UNIT-5

Introduction to Deregulation
The power industry across the globe is experiencing a radical change in its business as well as
in an operational model where, the vertically integrated utilities are being unbundled and
opened up for competition with private players. This enables an end to the era of monopoly.

The reason for monopoly can be traced right back to the early days when electricity was
comparatively a new technology. The skeptical attitude of the government towards electricity
led to investment by private players into the power sector, who in turn, demanded for the
monopoly in their area of operation. This created a win-win situation for both- government
and the electrical technology promoters. However, the government would not let the private
players enjoy the monopoly and exploit the end consumer and hence introduced regulation in
the business. Thus, the power industries of initial era became regulated monopoly utilities .

The regulations are generally imposed by the government or the government authority. These
essentially represent a set of rules or framework that the government has imposed so as to run
the system smoothly and with discipline, without undue advantage to any particular entity at
the cost of end consumer.

The characteristics of monopoly utilities are:

1. Single utility in one area of operation enjoying monopoly.

2. Regulated Framework: The utility should work under the business framework setup
by the government.
3. Universal Supply Obligation (USO): Utility should provide power to all those
customers who demand for it.
4. Regulated Costs: The return on the utility's investments is regulated by the
government.

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Deregulation of power industry

Deregulation or restructuring of an industry means discontinuation of the framework

provided by the regulation. In other words, deregulation is about removing control over the
prices with introduction of market players in the sector.

There are certain conditions that create a conducive environment for the competition to work.
These conditions need to be satisfied while deregulating or restructuring a system.

The competitive environment offers a good range of benefits for the customers as
well as the private entities. It is claimed that some of the significant benefits of
power industry deregulation would include:

1. Electricity price will go down: It is a common understanding that the

competitive prices are lesser than the monopolist prices. The producer will
try to sell the power at its marginal cost, in a perfectly competitive
environment.
2. Choice for customers: The customer will have choice for its retailer. The
retailers will compete not only on the price offered but also on the other
facilities provided to the customers. These could include better plans, better
reliability, better quality, etc.
3. Customer-centric service: The retailers would provide better service than
what the monopolist would do.
4. Innovation: The regulatory process and lack of competition gave electric
utilities no incentive to improve or to take risks on new ideas that might
increase the customer value. Under deregulated environment, the electric
utility will always try to innovate something for the betterment of service
and in turn save costs and maximize the profit.

The restructuring process starts with the unbundling of the originally vertically integrated
utility. This essentially leads to separate the activities involved in an integrated power system
leading to creation of functional partition amongst them.

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Various Entities Involved in Deregulation:

