent on other available usage in general. For the sake
of simplicity, let it be 1 unit. In other words, after spending one INR, the marginal utility associated with it
is one unit. Having the information on price and marginal utility of INR, the person can determine how
many lamps to be put ON. Consider only one lamp, C is ON. The person obtains marginal utility of 10
(from table 2.1). Since, marginal utility of 1 INR is equal to 1 unit of utility, the utility obtained in this case
would be (10/1 =10 INR). On the expenditure side, the person spends 4 INR to get the lamp ON. Then,
the person will go ahead and put the lamp ON (as a matter of fact, he is left with no choice in this case!).
When the person puts the second lamp ON, i.e., M1, he obtains a marginal utility of 9 units which is
equivalent of (9/1) = 9 INR. Since, the marginal utility that the person would obtain is greater than the
price he pays (INR 4), he would go ahead to put the second lamp ON. The person keeps on making such
comparisons before putting the next lamp ON.
What happens when he puts ON lamp L2, i.e. seventh lamp? It renders utility equal to 4 INR which is
equal to price per unit of electricity. The answer is that the person will be indifferent. However, one thing
is for sure: the person will not put ON lamps after 7th lamp as the price he pays is more than the worth he
accrues. This decision making process can be easily understood with the help of Figure 7. The horizontal
line at INR 4 depicts the price of electricity. Before lamp no. 7 is lit, the marginal utility (converted into
INR) is more than the price of electricity. At 7th lamp it becomes equal while for lamps 8, 9 and 10, the
marginal utility is lesser than the price.
Table 2 summarizes these results at each stage. It provides details about total utility and total
expenditure at each stage. Last column of Table 2 depicts nothing but the person's surplus in terms of
money. In other words, it is the difference between what he gains and expenditure towards the same. The
shaded area in Figure 7 is called as net consumer surplus. The net consumer surplus represents the
extra value that the person in the room is able to get from being able to buy all the electric energy at INR
4, even though the value he attaches to electric energy is higher than the price of electricity.

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Figure 7:Decision making based on marginal utility and net consumer surplus

No. of
Lamps

Total utility
(INR)

Total
Expenditure
(INR)

Surplus
(INR)

10

19

11

27

12

15

34

16

18

40

20

20

45

24

21

49

28

21

52

32

20

54

36

18

Table 2: Details about total expenditure and total utility at each stage

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Consumer Equilibrium
The word equilibrium used in generic terms means the position of balance. In the above example, the
person in the room will stop or rest or attain equilibrium after lighting 6th or 7th lamp on. Last column of
Table 2 reveals the fact that the person's surplus is maximized at 6th and 7th lamp. In other words, the
shaded area in Figure 7 representing net consumer surplus is maximized at equilibrium. In general, we
can then say that consumer's equilibrium with respect to the purchase of one good is attained when the
difference between total utility in terms of money and the total expenditure on it is maximized.
5.10 Supplier Behaviour
Law of Diminishing Marginal Product:
Just as we have law of diminishing marginal utility in case of consumer, we have law of diminishing
marginal product for supplier. This law establishes the input-output relationship for the producer in shortrun. This law is depicted in Figure 7
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).........................................................................................................................(1)
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)
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)...............................................................................................................(3)
Figure 8 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.

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## Figure 8: Cost function and marginal cost function

Supply functions
Suppose there are many suppliers and they make use of different technologies and fuels to produce
electric energy. Thereby, these producers will have different marginal costs and will have different power
producing quantities at different price levels. If the amount supplied by a large number of producers is
aggregated, a smooth and upward sloping curve is obtained as shown in Figure 9. This is typically known
as supply curve.

## Figure 9: Cost function and marginal cost function

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Suppliers' surplus
Suppliers' surplus can be explained on similar lines to the consumer surplus. The entire supply of
commodity is traded at the market price . The suppliers' revenue is the product of traded quantity q and
the market price . Let us consider Figure 10. The horizontal line depicts the market price . The shaded
portion shows producers' net surplus. This arises from the concept of all goods being traded at a price
higher than their opportunity costs. Eventually, net surplus is the area between supply curve and
horizontal line depicting market price.

## Figure 10: Suppliers' net surplus

The supplier whose opportunity cost is equal to the market price is called as marginal producer. The
marginal producer neither accrues any profit nor loss. The infra-marginal producers accrue profit while the
extra-marginal producers would find it worthwhile to sell the commodity only in case market price
increases.
Supplier's Equilibrium
If supplier's marginal cost function is as shown in Figure 8, at what level should the supplier stop
producing that commodity? To answer this question, let us explain what is meant by opportunity cost. The
supplier has a threshold price in mind below which it will not sell its commodity. There are two reasons for
deciding this threshold price. First of course is that the total revenue will be less than total cost of
producing that commodity. Second and important reason could be that the supplier could make use of
same resources required to produce the commodity under consideration to produce some other
commodity that would fetch more money. In that case, the revenue from the sale of the commodity under
consideration will be less than the opportunity cost associated with the production of the same. In other

