Electricity Markets

Lecture by Eleanor Kajuba

Credits: Dr. Victor Levi, University of Manchester
Electricity Markets

De-Regulation of the Power Industry

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Structure of old power systems
• In the old systems, customers had no choice but to buy electricity
from one utility who had the monopoly for the supply of electricity.
• Most of these utilities were “vertically integrated” meaning that it
was a single company from generation up to distribution of electricity
to the final consumers.
• Most of these utilities were regulated private companies or
companies controlled by the national government.
• In the initial phase of electrification, this structure of a power system
is the best.

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Why de-regulate?
• De-regulation: This is segmenting the power industry into smaller
businesses
• Monopolies with time become inefficient. Why?
-There is no incentive to operate efficiently
-Encourages unnecessary investments
-No penalty for mistakes
• Benefit of deregulation
- Increase efficiency
- Lower the cost of electricity to consumers

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Changes required for de-regulation
1. Unbundling
Generation, transmission and distribution functions have to be
unbundled and performed by separate companies
2. Competition
Generators compete to sell electricity and consumers can choose who
to buy from
3. Privatisation
Government owned companies need to become private, for profit
companies

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Participants in electricity markets
• Generating Company(GenCO)
-Produces and sells electricity in bulk
-Owns and operates generating plant (maybe a single plant or a
portfolio of plants with different technologies)
- Also part of generation are Independent Power Producers(IPPs) who
coexist with a vertically integrated utility
- Their objective is to make profit from the sale of energy

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Participants in electricity markets
• Distribution Company (DISCO)
-Owns and operates the distribution network
- In the traditional setup, the DISCO has a monopoly for the sale of
electricity to all consumers
- In the de-regulated and competitive environment, the network
operation, maintenance and development is separated from the sale
of energy
- Remains a regulated monopoly and is regulated by the regulator
- The objective is to maximise regulated profit.

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Participants in electricity markets
• Retailers
-These buy electricity from the wholesale market and sell it to
consumers
-They do not own generating, transmission or distribution assets and
are in most cases the subsidiaries of generating or distribution
companies.
-Customers pay bills for electricity to retailers
-The objective of retailers is to maximise profit (the difference between
the wholesale and the retail price)

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Participants in electricity markets
• Market Operator
• Runs a computer system that matches the bids and offers that the
buyers and sellers have submitted.
• The MO also forwards payment to sellers and monitors delivery of
electrical energy
• The objective of the MO is to run an efficient market to encourage
trading
• The MO is non-profit and the costs are paid by consumers

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Participants in electricity markets
• Independent System Operator(ISO)
• Has the responsibility of maintaining the security of the power system
• Is independent to ensure system is operated in a way that doesn’t
favor one player over another
• Owns only computing and communication assets to monitor and
control the power system.
• Usually runs the market of last resort i.e. balances generation and
load in real time
• The main objective is to ensure security of the power system

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Participants in electricity markets
• Transmission Company (TRANSCO)
-Owns the transmission assets
- In some cases, we can have an Independent Transmission Company
which is an ISO that also owns the transmission network.

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Participants in electricity markets
• Regulator
• This is always a government body
• They are responsible for ensuring fair and efficient operation of the
power system
• Determines and approves market and industry rules
• Investigates suspected abuses of market power
• Also sets prices for products and services provided by monopolies

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Participants in electricity markets
• The Regulator
- The objectives of the regulator are:
- Make sure the electricity sector operates in an economically efficient
manner
- Make sure the quality of supply is appropriate
- Make sure that ‘mistakes’ are penalised

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Participants in electricity markets
• Small Consumer
- Buy electrical energy from a retailer and lease a connection from the
local distribution company

• Large Consumer
- These often participate actively in the electricity market
- May sometimes offer load control ability to the ISO to help control
the system (with incentive)

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Models of Competition
• Hunt and Shuttleworth propose four models to show the evolution of
the electricity industry from full monopoly to a regulated industry
• The models are:
1. Model 1: Monopoly
2. Model 2: Purchasing Agency
3. Model 3: Wholesale Competition
4. Model 4: Retail Competition

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Models of Competition
1. Monopoly
This is where the utility integrates
the generation, transmission and
distribution of electricity.

