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UNIT 6 (1)(1)

The document outlines the regulation and deregulation of the energy industry, focusing on the changes in operation for electric utilities in both developed and developing countries. It discusses the characteristics and structure of regulated industries, as well as the conditions and reasons that led to deregulation, emphasizing the need for competition and efficiency. The document also describes the typical structure of deregulated electricity systems and the role of Independent System Operators.

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2 views

UNIT 6 (1)(1)

The document outlines the regulation and deregulation of the energy industry, focusing on the changes in operation for electric utilities in both developed and developing countries. It discusses the characteristics and structure of regulated industries, as well as the conditions and reasons that led to deregulation, emphasizing the need for competition and efficiency. The document also describes the typical structure of deregulated electricity systems and the role of Independent System Operators.

Uploaded by

mrfrimps1
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
You are on page 1/ 7

1/21/2025

Welcome to: INTRODUCTION TO ENERGY


ECONOMICS
Course Code:
ESE 303
Unit Six (6)
Sem:
1 Regulation of the Energy Industry
Credit:
3HRS

Location
TBA

Programme
HND 3

LECTURER: Isaac Kwasi Yankey, DEPT: Energy Systems Eng.

6.1 Introduction
• Many electric utilities and power network have been
forced to change their way of operation.
• This is evident in countries like UK, Sweden, US etc.
• The reason for the change differ for region and country.
• For developing countries the issues are:
1. High Demand growth.
2. Inefficient management systems.
3. Irrational tariff policies.
• This has affected the availability of financial resources
to support investments in improving generation and
transmission capacities.
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• In developed countries on the other hand the


driving force has been:
1. To provide electricity at lower prices.
2. To offer greater choice in purchasing
economic energy.
• The goal of changing the way of operation in
the utility sector is to:
1. Enhanced competition.
2. Bring consumers new choices
3. Economic benefit.

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6.2 Brief Concepts of Regulation


• Regulation means that:
• the Government has set down laws and rules that put
limits on and define how a particular industry or
company can operate.
• Regulation of the electric utilities is not the only
way government can control the electric power
industry within its jurisdiction.
• The other way is:
• to own and operate the power company directly as a
government utility.

6.2.1 Why was Electric Utility Industry Regulated


• During the early days of the electric power
industry, both government and business favoured
utility regulation.
• The reasons being that:
1. Regulation offered a risk free way to finance the
creation of electric industry.
2. Regulation legitimized the electric utility business.
3. It gave electric utilities recognition and support from
government, which was necessary to solve issue like
“Right of way”.
4. It established a local monopoly.
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6.2.2 Charatx of Regulated electric Industry


• Regulated electric industry has the following
characteristics:
1. Monopoly Franchise.
2. Obligation to serve.
3. Regulatory Oversight.
4. Least–Cost Operation.
5. Regulated Rates.
6. Assumed Rate of Return

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6.2.3 Structure of Regulated Industry


• The electric industry has over the years been
dominated by the large utilities that had an overall
authority in:
• Generation,
• Transmission and
• Distribution
of power within its domain of operation.
• Such utilities are often referred to as Vertical
Integrated Utilities.
• Such utilities serve as the only electricity provider in
the region and were obliged to provide electricity to
everyone in the region.
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• A typical structure of a vertically integrated


electric utility is shown below;

• In the figure above the money flow is


unidirectional, from the consumer to the electric
company.
• The information flow exist only between the:
i. Generators
ii. Transmission & Distribution (T&D) systems.
• In this structure it is often difficult to separate the
cost involved in generation, transmission and
distribution.
• Hence the utilities often charge their customers
an average tariff rate that depends on their
aggregated/accumulated cost during a period.
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6.3 Basic Concepts of Deregulation


• Deregulation is a restructuring of the rules and
economic incentives that government set up to
control and drive the electric power industry.
• They represent fundamentally opposite ideas.
• But neither concept is good or bad.
• Both Regulation and Deregulation make sense
and one or the other is preferable under certain
conditions.

10

6.3.1 Conditions that Led to Deregulation


• For the reasons stated below the shift in
economy of scale was observed:
1. Technological innovations improve the efficiency
of small units for gas turbines.
2. Improvements in materials, including new high
temperature metals.
3. Computerized control systems have been
developed that often reduced the number of on-
site personnel to zero.
4. Data communication and off-site monitoring
systems can control the units from remote
operations centers.
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6.3.2 The Reasons for Deregulation


• The main reasons for initiating
deregulation in the power industry are:
1. The need for regulation changed
2. Privatization
3. Cost is expected to drop
4. Customer focus will improve
5. Encourages innovation

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• Some other forces supporting the main reasons


for motivating deregulation are as follows:
1. Overstaffing in the regulated electric industry
2. Global economic crisis
3. Political and ideological changes.
4. Managerial inefficiency in the regulated company.
5. Lack of public resources for further development.
6. More demanding environment issues.
7. Pressure of financial institutions.

13

6.3.3 Disaggregation of Vertically Integrated Utility


• Step 1.
• One of the first steps in the restructuring process of the
power industry is to separate the transmission activities
from the electricity generation activities.
• Step 2.
• Introduce competition in the generation activities either
through:
• Creation of a power pool
• Provision for Direct Bilateral transactions
• Bidding in the spot markets

14

• Step 3.
• The transmission system have significant economics
of scale hence tendency to become monopoly.
• Electric utilities are expected to split apart into
unbundled companies with each utility re-aligning
itself into several other companies.
• The purpose of deregulation is to restructure the
electric industry so that power production and retail
sales are competitive while delivery is still a
regulated, monopoly franchise business.

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6.3.4 Structure of Deregulated Industry

Fig 8.2. Typical structure of a deregulated electricity system 16

• This configuration shown is not a universal one


since there are some variations across countries
and systems.
• A system operator appointed is entrusted with the
responsibility of keeping the systems in balance.
• The system operator ensures that the production
and imports match consumption and exports.
• The operator is an independent authority and
does not involve in market competition.

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• This Operator is called Independent System


Operator (ISO).
• In a regulated environment the electricity bill
consist of single amount to be paid towards the
generation, transmission and all other cost.
• But in the restructured environment, the electricity
prices gets separated into the following:
1. Price of electrical energy
2. Price of energy delivery
3. Price of other services such as frequency regulation
and voltage control. These charges may not be visible
in the electricity bill.
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1/21/2025

THANK
YOU.
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