Power Systems Engineering

Research Center (PSERC )

An NSF Industry / University

Cooperative Research Center

PSERC
1

Mission PSERC

Universities working with industry and

government to find innovative
solutions to challenges facing a
restructured electric power industry.
• Multi-disciplinary (engineering,
economics, operations research, etc.)
• Multi-university
• Collaborative
• Research and education activities

1
 PSERC Universities
PSERC

• Cornell University (lead university)

• Arizona State University
• University of California at Berkeley
• Carnegie Mellon University
• Colorado School of Mines
• Georgia Institute of Technology
• The University Of Illinois at Urbana
• Iowa State University
• Texas A&M University
• Washington State University
• University of Wisconsin-Madison
3

Research Program
PSERC

• Three research stems

• Markets
• Transmission and distribution technologies
• Systems
• Leveraged research (such as Consortium
for Electric Reliability Technology
Solutions)
• Public documents: www.pserc.wisc.edu

2
 Electric Service Reliability

Fernando L. Alvarado
Professor, University of Wisconsin
Invited Presentation
43rd NARUC Program
East Lansing, Michigan, August 15, 2001

Outline PSERC

• Traditional reliability concepts

• LOLP
• n-1 security
• Reserve margins
• Reliability in a market context
• The Value Of Lost Load (VOLL)
• Some market power issues

3
Traditional reliability concepts

• Loss of load probability (LOLP)

• Expected Demand Not Served (EDNS)
• n-1 security
• Reserve margins

Electric service reliability PSERC

• End-user perspective:
• Any involuntary loss of power is a
reliability event
• Bulk system perspective:
• Any system condition leading to loss of
load is a reliability event
• Only those leading to widespread or extended
outages are considered true reliability events
• The outage of a component is not an event

4
 Reliability Time Frames PSERC

• The planning time frame

• The operations time frame
• Reliability in this timeframe is sometimes
called security
• In this talk we will emphasize the
operations time frame

Loss of load probability PSERC

• A “planning” concept
• Based on random outage of generators,
what is the probability that the available
generators will be insufficient to meet
the anticipated load
• Measured in frequency of expected outages
• EDNS extends the concept to
consider energy “not served”

10

5
 The n-1 security criterion PSERC

• “The outage of any single piece of

equipment shall not result in an
uncontrolled loss of load”
• A pretty universal and fundamental way
of operating the system
• Cost in not in the equation
• Sometimes n-2 and n-3 criteria are
used
11

Applying the n-1 criterion PSERC

• Outage of any generator does not

cause overloads or other problems
• n-1 criterion used to establish reserve
requirements
• Outage of any line or transformer
should not cause any other overloads
• If a potential problem exists, system is
redispatched for “security reasons”
(either via CED, via TLR, or via prices)

12

6
 Why do systems fail? PSERC

• Cascading overloads
• A simple line or transformer outage is
not enough except in radial situations
• Most distribution systems are radial
• Loss of system stability
• Transient or dynamic
• Voltage collapse
• Insufficiency of generation

13

Reserves PSERC

• The loss of any generator shall not

cause an uncontrolled loss of load
• The “area control error” (ACE) must
be brought under control
• NERC has well-defined rules for this
• At present the rules are “voluntary”

14

7
 What is the ACE? PSERC

• To facilitate control, the power

system is divided into control areas
• All exports and imports are monitored
• Every area balances its energy to attain
the desired exports or imports
• It also contributes to frequency control
• The ACE is the deviation between the
intended frequency+exports and the
actual values
15

More on reserves PSERC

• Reserves may have to be locational

• They must consider time of response
• Reserves are often classified this way
• “Sustainability” attribute of reserves
has been underconsidered to date
• The cost of procuring reserves can be
quite important
• Reactive reserves are important

16

8
 Reserve margins PSERC

• “How far are we from a failure under

normal conditions”
• And how about under contingency
conditions
• A contingency is the loss of a component
• You must also ask “in what direction”
• How far is the nearest gas station is different
from how far is the next gas station
• Often the direction is “total system load”

