MODERN INSTITUTE OF TECHNOLOGY AND RESEARCH CENTRE, ALWAR

Name of Faculty: Gauri Shankar

Subject: RPS

Semester: V Session: 2021-22 (Odd Sem)

Branch: EE Batch: A

Unit: III Date of Submission: 24/09/21

Page Total
Topics Covered
No. Page
11 Monopoly model, single buyer model 35-39 5

12 Wholesale competition model 40-42 3

13 Retail competition model 43-45 3

14 Distinguishing Features of Electricity as a Commodity 46-48 3

15 Four pillar of market design 49-51 3

16 Bertrand competition model 52-54 3

 MODERN INSTITUTE OF TECHNOLOGY AND RESEARCH CENTRE, ALWAR

Name of Faculty: Gauri Shankar

Subject: RPS

Semester: V Session: 2021-22 (Odd Sem)

Branch: EE Batch: A

Unit: III Date of Submission: 24/09/21

Plagiarism
Topics Covered

11 Monopoly model, single buyer model 61%

12 Wholesale competition model 54%

13 Retail competition model 48%

14 Distinguishing Features of Electricity as a Commodity 62%

15 Four pillar of market design 57%

16 Bertrand competition model 53%

Average 55%
Unit-3 EE-5 Sem. Restructured Power System

UNIT-3 (THE PHILOSOPHY OF MARKET MODEL)

LECTURE NO:-11

INTRODUCTION

Unbundling of the conventional vertically integrated power system creates groups of

various commercial and technical activities. Since one of the major aims of
deregulation is the introduction of competition, it is worthwhile to explore every
avenue where competition can be introduced. Eventually, the competition provides a
choice for entities to choose another entity or a group of entities to do a profitable
transaction. In electricity parlance, either the load or an entity representing a group of
loads gets a choice to select its energy provider, or there may exist some mechanism
which would cater to the electrical energy needs of these loads at a competitive level.

The former mechanism essentially requires bilateral involvement of the entities who
wish to get into a power buy and sell contract. In this, the sellers and buyers mutually
agree upon the terms and conditions, including the price and time of delivery. A
repetitive bilateral interaction between buyers and sellers may lead to an equilibrium
point where everyone is happy. Alternatively, a similar result would be obtained if a
common exchange for the commodity is set up, where, buyers and sellers, instead of
interacting with each other, communicate their expectations to this marketplace. This
represents a simultaneous market clearing process and a common market price of
electrical commodity.
While moving from a vertically integrated structure to a competitive one, various
policy and structural issues crop up. One of the important concerns is regarding the
entity that should be allowed to take part in competitive activity. Similarly, issue of
rearrangement of various elements of power system, when a new set of rules is
introduced to buy and sell power, also needs to be addressed. It is obvious that the
commercial arrangements and virtual boundaries between various functional entities
can take many shapes and forms. Consequently, various models can be classified

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according to the levels at which the entities are given the choice of buying or selling
electricity.
Various trading models can be proposed based on the above discussion. The choice
of choosing a model is a policy decision and is dominated by various prevailing
conditions. They need to be accounted for before making structural changes. In [1],
four basic models of industry structure are suggested. These are:

[1] Monopoly model

[2] Single buyer mode
[3] Wholesale competition model
[4] Retail competition model

Every model needs different amount of structural change and rearrangements of

functions in the industry. These models are discussed next.

MONOPOLY MODEL

In this model, a single entity takes care of all the businesses such as generation,
transmission and distribution of electric power to the end users. One of the versions
of this model is shown in Figure 3.1(A). In this, a single utility integrates the
generation, transmission and distribution of electricity. Usually (but not necessarily),
in this kind of model, the monopoly lies with the Government. It is quite natural that
this kind of model should have strict regulation in order to protect end consumers
against monopoly. Most of the electric power systems followed this model prior to
deregulation.

Another version of the monopoly model is shown in Figure 3.1(B). In this model,
generation and transmission are integrated and operated by a single utility and it sells
the energy to local distribution companies, which themselves represent local
monopolies.

