Chapter I: Introduction

1.1 The Electric Utility Industry

The availability of electric energy is an essential asset in modern society for a variety of
uses; residential, commercial, industrial, educational, and other public activities. There is a
very strong relationship between economic growth and the usage of electricity as
qualitatively indicated by the graphs of Fig. 1. One can note the increase in total electric
energy consumption and a corresponding increase in per capita consumption. The scale can
be different for a developed country than for a developing one. In many developed
countries the total generation, and hence consumption, is high with the population growth
leveling off. Hence the growth of electricity usage is relatively low. In a developing
country, the economy is still developing the total and the per capita energy consumption are
increasing at a relatively high rate. Political stability can have very strong effects on the
electric industry as well as on other aspects of life!

population

G
e
n
e
r
a
t
i
o
n

(
G
W
h
)

Year 1970
1990 2010 1980 2000
2020
10000
5000
2500
7500
P
o
p
u
l
a
t
i
o
n

(
M
i
l
l
i
o
n
)

1.5
3.0
4.5
6.0
k
W
h

p
e
r

c
a
p
i
t
a


4000
2000
3000
1000
generation

kWh


Figure 1: Electricity and population growth diagrams
Due to the large investments required in the electricity industry, the electric utilities in
many developing countries were and still are state owned. However, with the liberalization
of world economy and the availability and the willing to use foreign investment, some
developing countries are changing towards private ownership. Also in most developed
countries the ownership was also largely to the state but has started changing into

EECE 670 S. H. Karaki 1 Introduction 2


unregulated competitive companies. In the US, electric utilities were investor owned
monopolies that are strongly regulated by the government. Some were owned by
municipalities or were cooperatives. The UK, the Nordic countries, and the US have led the
way towards privatization and the deregulation of the electric utility industry competitive
entities operating in a market environment. The financing of utilities in the US was largely
through borrowing and issuing of bonds and the sale of company stocks.
1.2 Load Characteristics
The Pearl Street Station in New York, built in 1881, was the first electric power
company. Other power stations quickly spread across the US and Europe and it was soon
realized that there are great economic benefits for these power stations to interconnect as
they can share reserve and support one another to improve reliability of supply. The electric
energy supplied by these stations is consumed according to seasonal or diurnal variation
that reflect people activities as shown in Figure 2. When the average hourly or half hourly
loads of a particular period (e.g. day, month, or year) are sorted in descending order another
type of curve is obtained, the load duration curve (LDC) shown in Figure 3. The horizontal
axis on the LDC represent the time duration usually depicted in hours or in percent. And the
vertical axis depicts the load in MW or in percent. The area under the LDC represents the
energy demanded in the corresponding period.


Load (MW)
Peak
Load
24
Time (hours)

Figure 2: Diurnal or seasonal variation in an electric load profile

EECE 670 S. H. Karaki 1 Introduction 3



Load (MW)
Base load
L
P

Duration 8760
Hours
Intermediate load
Peak load

Figure 3: Load duration curve (LDC)
1.3 Generation Systems
To supply such varying loads economically different types of units are utilized. The
lower or base part of the load is supplied by base load units of the steam turbine (ST) type
(Figure 4) or of the hydro-turbine type. Steam turbine units are capital intensive ($850 to
$1200/ kW) with a lifetime of around 30 to 35 years, and they use low grade fossil fuels,
e.g. coal or residual fuel oil, or nuclear fuel that very high energy intensity. They have a
relatively low to moderate operating cost that has been traditionally in the range 1 to 5
c/kWh, but this is largely function of the price of fuel. The efficiency of ST units is in the
range of 35 to 39%. Hydro turbine units are very highly capital intensive and have low
running costs as they need no fossil fuel. Their lifetime is over 50 years.


Boiler
Reheater
Condenser
G
Fuel
Steam
HP
LP

Figure 4: A simple steam turbine unit schematic

EECE 670 S. H. Karaki 1 Introduction 4


Intermediate load units may be of the ST or hydro turbines of relatively lower efficiencies
and smaller sizes. Combined cycle units (Figure 5) may also be used as intermediate-load
units since they are capital intensive ($650/ kW) and have a relatively high efficiency
(50%). However, they tend to use high quality fuel such as distilled fuels or natural gas.
However, their classification as intermediate or base load unit depends on their relative
merit order in comparison to other units in the system.