75

words, the supplier will sell the commodity at a price at which the opportunity cost of production is equal
or lesser.
5.11 Market Equilibrium
We have seen how consumers and suppliers would behave individually. Let us now consider how the
consumers and suppliers would interact with each other at the marketplace. We take the case of a
perfectly competitive market, although the electricity market is seldom a perfectly competitive market. A
perfectly competitive market has many attributes, the most important being that a single player is not able
to change the market price. Similarly, under perfect competition case, all market buyers buy at the same
market clearing price. The market equilibrium is achieved at a price called market clearing price such that
the quantity that the suppliers are willing to sell is equal to quantity that the consumers wish to obtain. In
other words, market equilibrium is a state of zero excess demand and zero excess supply.

## Figure 9: Market equilibrium

Consider Figure 9 for more explanation. It depicts supply and demand curves for a particular product
denoted by S and D, respectively. What should be the market equilibrium price? Suppose that price is 1.
At this price, the consumers demand the quantity d1 and the producers supply the quantity s1. Obviously,
there is a mismatch. Consumers want more than what the producers are willing to supply. The excess
demand will create competition among the buyers and push the price up. It will increase, say, to 2.
Excess demand is present at this price also. Thus price will increase further. Indeed, the price will keep
increasing as long as there is an excess demand. Finally it will converge to *, at which there is no
excess demand. Corresponding quantity is q*.
Just the opposite happens if the initial price is 3 . The quantity demanded d3 is less than the quantity
supplied s3. There is a mismatch in the form of excess supply. The price will keep falling as long as there
is excess supply. Where will the price finally settle? The answer is again * , at which there is no excess
supply.

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Thus,* and q* mark the price and quantity at equilibrium, respectively. The equilibrium situation in a
competitive market is said to be Pareto efficient. An economic situation is Pareto efficient if the benefit
derived by any of the parties can be increased only be decreasing benefit enjoyed by one of the other
parties. In Figure 8, suppose the quantity exchanged is s1 instead of q*. At that quantity, there is
someone willing to sell extra units of the good considered at price 1, which is less than the price 4 that
someone else is willing to pay for that extra unit. If trade can be arranged between these two parties at
any price between 1 and 4 , both parties will be better off and as per definition, this is not the Pareto
efficient situation. Thus, if total amount traded is less than the equilibrium q*, the situation is not Pareto
efficient. Similarly, any amount in excess of the equilibrium value is not Pareto efficient because the price
that someone would be willing to pay for an extra unit is lower than the price that it would take to get it
supplied.
It is not difficult to conclude that the Pareto efficiency is achieved only when goods are allocated on the
basis of a single marginal rate of substitution, as happens in a competitive market.
5.12 Explicit auctioning
The principle of explicit auctioning is based on selling the available capacity of the tie line to the highest
bidder through auction. This is nothing but auctioning of the tie line capacity. The explicit auctioning
separates the energy market from transmission capacity market.
This approach is commonly used in Europe for capacity allocation at several borders. In explicit
auctioning, the system operators (or the TSO in Europe) determine ex-ante, the available transmission
capacity (ATC) considering security analysis, accepts bids from potential buyers and allocates the
capacity to the ones that value it most. Thus, explicit auctioning is a market based concept, which
provides economic signals. Thus, with perfect foresight, bidders for transmission capacity would predict
the electricity market outcome with efficient use of transmission.
A limitation of this mechanism is the increased complexity which may complicate trading activities of
market participants. Another limitation is that the mechanism fails to account for parallel flows in meshed
networks. In this context, a new method has been proposed called coordinated auctioning.
5.13 Coordinated Auctioning
The coordinated auctioning splits the markets into energy market and transmission capacity market.
Participants have to ensure that they own sufficient transmission rights to conclude their energy
exchanges. However, coordinated auctioning tries to overcome problems associated with explicit
auctioning by accounting for the effects of loop flows in the network. A central auctioneer is introduced
who manages capacity allocation at all borders included in the Internal European Market (IEM). For
coordinated auctioning, three steps are necessary:

Each system operator informs the central auctioneer about the available transmission capability.
Market participants submit their bids to the central auctioneer.
The auctioneer allocates transmission capacity using a model similar to nodal pricing.

Market participants may value their willingness to pay for transmission rights by comparing the different
zonal prices. Hence, rational bidders for transmission rights will submit bids equal to the zonal difference
in energy prices, as savings for cheaper energy are traded off against the transmission costs. With
perfect foresight and all information available, a coordinated auction will lead to the same allocation as
the nodal pricing approach, which in turn is considered as an economically efficient decision.