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SINGLE BUYER MODEL

In this model, as shown in Figure 3.2, there is competition in the wholesale sector,
i.e., generation. Here, the single buyer agency buys power from Independent Power
Producers (IPPs) in addition to its own generation. The power purchasing agency in
turn sells it to state distribution utilities or distribution companies in the service area.
All power generated by generating companies (Gencos) must be sold only to a
purchasing agency and not to any other agency. Distribution companies (Discoms)
are only able to purchase from the single buyer agency. They do not have a choice of
choosing their power supplier.
In this model, sales from power pool to retailers take place at a pre-set tariff price.
The single buyer or the existing utility makes a long term contract with IPPs. A
contract is necessary because, without it, a generator would be reluctant to invest
large amounts of capital in a generating plant. The contracts are generally of life-of-
plant type, indicating sale of all capacity of generating units for its lifetime.

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Figure 3.3 shows another version of this model, which has further evolved from the
original single buyer model. In this model, the single buyer does not own any
generation and buys all the power from IPPs. The distribution and retail activities are
also disaggregated. This model has an advantage of introducing some competition
between generators without the expense of setting up a competitive market. The
tariff set by the purchasing agency must be regulated because it has monopoly over
the Discos while monopsony over the IPPs. The single buyer model is looked upon
as a way of attracting private participation in the generation sector, especially in the
developing countries.

In this model, transmission and distribution network can be owned and operated by
State and Regional transmission utilities. Inter-state tie line should be sufficient to
maintain a loose regional power pool. Merits and demerits of this model are as
follows:
Merits:
 Private participation in power generation
 Introduction of some competition without expensive set up for a competitive
market.

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Demerits:

 Long term contracts. Setting up a contract is problematic.

 No true competition.
 Price is not decided by demand-supply interaction.
 End consumers' price is regulated.


References

https://nptel.ac.in/courses/108/101/108101005/

https://en.wikipedia.org/wiki/Stackelberg_competition

https://www.economicsdiscussion.net/oligopoly/stackelbergs-duopoly-model-with-
diagram/5426

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LECTURE NO:-12

WHOLESALE COMPETITION MODEL

This model is one step closer toward competition. There is an organized market in
which the generators can sell their energy at competitive rates. The market may be
organized either by a separate entity or may be run by the system operator itself.
There is not much choice for the end-user. The end-user is still affiliated to the
Discom or retailer working in that geographical area of operation. The large
customers or the bulk customers, so to say, are privileged to choose their energy
provider. However, the definition of bulk customer is a subjective matter and
changes from system to system.

This model, as shown in Figure 3.4, provides the choice of supplier to Discoms,
along with competition in generation. Implementation of this model requires open
access to the transmission network. Also, a wholesale spot market needs to be
developed. Since this model permits open access to the transmission wires, it gives
the IPPs to choose an alternative buyer. Discoms can purchase energy for their
customers either from a wholesale market or through long term contracts with
generators.
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The customers within a service area still have no choice of supplier. They will be
served by a Discom in their area. With this model, the Discoms are under Universal
Service Obligation (USO), as they have monopoly over the customers. They own and
operate the distribution wires. The transmission network is owned and maintained
either by government and/or private transmission companies. System operators
manage the centrally accomplished task of operation and control.

Figure 3.4: Wholesale Competition Model

The model provides a competitive environment for generators because the wholesale
price is determined by the interaction between supply and demand. In contrast, the
retail price of electrical energy remains regulated because the small consumers still
do not have a choice for their supplier. The distribution companies are then exposed
to vagaries of the wholesale price of the commodity. The merits and demerits of this
model are as follows:

Merits:
 Choice of seller provided for Discoms and bulk consumers.
 The buyers and sellers can make forward contracts or buy from a wholesale
marketplace.

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 The price is decided by interaction between demand and supply. Hence,

indicates truly competitive price.

Demerits:
 The end consumer still doesn't have a choice. It buys power from the affiliated
Discom.
 Rates for end consumers are regulated rather than competitive.
 Discoms face competition at wholesale level, while their returns are regulated.
 Structural and institutional changes required at wholesale level.