Condenser
Fuel
Compressor
Boiler
CC
G
G
Steam
Exhaust
Air
Turbine
Heat
Recovery

Figure 5: A simple combined-cycle turbine unit schematic
Peak loads have substantially short duration that cannot be economically supplied by highly
capital intensive base or intermediate load units. Combustion turbines are less capital-
intensive ($350/ kW) with relatively low efficiency (30%) and high fuel price and hence
have relatively high production cost (e.g. 10c/kWh). Other types of peak load units are
pumped storage hydro units shown in Figure 6. A pumped storage scheme consists of a
lower and upper reservoirs and a hydro turbine. At the time of low load the most economic
units are operating and hence water is pumped up from the lower to the higher reservoir. At
the time of peak load the water is allow to fall down from the upper to the lower reservoir
and drive the turbine to produce electricity. For a pumped storage to be economically
favorable then its operating cost in $/MWh must be lower than that of available combustion
turbines and thus yield positive benefits in the long run.


EECE 670 S. H. Karaki 1 Introduction 5



Lower
Reservoir
Upper
Reservoir
Pump/
Turbine
G
Motor/
Generator

Figure 6: Pumped storage scheme
Fuel availability and prices will be a vital issue in determining the most economical
generation mix. A power generation system must have a suitable mix of base, intermediate
and peak load units so that a sound economic operation of the system is possible. With the
prices of oil soaring upwards, the expected trend is an increase in the power generation
from coal and nuclear.
Environmental factors are having an impact on the electricity industry in terms of capital
expenditures on equipment needed to control air pollution and water quality. Production
costs are now in the range 7 to 15 c/kWh on average and pollution control equipment to
reduce SO
2
, NO
X
, and particulates are 10 to 20 % of these costs. The reduction of water
thermal pollution is through a variety of equipment that mainly includes cooling towers
with forced and natural drafts. The cost of such equipment is of the order of 2 to 10% of
the corresponding unit cost.
Random outages that occur in generation systems require electric utilities to have sufficient
reserve or excess capacity over load to insure a good reliability in the supply. The reserve
has been traditionally evaluated in deterministic or probabilistic criteria. The deterministic
criterion is to allow for an increment above the peak load as a percentage, or as the size of
the largest two units allowing one for maintenance and one for outage. The more widely
used method is probabilistic based on evaluating the loss of load probability (LOLP), or the
expected energy not supplied (EENS). More about the reliability evaluation of generation
system will be discussed in Chapter 3.

EECE 670 S. H. Karaki 1 Introduction 6


1.4 Transmission Systems
Transmission networks play a pivotal role in delivering electric energy from generation
systems to load centers. Voltage levels of 150, 220, and 400 kV are used to transport the
electric energy in Lebanon. In larger countries higher voltages are needed to transmit higher
levels of powers over longer distances. In the US transmission voltages are 345, 500, and
750 kV. The planning of a transmission network requires the use of simulation tools such as
power or load flow (LF) and contingency analysis (CA) to evaluate its reliability. Using
these tools, the planning engineer evaluates line and equipment overloads in a proposed
network plan. The contingency analysis will provide the planner with the network behavior
in terms of any equipment overloads when single or double line outages are considered.
Probabilistic load flow methods have been widely researched and proposed as tools for
system planners but have not obtained wide acceptance in the industry as they do not
provide any significant additional insight. Optimal power flow (OPF) programs have been
used as tools to evaluate the possibility of re-dispatch generators to remove line overloads
in a formulation known as security dispatch. The use of OPF has gained significant
attention as a tool to evaluate the operation of the system working in a market environment.
1.5 Economic Analysis
Three kinds of economic assessment methods are frequently used:
- Static assessment
- Dynamic assessment
- Stochastic assessment
If time value of capital is not considered, the assessment is then static, which is simple and
direct. The method can be used only initially, even on simple projects. In the stochastic
assessment the future uncertainties on the load forecasts and fuels price, for example, are
taken into the problem formulation. Most models for planning nowadays are based on a
dynamic assessment method that takes into consideration the effect of time on capital. Four
methods are frequently used:
- Present and net present value methods
- Internal profit rate method