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## 5.14 Timeline for Various Energy Markets

There are many ways depending on the time of hand-shaking, where buyers and sellers can do the
transaction. Following are the common modes in which the electric energy can be traded:
1. Bilateral contracts
2. Spot market
Bilateral/Forward Contracts
Bilateral trading generally involves two parties interacting with each other: a buyer and a seller. The
characteristic of bilateral trades is that the price of a transaction is set independently by the parties
involved. There is no market clearing price as such. Since, electricity can not be stored, it creates a wide
fluctuation in the spot price. Forward contracts provide generators and loads with a means of hedging
their exposure to fluctuations in the spot price of electricity. The generators can negotiate a price for their
output prior to the moment of producing it. Similarly, properly structured forward contracts provide buyers
with the ability to lock in a fixed price for a fixed quantity of electricity well in advance of delivery and
consumption. Indeed, if a buyer's actual energy usage matches its forward market purchases, it can
achieve a benefit of complete price certainty in the face of real time price volatility.
Depending upon the quantity of power and time, the buyers and sellers resort to different forms of
trading:

Long Term Contracts: This type of trade generally includes contract for a large amount of power
for a long time period. These types of contracts are negotiated privately and the terms and
conditions are such that they suit both the parties involved in the transaction.
Trading Over The Counter: These transactions involve smaller amounts of energy to be
delivered. For example, the amount of energy to be delivered during different periods of the hour,
day, etc. This type of trading has much lower transaction costs and is used by producers and
consumers to refine their positions before real time.
Electronic Trading: In this, participants can enter offers to buy energy and bids to sell energy
directly in a computerized marketplace. The participants can observe the quantities and offers/
bids submitted by all participants, but do not know the party involved. The software in the
exchange couples the matching offers. It checks whether for a newly entered bid, if there is
matching offer whose price is greater than or equal to price of the bid. If no match is found, the
bid is added to the list of outstanding bids until a new offer matches it. Otherwise, it lapses after
the market is closed. The same process is repeated after a new bid is entered. There is no
market clearing price as such.

## The Spot Market

As we have discussed a market for any commodity provides an environment for buyers and sellers to
interact and agree on transactions, generally, the quantity and price. These interactions progressively
lead to an equilibrium point at which the price clears the market, that is, the supply is equal to demand. If
electrical energy is to be traded according to a mechanism in which the buyers and sellers are free to
interact individually, the equilibrium between the production and the consumption can be set through
repetitive interaction. In this scheme of attaining equilibrium, the consumers make an estimation of their
consumption before entering into a contract. The generators schedule the production of their units to
deliver at the agreed time the energy that they have agreed to sell. However, in practice, neither party can
meet its contractual obligation with perfect accuracy because, for example, from a load's point of view, the
actual demand of a group of customers is never exactly equal to the value forecasted. Changes in
weather and due to some other externalities, the day ahead or before real time estimation of load
consumption can have deviation from that done few months or years back, while doing the contract. Also,
unforeseen problems may prevent generating units from delivering the contracted amount of energy.

78

It can be concluded that, while a large proportion of the electrical energy can be traded through an
unmanaged open market in terms of forward contracts, such a market may not necessarily lead to an
equilibrium that replicates real time scenario. Thus, an intermediate stage is necessary, where a
managed spot market can provide a mechanism for balancing load and generation. This market should
supersede the open energy market as the time of delivery approaches. Its function is to match residual
load and generation by adjusting the production of flexible generators and curtailing the demand of willing
customers.
In many real life markets, more than 80% of the energy traded is through the forward or bilateral
contracts. The rest is traded through the spot market.
5.15 Global Welfare
Global welfare is the sum of net consumer surplus and net producer surplus. It is the quantification of the
overall benefit that arises from trading. Global welfare is maximized when market is settled at the
intersection of supply and demand curves. The global welfare is also termed as social welfare and social
surplus. Global welfare is explained with the help of Figure 2 In this figure, sum of the areas DS1, DS2
and DW2 represents the consumer surplus while sum of areas SS1, SS2 and DW1 represents the
producer surplus. The total area consisting of areas DS1, DS2, SS1, SS2, DW1 and DW2 represents the
global welfare. It is clear from the figure that if the price is set to any infra-marginal value rather than the
equilibrium price, there is a reduction in the global welfare.

## Figure: 10 Global welfare and deadweight loss

5.16 Deadweight loss
It leads to reduction in global welfare and creation of deadweight loss. Suppose the price is set at 2 due
to some intervention by say, the government, as shown in Figure. In this case, the consumers reduce
their consumption from q* to q. The consumer surplus then becomes equal to area DS1, while producers'

79

surplus is the sum of areas DS2, SS1 and SS2. Similarly, if price is set at 1 , the suppliers reduce their
production to q from q*. The net consumer surplus is the sum of areas DS1, DS2 and SS2, while
producers' surplus is area SS1. Thus, these interventions while setting price have undesirable effect of
reducing the global welfare by an amount equal to the sum of areas DW1 and DW2. The amount
equivalent to this area is called as the deadweight loss. In general, regulated tariff is the major source of
deadweight loss. From electric market point of view, the network constraints can be a major source of
creation of deadweight loss.

80