Market Architecture of Restructured Power System

1,

Akshay Sharma, 1, Laxmikant Nagar

1,

Scholar M.E., Department of Electrical and Electronics Engineering, NITTTR, Bhopal, India.

Abstract: This paper deals with market architecture which is a map of its components "submarkets." This map includes the type of each market and the linkages between them.' The submarkets of a power market include the wholesale spot market, wholesale forward markets, and markets for ancillary services. "Market type" classifies markets as, for example, bilateral, private exchange, or pool. Linkages between submarkets may be implicit price relationships caused by arbitrage or explicit rules linking rights purchased in one market to activity in another. Architecture should be specified before rules are written, but it is often necessary to test the architecture during the design process, and this requires a rough specification of the rules. Architectural design must also consider the market structure in which it is embedded, which may inhibit the proper function of some designs. Market design should not be rigidly compartmentalized, yet it is useful to consider the market's architecture apart from the details of the rules and the limitations of market structure. Keywords : power exchange, market cleaning price, Day-ahead market, Real time market, Submarket, Market linkages, Spot Market, Forward Market, Ancillary service, Bilateral market. I. INTRODUCTION A process has been underway worldwide for twenty years to privatize state enterprises and liberalize markets for the services of the infrastructure industries, including electricity, gas, telecommunications, transport and water, among others. This process is usually viewed in terms of the shift from tight regulation of vertically

integrated monopolies to light regulation of functionally separated firms. This shift has been justified by changes in technology, such as diminished economies of scale reflected in the electricity industry by smaller efficient plant sizes. In airlines and trucking, contestability was viewed sufficient to limit market power, and in telecommunications, it was enforced by requiring incumbents to offer wholesale tariffs to resellers, and occasionally, access by competing carriers. Some countries have simply separated the public good embodied in the infrastructure network, such as electricity or gas transmission and rail lines, from the associated commodity or services industry. Another viewpoint emphasizes the role of unbundling to expose cross-subsidies and to improve efficiency via better pricing an incentive for greater variety of products and services. A third viewpoint, common in developing countries, sees privatization and liberalization as necessary to overcome organizational inertia with stronger incentives, and to attract private investment to serve rapidly growing demand arising from economic expansion. II. MARKET The term market is used in many ways and has no strict definition. Tirole (1997) explains that it should not be so narrow as to encompass only a specific product produced at a specific location, nor should it be "the entire economy." He concludes that there is no simple recipe. In practice, the market designer must choose a definition to suit the problem at hand by relying on common sense rather than theory.

III.SUBMARKET Just as for a market, there is also no strict definition of a submarket. An entire market may include many or few submarkets depending on its degree of unbundling. A market design analysis project concerns a collection of submarkets, which are collectively referred to as the entire market (both will often refer to simply as market). Unbundling means, decentralization or deregulation of state electricity boards on the basis of functions like generation, transmission and disturbance. IV. POWER EXCHANGE Even though short-term and long-term financial energy transactions could be in bilateral forms in the electricity industry where contracted parties agree individually for certain terms such as price, availability and quality of products, industry restructuring proposals have concluded the necessity of creating a new marketplace to trade energy and other services in a competitive manner. This marketplace is termed Power Exchange (PX) or, as sometimes called, spot price pool. This marketplace permits different participants to sell and buy energy and other services in a competitive way based on quantity bids and prices. V. MARKET CLEARING PRICE (MCP) PX accepts supply and demand bids to determine a MCP for each of the 24 periods in the trading day. Computers aggregate all valid (approved) supply bids and demand bids into an energy supply curve and an energy demand curve. MCiPs determined the intersection of the two curves and all trades are executed at the MCPi, n other words, the MCPis the balance price at the market equilibrium for the aggregated supply and demand graphs. Generators are encouraged to bid according to their operating costs because bidding lower would lead to financial losses if MCPis lower than the operating cost and bidding higher could cause units to run less frequently or not run at all.