EECE 670 S. H. Karaki 1 Introduction 7


- Annual cost method
The cost elements that usually considered in the economic analysis are the capital
investment cost and the operating costs. The latter may consist of maintenance and
operation (MO) and fuel costs, for generators.
Time value of capital
Value of capital is related to time. A sum of money available now is more valuable that the
same amount in the future, even without inflation. The time value of capital is expressed
mainly in 3 ways:
- Present value (P): converts the capital at different times to a present equivalent capital.
This conversion is called discount calculation.
- Future value (F): equivalent value of capital converted to a given time in future.
- Annual equivalent value (A): is the capital converted to annual installments of equal
values.
The values above are mutually convertible with P and F consisting of one payment while A
is in installments. Let i be the interest rate.
- The future value F of P at the end of year n is:
n
i P F ) 1 (
- The present value P of a future value F is:
n
i
F P
) 1 (
1

- Future value F of an annual equivalent value A:
i
i
A F
n
1 ) 1 (

- Annual value A of a future value F:
1 ) 1 (

n
i
i
F A
- Present value P of an annuity A:
n
n
i i
i
A P
) 1 (
1 ) 1 (

EECE 670 S. H. Karaki 1 Introduction 8


A simplified notation is often used to represent the ratio factor on right hand side of the
above equations: for example the factor in the second equation multiplying a future value to
obtain a present value is denoted by (P/F, i, n), and the factor multiplying an annuity A to
obtain a present value P is denoted by (P/A, i, n).
Net Present Value Method: This method maximizes the profits or the difference between
revenues and costs converted to the present. For m mutually exclusive schemes, we
normally select the scheme to maximize the NPV:
m j n i F P O C R NPV
n
t
jt jt jt j
... 1 ) , , / ( ) ( : max
0

R
jt
: Revenue of scheme j in year t
C
jt
: Capital cost of scheme j in year t
O
jt
: Operating cost of scheme j in year t
Minimum Cost Method: When the expected revenues does not vary from one scheme to
another the NPV method simplifies to a minimum cost method illustrated in the following
example.
m j t i F P O C PVC
n
t
jt jt j
... 1 ) , , / ( ) ( : min
0

Example 1.2: Two schemes of an engineering project are shown in the table below. Which
scheme is more economical if the discount rate is 6% and the depreciation in investment is
linear?

1 2
Investment (M$) 3 5
Salvage (M$) 0 1
Life (years) 6 8
Depreciation cost (M$/year) 0.75 0.55

Solution:
The present value cost of the first project is given by:

EECE 670 S. H. Karaki 1 Introduction 9


917 . 4 75 . 0 3
) 06 . 0 1 ( 06 . 0
1 ) 06 . 0 1 (
75 . 0 3
6
6
1

PVC
= 6.688 M$
This should be compared to the cost of operating the second project for 6 years. The salvage
value of the investment after 6 years is given by (assuming linear depreciation):
I d S 6
6
where 5 . 0
8
1 5

d
$ 2 5 6 5 . 0
6
M S
M$ 29 . 6 917 . 4 55 . 0
) 06 . 1 (
2
5
6
2
PVC
So select scheme 2!
Internal Rate of Return (IRR) Method or Investment Recovery Method: One should
note that the NPV diminishes as the discount rate i increases. In this method it is required to
determine the special value i
*
such that:
m j n i F P O C R NPV
n
t
jt jt jt j
... 1 0 ) , , / ( ) (
0
*

This may be solved by a trial and error method. According to this method a scheme j is
viable if i
*
is larger than i the standard discount rate. The method is graphically illustrated
in Figure 7.

i
*
NPV
i
5 10 15 20 25

Figure 7: Illustration of the internal rate of return method

EECE 670 S. H. Karaki 1 Introduction 10


1.6 Planning in a Classical Environment
Power system planning is conducted under national guidelines and energy resources policy.
Figure 8 shows the structure of power system planning. Energy resource planning
evaluates the effective use and coordination of various available primary energy resources,
such as fuel oil, gas oil, natural gas, and hydro-energy. As shown in Figure 8 power system
planning consists of a load forecast, generation planning, and network planning. Generation
and network planning exert influence on each other and on the load curve.
The objective of generation planning to seek the most economical system that supplies the
demand forecast within some established reliability environmental constraints. The
following questions should be addressed:
- When and where to invest in new units?
- What capacity and type of new units should be installed?