References

https://nptel.ac.in/courses/108/101/108101005/

https://en.wikipedia.org/wiki/Stackelberg_competition

https://www.economicsdiscussion.net/oligopoly/stackelbergs-duopoly-model-with-
diagram/5426

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LECTURE NO:-13

RETAIL COMPETITION MODEL

In this model, as shown in Figure 3.5, all customers have access to competing
generators either directly or through their choice of retailer. This would have
complete separation of both generation and retailing from the transport business at
both transmission and distribution levels. Both, transmission and distribution wires
provide open access in this model. There would also be free entry for retailers. In this
model, retailing is a function that does not require the ownership of distribution
wires, although, the owner of distribution wires can also compete as a retailer.

This model is a multi-buyer, multi-seller model and the power pool in this model acts
like an auctioneer. It behaves like a single transporter, moving power to facilitate
bilateral trading and this is achieved through an integrated network of wires. In this
pooling arrangement, there is a provision for bidding into a spot market to facilitate
merit order dispatch. The pool matches the supply and demand and determines the
spot price for each hour of the day. It collects money from purchasers and distributes
it to producers.

The advantage of this model over monopoly utilities is that competition is introduced
in both wholesale and retail areas of the system. This model is supposed to be a truly
deregulated power market model. The retail price is no longer regulated because
small consumers can change their retailer for better price options. This model is
economically efficient as the price is set by interaction of demand and supply. In
wholesale competition model, with relatively few customers, all of them regulated
Discoms, a spot market can be preferable but not essential.

However, in retail competition model, spot markets become essential, since

contractual arrangements between customers and producers are carried out over a
network owned by a third party. In retail competition model, metering becomes a
major problem. If the number of customers are increasing and metering capability for

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all the customers is not sufficient, it may create logistical problem and provoke
disputes.

Figure 3.5: Retail Competition Model

Merits:
 Supposed to be 100% deregulated model.
 Every consumer has a choice of buying power.
 The price is decided by interaction of demand and supply. Hence, it is truly
competitive price.
 There is no regulation in energy pricing.

Demerits:
 Need constitutional and structural changes at both, wholesale and retail level.
 Extremely complex settlement system due to large number of participants.
 Requirement of additional infrastructural support.

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Comparison of Various Market Model

A comparison between the four models discussed above is provided in Table 3.1.
The attributes for comparison are chosen in such a manner that the difference
between two truly competitive models - wholesale competition and retail competition
gets significance. It is then obvious that the monopoly and single buyer models will
emerge to be similar models when compared on the chosen attributes.

Single Wholesale Retail

Attribute Monopoly
Buyer Competition Competition

Degree of
0 1 2 3
deregulation*

Number of
1 1 Many Many
buyers

Number of
1 Many Many Many
seller
Everbody
Discoms and
Choice including
No No big
available small
customers
consumers

Requirement Preferable,
of spot No No but not Essential
market essential

Transmission
Transmission as well as
Open access NA NA
network distribution
network

Regulated
Small
price to be Everbody Everbody None
consumers
paid by

REFERENCES:
1. https://www.slideshare.net/ManuPreckler/us-energy-market-climate-institute
2. https://www.scribd.com/document/354095291/IIT-RSP
3. https://www.scribd.com/document/320041537/T-D-Basis

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LECTURE NO:-14

Distinguishing Features of Electricity as a Commodity

There are three basic distinguishing features of electricity. These are associated with
electricity due to its physical nature. These three basic features effectively lead to
one distinguishing feature of this commodity, the one that has commercial
implications. Let us see these in details

Real Time Demand Supply Balance

Electricity can not be stored in bulk. Other commodities can be manufactured and
kept in a warehouse until the demand for the same is sensed. A manufacturer of other
commodities gets sufficient flexibility in planning the manufacturing activity and
coordinating the dispatch.

The parties involved in electricity trade perhaps would like to do it through forward
contracts . These can be contracts for physical delivery or financial in nature. In
many power markets, bulk trade of electricity (> 80%) is done through forward
contracts.

