EPGDIB (2019-20)

Early Bird System Analysis

Business Economics

Assignment on Analysis of Case Study

The Early Bird - Electric Power Load Dispatching

Submitted to : Prof. Dr. D. Sunitha Raju

EPGDIB 2019-20, Section - B, Group: 10

Question:
If each plant is assumed to be a profit head, then does operational efficiency translate
into profit maximization?
 EPGDIB (2019-20)

Early Bird System Analysis

Business Economics

Early Bird System Overview

Southern Company, the nation’s third largest utility, refers to its load dispatching method
as the “Early Bird” system.
Southern’s Early Bird is designed to provide automatic, computerized control of all the
company’s power production and transmission facilities.
The Early Bird continuously calculates the marginal cost of delivering additional kilowatts
of electricity to Southern Company customers anywhere in the company’s service area.
Then, as electricity demand rises or falls at points throughout the system, Early Bird
transmits “raise” or “lower” impulses to the company’s generating units and routes the
correct amount of electricity along the most economical transmission path to the end user.

In order to have optimal use of variable and fixed parameters, Southern Company
engineers test the operating efficiency of every piece of power-generating equipment
the company has in service.
Production function of generating unit depends on following parameters:
1. Fixed Inputs ( Plant, Machinery etc.)
2. Variable Inputs
a. Fuel
b. Labor
c. Duration of service
d. Wear and Tear (Mechanical Efficiency) etc.

However, operation efficiency of each unit varied on its own variable parameters and
these results in separate production and marginal cost function for that generating unit.
Production at lowest MC level yields the lowest per unit cost, hence early bird send
impulse to raise electricity output of generating unit where MC is lowest.
The equations for the production functions of each generating unit are then fed into
Early Bird to obtain marginal cost function.
Overall operation efficiency of Southern company depends on MC function of power
generating on-line unit and transmission system (transmission losses etc.)
 EPGDIB (2019-20)

Early Bird System Analysis

Business Economics

Analyzing each Generating Unit as Profit Head

As each unit is assumed to perform as profit head then each unit will incur expenditure to
generate revenue and total revenue minus total cost is unit’s profit.
To achieve this at optimum level unit utilizes its resources to maximize their profits by
reducing their cost and increasing productivity.
Considering Average cost (AC) consists of fixed (K) and variable (L) inputs, lets check
relation between AC and Average product (AP):

Given the price of the variable input (PL), the AC is equal to the reciprocal of the average product.
In other words, AC is inversely related to AP i.e. if AP is maximum AC is minimum and
vice-versa.
This relation shows that if each generating unit assumed to be a profit head, then they
will strive to reduce their cost (TC) and increase productivity (TP)
And marginal cost varies inversely with the marginal product of the variable input, maximum of
marginal product corresponds to minimum of marginal cost.
Average cost and marginal cost are simply the transformation of average product and marginal
product respectively from physical terms into money terms.

As each unit is assumed to perform as profit head then each unit has to utilize its
resources to maximize their profits by minimizing average cost and maximizing average
product.
 EPGDIB (2019-20)

Early Bird System Analysis

Business Economics

Analyzing Profit Maximization

1. Unit is said to be operationally efficient when Average Cost (AC) is minimum or

average product (AP) is maximum.
2. Increase in productivity causes cost to fall while decreases in productivity causes
cost to rise.
3. Business decisions are made to earn profit i.e. π = TR – TC
4. Profit maximization is a function of TR and TC, i.e. minimum TC and maximum TR.
Profit maximizing output: MR = MC

Cost Curve of Generating Unit

Assuming a perfectly competitive market, market transactions at fixed price; MR is

constant and equal to the price P and AR..
Profit maximization at MC = MR , economic profit (in monetary value : Q * P) is denoted
as yellow patch i.e. (QE * P – QE * C)

For profit maximization generating firm will continuously work to lower total cost and
operate where MR = MC.
 EPGDIB (2019-20)

Early Bird System Analysis

Business Economics

Conclusion

Early Bird system continuously calculates the marginal cost of delivering additional
kilowatts of electricity to Southern Company customers.
Marginal cost equation of Early Bird system depends on MC of Generating on-line unit
and marginal cost function of transmission system (loss coefficients etc.)

System continuously work to determine lower average cost and increasing profits for
Southern Power as whole not only with individual generating unit.
To meet customer demand system always select unit with lower marginal cost or buy a
“block” of electricity from an adjacent company (will have lower MC than Southern) for
more economical options.
Even if generating unit is operating at their best operational efficiency and at lower MC,
system may not allow increased load to be allocated on the transmission grid (to minimize
loses for substations), this is due to Early Bird program analyzes the transmission loss
coefficients for overall profit maximization.
When each unit is assumed to be a profit head, operational efficiency of each unit may
not be translated in to overall profit maximization of Southern power.