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Models of Competition
2. Purchasing Agency
• This is a step towards competition.
• The utility no longer owns all the generation capacity. IPPs are
connected to the network and sell electrical energy to the utility who
now becomes a purchasing agent.
• This model can also be disintegrated whereby the distribution and
retail services are also disintegrated.
• In this model, the rates of the wholesale purchasing agent must be
regulated because they have monopoly powers over the DISCOs and
the IPPs

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Models of Competition

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Models of Competition
3. Wholesale Competition
• In this model, the DISCOs purchase electrical energy directly from the
generators through the wholesale market.
• Also large consumers are allowed to buy directly from the wholesale
market.
• In this model, the only functions that remain centralised are
managing the spot market and the operation of the transmission
network.
• In addition, each DISCO only operates the distribution network in
their area and purchases electricity for consumers in their territory.

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Models of Competition

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Models of Competition
4. Retail Competition
• This is the ultimate form of a competitive electricity market
• Here, customers can choose their supplier
• In this kind of mind, consumers select the best retailer and can move
from one to another
• The only monopolies left are the provision and operation of the
transmission and distribution networks.

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Models of Competition

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Regulation of the power system industry
Responsibilities of the regulator
• define the service levels required by customers taking into account
customers’ willingness to pay for those service levels
• determine an appropriate price to be paid for the agreed service
levels
• monitor delivery of the agreed services to confirm delivery
• safeguard the long term supply of the services
• seek to minimise the price paid for the required services over the long
term

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Regulation of the power system industry
Forms of regulation
• Economic based regulation
–Rate of return
–Price regulation
• Performance based regulation
–Absolute and relative approaches
–Targets on performance
–Customer willingness to pay

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Regulation of the power system industry
Distribution Network Cost Drivers
• Efficiency in distribution
– Minimise losses
• Security
-Security is the ability of a system to maintain supply to a defined level
of demand under defined credible contingency conditions

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Distribution Network cost drivers
• Quality of supply
– some aspects of quality of supply improvement require investment
for example reactive compensation to deal with voltage complaints,
distribution automation to reduce supply restoration times
• Safety
– To protect both plant, utility personnel and the public (protective
devises and systems including switchgear, isolators, earthing &
insulation systems, lightning and surge protection)

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Regulation of the power system industry
Security Standards
• The main aim of security standards is to provide sufficient plant and
other resources to provide and maintain an economic level of
reliability of supply to the consumer
• Also these standards guide system planning and reinforcement
investment programmes

• Read about security standards(n,n-1 etc)

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Regulation of the power system industry
Guaranteed Standards
These are set service levels which must be met.
Examples:
• restore supply in 18 hours from fault
• arrange to provide new domestic supply in 2 days
• estimate cost of new supply in 5 days
• provide 7 days notice of planned interruption
• visit voltage complaint within 10 days
Qn: What are some of Uganda’s guaranteed standards?

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Electricity Markets

Operation of the Electrical Energy Markets

Credits: Dr. Victor Levi and Dr.Joseph Mutale

 Electricity is a commodity and can
be defined as “MWh at a given time
and a given location, with a given
level of supply security.”
Electricity as a
commodity To some extent, since it is a
commodity, we can apply general
market concepts but in some cases,
it differs from other commodities.

Credits: Dr. Victor Levi and Dr.Joseph Mutale

Credits: Dr. Victor Levi and Dr.Joseph Mutale
Credits: Dr. Victor Levi and Dr.Joseph Mutale
Credits: Dr. Victor Levi and Dr.Joseph Mutale
Credits: Dr. Victor Levi and Dr.Joseph Mutale
Credits: Dr. Victor Levi and Dr.Joseph Mutale
Reading Assignment
• Types of electricity markets
Fundamentals of Power System Economics Section 3.4 to 3.7

Credits: Dr. Victor Levi and Dr.Joseph Mutale