Due to storage limitation, the supply-demand matching decision needs to be done on

a competitive basis by letting supply and demand interact with each other. The
operator buys and sells these imbalances through some commercial mechanism. Due
to this feature of electricity, an issue related to the speed of operation pitches in. The
system operator, while making a provision for imbalances, has to take into
consideration various network interdependencies. The system operator always has to
communicate with the active participants to tell them which generators should
increase their output and which ones should decrease it. This activity is called
scheduling in advance and dispatch in real time. Since the system operator has to
work with seconds to spare, a delivery system to make up for imbalances has to be in
place. In real time, the only time available with system operator is what is allowed by
the energy stored in rotating masses of huge interconnected grid.

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Thus, this exceptional feature of electricity leads to two issues related to power
market design: Imbalances and Scheduling and Dispatch. The question is how these
difficult tasks get reflected in the rules of marketplaces.

Power Flows Obey Laws Of Physics

The electric power can not be told as to where and how it should travel, once the
injection and take-off points are decided. The electric power flow over transmission
lines obey laws of physics. Effectively, electric power can not be stopped from
flowing on a transmission line that is already hitting its power carrying capacity. The
system operator has to ensure that none of the lines get overloaded. To do this, only
freedom left with it is the selection of pattern of nodal injections (either generation or
load).

Thus, any arbitrary set of forward contracts can not be scheduled by the system
operator as this may lead to exceeding of limits of physical parameters of some of
the power system elements. Allowing only the practically feasible set of transactions
during scheduling and further making corrections while dispatching so as to keep
line loadings within limits is usually termed as congestion management.

electricity.

Generator Product Compatibility and Interactions

To ensure reliable delivery of electricity, only generation by generators at injection

points and take-off by loads at take-off points is not sufficient. The system operator
must make arrangements for provision of allied services necessary to do this. These
allied services are usually referred to as the ancillary services. Provision of reactive
power, operating reserves are some of the commonly required ancillary services.
Mostly, ancillary services are provided by generators. In this case, one is likely to
witness the interdependencies involved in providing these services. In other words,
the production of ancillary services is also dependent on production of energy. Then,

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the same generator is said to be providing two different products: energy and
ancillary services.

Figure 3.7: Generation capacity allocation to various products

REFERENCES:
1. https://www.slideshare.net/ManuPreckler/us-energy-market-climate-institute
2. https://www.scribd.com/document/354095291/IIT-RSP
3. https://www.scribd.com/document/320041537/T-D-Basis

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LECTURE NO:-15

FOUR PILLOR OF MARKET DESIGN

We have seen the characteristic features of electricity when compared with other
commodities. How do these affect the trading activities of this commodity? For
example, what if network congestion does not allow a set of transactions to be
feasible? Should the generator sell its generation capability in a single market that
makes provision for energy as well as reserves, or should there be different markets
for the same? Some subtle questions like these provide food for thought when
designing criteria of markets are to be determined.

Hunt in [1] has described the design issues arising out of characteristics of electricity
as pillars of market design. These are:

Figure 3.8: Four Pillars of Market Design

 Imbalance
 Scheduling and Dispatch
 Congestion Management
 Ancillary Services

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Figure 3.8 shows four pillars of market design arising due to the basic characteristics
of electricity.
The design of market revolves around the four pillars described above. It also
depends on how and where these issues are accommodated in the whole process of
market mechanism. Some of the pillars lead to creation of separate markets.

Cournot Competition Model

Cournot competition is an economic model used to describe an industry structure in

which companies compete on the amount of output they will produce, which they
decide on independently of each other and at the same time.
It is named after Antoine Augustin Cournot who was inspired by observing
competition in a spring water. It has the following features:
 There is more than one firm and all firms produce a homogeneous product,
i.e. there is no product differentiation;
 Firms do not cooperate, i.e. there is no collusion;
 Firms have market power, i.e. each firm's output decision affects the good's
price;
 The number of firms is fixed;
 Firms compete in quantities, and choose quantities simultaneously;
 The firms are economically rational and act strategically, usually seeking to
maximize profit given their competitors' decisions.

An essential assumption of this model is the "not conjecture" that each firm aims to
maximize profits, based on the expectation that its own output decision will not have
an effect on the decisions of its rivals.

Price is a commonly known decreasing function of total output.

All firms know N, the total number of firms in the market, and take the output of the
others as given.