17

Choosing reserve margins PSERC

• Depends on “largest credible event”

• Sometimes the probability of a
triggered event is factored in
• Play it more conservative during bad
weather
• Margins often expressed in terms of
size of largest generator or loss of
biggest import
18

9
 Temporal classification PSERC

• Spinning reserves
• Fast-responding, usually instantaneously
• Supplemental reserves
• You can bring resources on-line quickly
• Backup reserves
• They can be brought on line after some
time

19

Reliability in a market context

• Reliability event occurs when demand

exceeds supply
• The supply and demand curves do not
intersect!

10
What is reliability anyway? PSERC

• The CAISO just disconnected you as

a result of insufficient reserves
• This is an example of a reliability event
• You had vountarily signed up for an
interruptible program and got cut off
• This is not a reliability event

21

Economics 101
PSERC

Demand function
Price

(value of electricity
to customers)
Consumer
surplus Price

Total consumer Equilibrium

surplus (area)

Quantity

11
 Economics 101
PSERC
Production function
Price (cost of electricity
to producers)

Price
Producer
surplus
Equilibrium
Total producer
surplus (area)

Quantity

Economics 102
PSERC

Total consumer
Price

surplus (area)

Price

Equilibrium
Total producer
surplus (area)

Quantity

12
 Some realities PSERC

• Demand function is closer to vertical

• Supply function tends to have steps
• Supply function does not extend to
infinity

25

A market problem
PSERC
Price

Price

No Equilibrium?

Quantity

13
 A market failure
PSERC

Price
Inelastic
demand

No Equilibrium

Quantity

Reliability & market failure PSERC

• Market failure ⇒ Reliability event

• Reliability event ⇒ Market failure?

• Certain reliability events are not the

result of market failure
• There must have been a market in the first
place

28

14
 Assumptions PSERC

• Exactly two technologies

• Each technology has a known price
• No market power
• Inelastic demand

29

Deterministic Demand and Supply, low demand case

Security Margin
Price

Demand (inelastic)

Maximum
available
power

Available supply

Quantity (power)
Clearing
price

15
Deterministic Demand and Supply, high demand case
Clearing
price

Price

Demand (inelastic)
Maximum
available
power

Available supply

Quantity (power)

Unfeasible case, no demand elasticity

No intersection

16
 The effect of demand elasticity

Demand elasticity makes case feasible

Greater elasticity does not help

much more (price is still high)

Interruptible demand

Interruptible demand also helps

17
Probabilistic Demand, high demand case

Probability of low prices

Outage
probability

The piece-wise nature of the supply curve

Generator 6
Generator 5
Generator 1

Generator 2

Generator 3

Generator 4

18
 The effect of a generator outage

Old
Outaged supply
generator limit
New
supply
limit

Effect of demand uncertainty

Probability
and generator outage
p2

Probability p1

n-1 secure

insecure

Outage probability is p1*p2

19
 Generator 1A

Generator 2A

System A

System A
n-1 secure
Low price

Secure
Low price
Generator 3A

Generator 4A
Generator 5A
Generator 6A

Generator 1B

Generator 2B
System B

System B
n-1 secure
High price

n-1 insecure
High price
Generator 3B

Generator 4B

Generator 5B
20
 System B
Flow
System A
Low price
Low price n-1 secure
n-1 secure

Temptation: construct a composite supply curve

unnecessary

Low price
n-1 secure

21
Situation with line transmission limits
Max
flow
System B
Flow
System A
Low price
Low price n-1 insecure
n-1 secure
Outaged
generator Normal conditions
Max
Unable flow
to clear