1. Genco (Generating Company): Genco is an owner-operator of one or more

generators that runs them and bids the power into the competitive marketplace. Genco
sells energy at its sites in the same manner that a coal mining company might sell coal
in bulk at its mine.
2. Transco (Transmission Company): Transco moves power in bulk quantities from
where it is produced to where it is consumed. The Transco owns and maintains the
transmission facilities, and may perform many of the management and engineering
functions required to ensure the smooth running of the system. In some deregulated
industries, the Transco owns and maintains the transmission lines under the
monopoly, but does not operate them. That is done by Independent System Operator
(ISO). The Transco is paid for the use of its lines.
3. Discom (Distribution Company): It is the owner-operator of the local power
delivery system, which delivers power to individual businesses and homeowners. In
some places, the local distribution function is combined with retail function, i.e. to
buy wholesale electricity either through the spot market or through direct contracts
with Gencos and supply electricity to the end use customers. In many other cases,
however, the Discom does not sell the power. It only owns and operates the local
distribution system, and obtains its revenue by wheeling electric power through its
network.
4. Resco (Retail Energy Service Company): It is the retailer of electric power. Many
of these will be the retail departments of the former vertically integrated utilities. A
Resco buys power from Gencos and sells it directly to the consumers. Resco does not
own any electricity network physical assets.
5. Market Operator: Market operator provides a platform for the buyers and sellers to
sell and buy the electricity. It runs a computer program that matches bids and offers of
sellers and buyers. The market settlement process is the responsibility of the market
operator. The market operator typically runs a day-ahead market. The near-real-time
market, if any, is administered by the system operator.
6. System Operator (SO): The SO is an entity entrusted with the responsibility of
ensuring the reliability and security of the entire system. It is an independent authority
and does not participate in the electricity market trades. It usually does not own
generating resources, except for some reserve capacity in certain cases. In order to
maintain the system security and reliability, the SO procures various services such as
supply of emergency reserves, or reactive power from other entities in the system. In
some countries, SO also owns the transmission network. The SO in these systems is
generally called as Transmission System Operator (TSO). In the case of a SO being
completely neutral of every other activity except coordinate, control and monitor the
system, it is generally called as Independent System Operator (ISO).
7. Customers: A customer is an entity, consuming electricity. In a completely
deregulated market where retail sector is also open for competition, the end customer
has several options for buying electricity. It may choose to buy electricity from the
spot market by bidding for purchase, or may buy directly from a Genco or even from
the local retailing service company. On the other hand, in the markets where
competition exists only at the wholesale level, only the large customers have privilege
of choosing their supplier.

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 Load Forecasting
Electrical energy cannot be stored. It has to be generated whenever there is a demand for it.It
is, therefore imperative for the electric power utilities that the load on their systems should be
estimated in advance. This estimation of load in advance is commonly known as load
forecasting .It is very much necessary for power system planning.

Purpose of load Forecasting

(i) For proper planning of power system
(ii) For proper planning of transmission and distribution facilities
(iii) For proper power system operation
(iv) For proper financing
(v) For proper manpower development
(vi) For proper grid formation
(vii) For proper electrical sales

Forecasting procedure: Depending on the time period of interest, a specific forecasting

procedure may be classified as a-

 Short term
 Medium (Intermediate) term
 Long term technique

(1) Short- term forecast:

For day-to-day operation, covering one day or a week, short-term forecasting is needed in
order to commit enough generating capacity formatting the forecasting demand and for
maintaining required spinning reserve. Hence, it is usually done 24 hours ahead when the
weather forecast for that day becomes available from the meteorological office. This mostly
consists of estimating the weather –dependent component and that due to any special event or
festival because base load for the day is already known.

The power supply authorities can build up weather load model of the system for this purpose
or can consult some table. The final estimate is obviously done after accounting the
transmission and distribution losses of the system. In addition to the predicate of hourly
values, a short-term load forecasting is also concerned with forecasting of daily peak system
load, system load at certain times of a day, hourly values of system energy and daily and
weekly system energy.

Applications of Short-term Load Forecasting (STLF) are mainly

 To drive the scheduling functions that decides the most economic commitment of
generation sources.
 To access the power system security based on the information available to the
dispatchers to prepare the necessary corrective actions.
 To provide the system dispatcher with the latest weather predictions so that the
system can be operated economically and reliably.

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(2) Long term forecast

This done for 1-5 years in advance in order to prepare maintenance schedules of the
generating units, planning future expansion of the generating capacity, enter into an
agreement for energy interchange with the neighbouring utilities, etc.

(3) Medium (Intermediate) term

This done for 1 week to 1 month in advance in order to prepare maintenance schedules of the
generating units, planning future expansion of the generating capacity, enter into an
agreement for energy interchange with the neighbouring utilities, etc

Electricity price forecasting

Electricity price forecasting (EPF) is a branch of energy forecasting which focuses on
predicting the spot and forward prices in wholesale electricity markets. Over the last 15
years electricity price forecasts have become a fundamental input to energy companies’
decision-making mechanisms at the corporate level.

the process of deregulation and the introduction of competitive electricity markets have been
reshaping the landscape of the traditionally monopolistic and government-controlled power
sectors. Throughout Europe, North America and Australia, electricity is now traded under
market rules using spot and derivative contracts. However, electricity is a very special
commodity: it is economically non-storable and power system stability requires a constant
balance between production and consumption. At the same time, electricity demand depends
on weather (temperature, wind speed, precipitation, etc.) and the intensity of business and
everyday activities (on-peak vs. off-peak hours, weekdays vs. weekends, holidays, etc.).
These unique characteristics lead to price dynamics not observed in any other market,
exhibiting daily, weekly and often annual seasonality and abrupt, short-lived and generally
unanticipated price spikes.