Each firm has a cost function

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Normally the cost functions are treated as common knowledge. The cost functions
may be the same or different among firms. The market price is set at a level such
that demand equals the total quantity produced by all firms. Each firm takes the
quantity set by its competitors as a given, evaluates its residual demand, and then
behaves as a monopoly.

While considering electricity, underlaying are assumption of electricity as

homogenious good and of market equilebra being determined though capacity setting
decision of supplier

An analysis of the model with 2 firms and constant marginal cost.

REFERENCES:
1. https://www.slideshare.net/ManuPreckler/us-energy-market-climate-institute
2. https://www.scribd.com/document/354095291/IIT-RSP
3. https://www.scribd.com/document/320041537/T-D-Basis

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LECTURE NO:-16

BERTRAND COMPETITION MODEL

Bertrand competition is a model of competition used in economics, named

after Joseph Louis François Bertrand . It describes interactions among firms (sellers)
that set prices and their customers (buyers) that choose quantities at the prices set.
The model was formulated in 1883 by Bertrand. . Cournot argued that when firms
choose quantities, the equilibrium outcome involves firms pricing above marginal
cost and hence the competitive price. In his review, Bertrand argued that if firms
chose prices rather than quantities, then the competitive outcome would occur with
price equal to marginal cost. The model was not formalized by Bertrand: however,
the idea was developed into a mathematical model by Francis Ysidro Edgeworth in
1889.

The model rests on very specific assumptions. There are at least two firms producing
a homogeneous (undifferentiated) product and cannot cooperate in any way. Firms
compete by setting prices simultaneously and consumers want to buy everything
from a firm with a lower price (since the product is homogeneous and there are no
consumer search costs). If two firms charge the same price, consumers' demand is
split evenly between them. It is simplest to concentrate on the case of duopoly where
there are just two firms, although the results hold for any number of firms greater
than one.

A crucial assumption about the technology is that both firms have the same constant
unit cost of production, so that marginal and average costs are the same and equal to
the competitive price. This means that as long as the price it sets is above unit cost,
the firm is willing to supply any amount that is demanded (it earns profit on each unit
sold). If price is equal to unit cost, then it is indifferent to how much it sells, since it
earns no profit. Obviously, the firm will never want to set a price below unit cost, but
if it did it would not want to sell anything since it would lose money on each unit
sold. In summary, Bertrand competition is often characterized as harsh, cutthroat

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competition between firms, driving prices down to marginal cost through a series of
price undercutting.

Bertrand Competition Versus Cournot Competition

Neither model is necessarily "better" than the other. The accuracy of the predictions
of each model will vary from industry to industry, depending on the closeness of
each model to the industry situation. If capacity and output can be easily changed,
Bertrand is generally a better model of duopoly competition. If output and capacity
are difficult to adjust, then Cournot is generally a better model.

Under some conditions the Cournot model can be recast as a two-stage model,
wherein the first stage firms choose capacities, and in the second they compete in
Bertrand fashion.

Bertrand predicts a duopoly is enough to push prices down to marginal cost level; a
duopoly will result in an outcome exactly equivalent to what prevails under perfect
competition.

STACKELBERG COMPETITION MODEL

This model was developed by the German economist Heinrich von Stackelberg and
is an extension of Cournot’s model.

It is assumed, by von Stackelberg, that one duopolist is sufficiently sophisticated to

recognise that his competitor acts on the Cournot assumption.

This recognition allows the sophisticated duopolist to determine the reaction curve of
his rival and incorporate it in his own profit function, which he then proceeds to
maximise like a monopolist.

If firm A is the sophisticated oligopolist, it will assume that its rival will act on the
basis of its own reaction curve. This recognition will permit firm A to choose to set
its own output at the level which maximizes its own profit. This is point a (in figure
9.20) which lies on the lowest possible isoprofit curve of A, denoting the maximum
profit A can achieve given B’s reaction curve

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References

https://nptel.ac.in/courses/108/101/108101005/

https://en.wikipedia.org/wiki/Stackelberg_competition

https://www.economicsdiscussion.net/oligopoly/stackelbergs-duopoly-model-with-
diagram/5426

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