Use of distributed reserves

Max
flow
System B
Flow
System A
Low price
Low price n-1 secure
n-1 secure

22
 Reality PSERC

• Many flowgates • Transmission outages

• Networked sysyem
• Demand can be elastic
• Time delays important
• Generators have fixed
(investment) costs and
restrictions
• Load is uncertain
exacerbate problems
• If one firm dominates
a technology, market
power occurs (next)
• If one firm dominates
a location, market
power results

45

The effect of congestion

PSERC
Total consumer
surplus (area)
Price

Equilibrium
point

Equilibrium Price
region

Congestion
level Surplus
Total producer
net loss
surplus (area)

Quantity

23
 Who gets what
PSERC

Producer
Price surplus
loss
Producer
surplus Price
gain

Congestion
level

Quantity

Who gets what, part II

“Only under monopsony or regulated conditions” PSERC
Price

Price

Congestion
Consumer level
surplus gain

Quantity

24
 The incentive to congest
Gain: ∆p*C PSERC
Producer Loss: ∆C*p
surplus
Price gain

Producer
surplus Price
loss p

Congestion
C level

Quantity

Equilibrium with congestion

Gain: ∆p*C
Loss: ∆C*p
Price

Price
p

Equilibrium when:
∆p*C = ∆C*p, or
C
∆p/ ∆C=p/C

Quantity

25
 The effect of congestion
PSERC

• Congestion creates “gaming”

opportunities
• Producers have an incentive to congest
• (Up to a point)
• The only unambiguous way to
characterize the effect of congestion
is to look at net surplus loss
• Translated: when we compute congestion
costs, we do not care who incurs them

Additional remarks PSERC

• Two-technology suppliers can lead to higher

than marginal prices as the knee of the
supply curve is approached
• Larger number of suppliers reduces this
effect
• Market power studies should consider
investment recovery issues
• Transmission congestion makes matters
worse!!

52

26
 Features of the example PSERC

• Only two areas (one flowgate)

• Radial
• Demand is inelastic
• Time delays are not an issue
• Generators have no startup/shutdown
costs or restrictions or minimum
power levels

53

Observations PSERC

• Demand elasticity is important

• Locational aspects of reserves matter
• LMP for reserves
• Ramping rates matter
• In deregulated markets only units explicitly
committed to reserves are available
• In regulated markets and in PJM all units are
• Reliability requires that we increase supply
• Standby charges tend to reduce supply (Tim
Mount)
54

27
 Reliability and price spikes*PSERC

• What has happened in California?

• Price caps have come down
• Average prices have increased
• Price volatility has decreased
• There have been involuntary curtailments

(*) Some of this material comes from Tim Mount at Cornell

55

$/MWh PJM daily average on-peak spot price and max load MW

800.00
Price 78000

600.00 Maxload
70000

400.00
62000
200.00

54000
0.00

46000
-200.00

38000
-400.00

-600.00 30000

-800.00 22000
4/97 6/97 8/97 10/97 12/97 2/98 4/98 6/98 8/98 10/98 12/98 2/99 4/99 6/99 8/99 10/99 12/99 2/00 4/00

date

28
 Assorted PJM offer curves
PJM Offer Curves at 5pm from April to August (last Tuesday)
1200 Offer Price April (4/27/99) : $29.4/MWh 28.2GW/h
1000
800
600
400
200
0
0 10 20 30 40 50 60 70

Offer Price May (5/25/99) : $25.9/MWh 30.3GW/h

1200
1000
800
600
400
200
0
0 10 20 30 40 50 60 70

Offer Price June (6/29/99) : $59.5/MWh 48.1GW

1200
1000
800
600
400
200
0
0 10 20 30 40 50 60 70

Offer Price July (7/27/99) : $935.0/MWh 49.2GW

1200
1000
800
600
400
200
0
0 10 20 30 40 50 60 70

Offer Price August (8/24/99) : $33.7/MWh 38.5GW

1200
1000
800
600
400
200
0
0 10 20 30 40 50 60 70

29
 Observations PSERC

• Price spikes have developed not so much

under high load conditions as under tight
reserve conditions
• For suppliers that own more than one
technology, there are strong incentives to
withhold capacity
• There is a strong connection between
reserves and reliability (and market power)

59

Market Power?