Following are the common modes in which the electric energy can be traded:

1. Bilateral contracts
2. Spot market

Bilateral Contracts

Trading for power delivered in any particular minute begins years in advance and continues
until real time, the actual time at which the power flows out of a generator and into a load.
This is accomplished by a sequence of overlapping markets. The earliest amongst these are
forward markets that trade non-standard, long term, bilateral contracts. This generally
represents energy trading between buyers and sellers directly for the mutually agreed price.
This type of trading stops about one day prior to real time.

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Spot Market

a market for any commodity provides an environment for buyers and sellers to interact and
agree on transactions, generally, the quantity and price. These interactions progressively lead
to an equilibrium point at which the price clears the market, that is, the supply is equal to
demand.

In many real life markets, more than 80% of the energy traded is through the forward or
bilateral contracts. The rest is traded through the spot market.

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 Restructuring Models and Market Operations

Market Models Based On Contractual Arrangements

1. Monopoly model
2. Single buyer mode
3. Wholesale competition model
4. Retail competition model

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 (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 (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.

Single Buyer Model

In this model, as shown in Figure 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

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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.

Merits:

 Private participation in power generation

 Introduction of some competition without expensive set up for a competitive market.

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 .

Wholesale Competition Model

This model is one step closer towards 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.

Merits:

 Choice of seller provided for Discoms and bulk consumers.

 The buyers and sellers can make forward contracts or buy from a wholesale
marketplace.
 The price is decided by interaction between demand and supply. Hence, indicates
truly competitive price.

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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.

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.

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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 ISO (Independent System Operator)
In ISO (Independent System Operator) model, the owner of transmission network is different
from the system operator.

ISO Model

ISO model is practiced in those countries in which transmission companies are also providing
the generation and distribution services in their area of operation. Further, in these countries,
sufficient number of equal sized transmission companies exists in the market and it is not
possible to club the system operation function with any of these companies for commercial
reasons. Therefore, separation of ownership of the transmission assets from the system
operation function is considered necessary to avoid any preferential treatment for dispatching
its own generation.

POWER EXCHANGE

The power trading in India so far has been facilitated by the bilateral transactions. Though
this is the simplest way of getting into a trade for smaller number of players, it becomes more
and more complex and inefficient as volume traded and number of private participants
increases. The important features of power trading in India are as follows:

1. Sellers dictate prices by inviting bids from the traders. Traders bidding the highest
obtain the limited supplies and sell it to deficit entities after topping it with trading
margin.
2. Separate arrangement is required for transmission.
3. Trading is taking place through non-standard loose bilateral contracts. Generally,

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 there is little or no penalty if the supplier fails to supply or the buyer backs out.
4. The private generation (captive and IPPs) are not coming up in a big way due to
absence of proper accounting mechanism etc. Thus, there is a barrier to entry.
5. Pancaking of transmission charges do not provide equal footing to sellers spread
across the region.
6. The trend of price and volume for bilateral transactions shows that day by day, the
demand is being stagnant as price keeps on growing.

These features indicated need for establishment of a power exchange that would overcome
the lacunae in the current trading mechanisms. The establishment of power exchange would
achieve following objectives:

1. Efficient, transparent and equitable trading.

2. Standardization of electricity as a tradable product.
3. Easy access to new entrants.
4. Optimal utilization of existing resources.

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