Figure 8: Structure of power system planning
Given the existing generation structure and cost of primary energy resources, the following
quantitative analysis is normally done by planning models to determine and justify a given
plan:
- Cost of investment and annual operation
- Reliability indices
Electrical Generation Planning
Electrical Network Planning
Electrical Load Forecast
Energy Plan
State Planning & Energy Policy

EECE 670 S. H. Karaki 1 Introduction 11


- Sensitivity to price changes
- Effect of delaying certain key projects
So generation planning is a complicated task. Many types of units are involved and
therefore, the number of decision variables can be very large (number of units added per
year). This is a discrete optimization problem involving nonlinear reliability constraints
and non-linear generation investment and operation costs. The data required for generation
planning involve essentially load forecasting, fuel and equipment costs, and discount rates,
which contain uncertainties. So the complexity of problem increases because sensitivity
analysis may be needed to cater for these uncertainties. So, when carrying out generation
planning, suitable simplifications are normally made in practice:
- Heuristic algorithms are used instead of rigorous operations research.
- Simplifying assumptions are adopted like linearization of generation unit investment.
- All generation units are considered to be a on a single node as far as generation planning
is considered.
1.7 Planning in Competitive Electricity Markets
In competitive electricity markets, generation companies invest in new plant where it is
profitable to do so. The profitability measure in a market setup is return on investment. A
generating company evaluating a new plant will forecast its expected revenues and
operating cost to deduce a stream of net future revenues that will be compared to the net
investment in the plant. If the resulting rate of return is higher than a companys handle
rate the project may be carried out, else it may be deferred.
In a competitive market, a generation companys success is motivated usually by financial
rewards for good performance and penalties for a poor one. This performance is facilitated
first by the existence of a spot market purchases or sales, which allows producers and
consumers to resolve imbalances between contracted and actual production and
consumption. In addition, long-term contracts may be used by producers and large
consumers to buy and sell energy to help ease the difficulty associated with high prices of a
spot market. Whereas a regulated monopoly had to maintain a 25% reserve margin, in a
competitive market this reliability rate is replaced by The failure to produce the promised

EECE 670 S. H. Karaki 1 Introduction 12


energy is penalized at $1000/MWh. So the cost and risk of the penalty will now be
balanced against the cost of investing new plant to avoid the penalty. So the decision to
build a new plant is now made by a generating company based on purely on economic,
financial and other commercial issues.
The art of evaluating generation investment in a competitive market is new and relatively
little quantitative data are available. Tools such as portfolio analysis, decision analysis, and
asset valuation have been used but should be applied prudently as electric energy is not
stable and can only be transported on dedicated electric networks that obey physical laws.
A competitive generating company may not always base its decision on rigorous financial
and economic analysis. Consideration such as regional market share, early entry
opportunity, energy with other projects and corporate prestige will affect the evaluation of
an individual generation project.
Electric energy requires a unique and dedicated set of physical facilities for transporting it
from the producers to the consumers. Such a transmission system in a competitive
electricity market functions as a market place to impartially enable competing transactions
to take place. The transmission function must now (1) provide enough transmission
capacity to allow competitive transactions in a competitive electric energy market, (2) allow
impartial access to and use of that transmission capacity, and (3) charge the producers and
consumers using the transmission system prices that reflect such usage and recover the cost
of constructing and operating such a system. The latter point is particularly important since
transmission services are paid separately from energy production.
The challenge in transmission pricing is in developing a mechanism that both (1) promote
efficient use and expansion of the grid, and (2) facilitate effective competition in
generation. These objectives are conflicting by their nature: By definition efficient
transmission pricing means that differently situated users (producers and consumers) pay
different prices depending on their usage of the grid. Thus some generators will be at a
competitive disadvantage relative to others located at more favorable sites. The art of
designing transmission prices to meet these two conflicting objectives is still being
developed.