• The ability to raise • Disclaimer: the slides

prices significantly that follow are not
really a market power
above the efficient
study but rather they
economic equilibrium represent a simplified
illustration of how
higher prices could
result as a result of
market concentration.

30
 Market Power: Assumptions
• There are exactly two technologies
• Each technology has a fixed marginal price
• ∞ availability of the expensive technology
• Limited availability of the cheap technology
• Cheap technology has fixed costs (investments) to recover
• Demand is inelastic
• All suppliers but a schedule all their cheap power
• a owns P MW in n≥1 equal-sized generators
• Supplier a can “withhold” one or more generators
• Bidding above marginal cost is not allowed, withholding is

The piece-wise nature of the supply curve revisited

Demand
Supplier a generator 2

Supplier a generator 1
Other suppliers

If generators bid marginal price, Clearing

the generators surplus is zero price

31
 Red generator decides to withhold one generator
Clearing
price

blue supplier
Surplus for

red supplier
Surplus for
Withheld
generator

Red supplier now Of course blue supplier

has large surplus has even LARGER surplus!

If margins are increased Answer: you may end

up with less capacity
Question: and how are the than you thought
expensive technology units
supposed to recover their
investment if they always
clear at their marginal cost? Raising prices
would require
collusion

Clearing
Now it is not possible for red
price
supplier to withhold and gain

32
 If demand is uncertain Probability p that
withholding will
result in surplus
π2
Price

P1
price π1
Quantity (power)

The expected surplus Since π1 is cheap unit’s marginal

gain is: p*(π2-π1)*P1 cost, there is no expected surplus loss

Additional observations PSERC

• If the margin to the “knee” is Pm, any

supplier with a total ownership above
Pm may profit from withholding
• If more than one supplier meets this
conditions, chances are that someone will
withhold

66

33
 Effect of “granularity”
Surplus is P*(π2-π1) for
demand above this level

With only one

generator, it is
impossible to
withhold and
benefit P

For two generators, surplus

is P*(π2-π1)/2 for demand
above this level

Effect of “granularity,” three generator case

Surplus is P*(π2-π1)/3 for Surplus is 2P*(π2-π1)/3 for

demand above this level demand above this level

34
 Effect of “granularity”

Surplus
With n=1, there is no surplus

Surplus with n=2

Surplus with n=3

Surplus with n=4

Demand level

Surplus with n→∞

Observations and assumptions

• For “worst case” effect, assume n=∞

∞
• Assume withholding will occur
• Withholding “softens” the supply curve
• High cost periods needed for investment
recovery
• Demand is probabilistic
• Suggestion: market power occurs if expected
surplus far exceeds investment recovery
• This is also a signal for system expansion

35
 Effect of number of suppliers on supply curve

Price

p lier

ers
u p
es

s
rs
On

lier

10 suppli
lie
pp

u pp
su

3s
2

Demand

Effect of demand uncertainty on investment recovery

Period during which
investment recovery
can take place
Price

Withholding increases the period during

which surplus accrues but reduces the
amount that accrues

Demand

36
 The effect of demand uncertainty on investment recovery

Price

Period during which

investment recovery
can take place

Demand

Numerical studies PSERC

• Demand is 60/70/80/90/95% of “knee”

• σ for demand varies from 0 to 20%
• Demand probability function is normal
• Supplier has ∞ equal size units available
• There are 3/6/10/15/∞ ∞ suppliers

We illustrate the investments that can be recovered

for each of the case combinations above according
to our earlier withholding assumptions
74

37
Investment recovery without market power (∞ suppliers)
250

Thousands per year per MW

200 99%
Demand level as a percentage
of available capacity
150

95%
100

90%

50

80%
0
0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2

Variance of demand (per unit)

∞ suppliers, demand level as a parameter

200

60%
Even for high
Investment recovery (thousands per MW-year)

180 70%
80%

160
90%
95%
demand levels, some
demand variance
140
is essential for
120 cost recovery
100

80

60

40

20

0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)

38
 15 suppliers, demand level as a parameter
250

Investment recovery (thousands per MW-year)

200
For high enough demand levels
cost recovery is possible
150 even without demand
variance
60%
100 70%
80%
90%
95%

50

0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)

10 suppliers, demand level as a parameter

300
Investment recovery (thousands per MW-year)

250

200
For high demand levels
demand variance can become
irrelevant
150
60%
70%
80%
100 90%
95%

50

0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)

39
 6 suppliers, demand level as a parameter
400

Investment recovery (thousands per MW-year)

350

300

250

200
60%

150 For low demand levels it is 70%

80%
90%
very difficult to recover 95%

100
investments
50

0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)

4 suppliers, demand level as a parameter

450
Investment recovery (thousands per MW-year)

400

350

300

250 For high demand levels, high variance

can even be slightly detrimental to profits
200 60%
70%
80%
150 90%
95%

100

50

0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)

40
 3 suppliers, demand level as a parameter
450

Investment recovery (thousands per MW-year)

400

350

60%
300 70%
80%
90%
250 95%

200
With three or less suppliers, it becomes feasible
150 at high variances to recover investments by
100
withholding at low demand
50

0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)

Demand level 60%, number of suppliers as a parameter

50
∞ suppliers
15 suppliers
Investment recovery (thousands per MW-year)

45 10 suppliers
6 suppliers
4 suppliers
40 3 suppliers

35

30

25

20
At low demand and low
variance it is impossible
15
to recover investments
10

0
0 2 4 6 8 10 12 14 16 18 20
Demand Variance (percent)

41
 Dem and lev e l 70% , num ber of suppliers as a param e ter
120
∞ s upplie rs
15 s upplie rs

Fixed cost recovery (thousands per MW-year)

10 s upplie rs
6 s upplie rs
100 4 s upplie rs
3 s upplie rs

80

60

40
At higher demand with 3 suppliers
it is possible to recover
20 costs at low variance

0
0 2 4 6 8 10 12 14 16 18 20
De m and Variance (pe rce nt)

Dem and lev e l 90% , num ber of suppliers as a param e ter

400
Fixed cost recovery (thousands per MW-year)

350

300

As demand increases, withholding becomes

250 profitable even when there are many suppliers
200
∞ s upplie rs
15 s upplie rs
10 s upplie rs
150
6 s upplie rs
4 s upplie rs
3 s upplie rs
100

50

0
0 2 4 6 8 10 12 14 16 18 20
De m and Variance (pe rce nt)

42
 Dem and lev e l 95% , num ber of suppliers as a param e ter
450

Fixed cost recovery (thousands per MW-year)

400

350

300

250

200

150

100
∞ s upplie rs
Only in the case 15 s upplie rs
10 s upplie rs
50 of infinite suppliers is it 6 s upplie rs
4 s upplie rs

0
impossible to recover costs 3 s upplie rs

0 2 4 6 8 10 12 14 16 18 20
De m and Variance (pe rce nt)

Comments on numerical results

• The number of suppliers has a strong influence on
investment recovery
• Below a certain number of suppliers, investment
recovery by withholding becomes easier
• There are demand thresholds beyond which there
is a jump in the ability to recover investments
• All studies have assumed that supplier adjusts
withholding after learning the demand
• Demand variance affects reliability
• It also influences the ability to recover investments

43
 Final remarks PSERC

• Reliability not decoupled from economics

• Tight reliability precursor to price spikes
• The structure of two-technology suppliers
can lead to higher prices as the “knee” of
the supply curve is approached
• More suppliers reduce this effect
• Market power studies should consider
investment recovery, locational effects
• Congestion, loop flows, voltage, frequency
are also important
87

Reliability

Reserves

Price spikes

44