VI. HOUR-AHEAD MARKET DAY-AHEAD MARKET The day-ahead market and for each hour of the 24-hour scheduling day, sellers bid a schedule of supply at various prices, buyers bid a schedule of demand at various prices, and MCPis determined for each hour. Then, sellers specify the resources for the sold power, and buyers specify the delivery points for the purchased power. PX schedules supply and demand with the ISO for delivery. Supply and demand are adjusted to account for congestion and ancillary services and then PX finalizes the schedules. The hour-ahead market is similar to day-ahead, except trades are for 1 hour, and the available transfer capability (ATC) is reduced to include day-ahead trades, and bids are not iterative in this market. Once the MCPis determined in the PX, market participants submit additional data to the PX. The data would include individual schedules by generating unit; take out point for demand, adjustment bids for congestion management ancillary service bids. After this stage, the ISO and the PX know the injection points of individual generating units to the transmission system. A schedule may include imports and/or exports. To account for transmission losses, generators schedules are adjusted where real losses are only known after all metered data are processed. VII. REAL TIME MARKET Unlike a day-ahead exchange, a real-time exchange cannot use bids. The real-time (RT) market consists of trades that are not under contractpower that just shows up, or is taken, in real time and accepts the spot price. An RT exchange works like a classical Walrasian auction. A price is announced and suppliers and customers respond. If the market does not clear, a new price is announced. The difference is that in a power market trade takes place all the time; there is no waiting to trade until the right price is discovered. Like a Walrasian auction and unlike a day-ahead (DA) exchange, an RT exchange may find there is no price that balances supply and demand. Consequently, if an exchange is used, it must be supplemented with another exchange or
2

perhaps an operating-reserve market in the form of a pool. There are many possibilities, and little is known about their relative merits.
VIII. SPOT MARKET

participants do not expect much change in the price of a currency over the given period of time. X. LISTING THE SUBMARKETS The term market is used in many ways and has no strict definition. Tirole (1997) explains that it should not be so narrow as to encompass only a specific product produced at a specific location, nor should it be "the entire economy." He concludes that there is no simple recipe. In practice, the market designer must choose a definition to suit the problem at hand by relying on common sense rather than theory. At least two categories of market are needed. First the designer must define the scope of the design problem which will be termed the entire market. "Power market" in the present book refers to such a market. Depending on context this could include only the wholesale market or the retail market as well. This choice demonstrates the need for a second market concept. An entire market typically includes components that are themselves markets. These will all be called submarkets. The distinction between an entire market and a submarket is relative, not absolute. In a different context it could be useful to view the ancillary services market as an entire market with submarkets instead of as a submarket of the entire power market. An entire market may comprise many or few submarkets depending on its degree of vertical integration or unbundling. In other words, the intermediate products used to produce the final products of the entire market can be produced internally by the producer that uses them or can be purchased in a submarket. The first step in mapping an entire market's architecture is to decide on the list of submarkets. This is a key step in the design, requiring careful consideration, and it can be highly contentious. Currently, there is no consensus, even within the most informed circles, as to the best collection of submarkets from which to construct a power market. Just as for a market, there is no simple recipe for the definition of a submarket. If a day-ahead energy market contains two zones, then different suppliers will sell into each zone and there will be two prices. Clearly there are two products: energy delivered to zone 1 and energy delivered to zone 2. Should these be considered different submarkets? That may prove convenient, but when there are 500 locations with different prices
3

A commodities or securities market in which goods are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective. A futures transaction for which commodities can be reasonably expected to be delivered in one month or less. Though these goods may be bought and sold at spot prices, the goods in question are traded on a forward physical market. The spot market is also called the "cash market" or "physical market", because prices are settled in cash on the spot at current market prices, as opposed to forward prices. IX.FUTURE AND FORWARD MARKET Futures markets and forward markets trade contracts that determine a current price for a commodity transaction designated to take place at a later date. Despite being fundamental to financial and commodity trading, there is some confusion over the precise definition of futures and forward contracts. While common usage sometimes defines futures and forwards as synonyms, a futures contract is a specialized form of forward contract that is standardized and traded on a futures exchange. Forward rates are usually negotiated for delivery one month, three months, or one year after the date of the contract's creation. They usually differ from the spot rate and from each other.

a) What Determines the Forward Rate? If there is no government intervention on the value of a currency, the forward market will be governed by supply and demand. In such a case it is possible that the forward rate provides information on the future spot rate, but ultimately uncertain. What is certain is that the forward rates reflect the expectations forward market participants have on the changes of the spot rate during the specified interval. If the forward rate and the spot rate are the same, forward market

it will be necessary to count it as a single multiproduct submarket. Submarkets that play a significant role in an entire market should be included in the list of markets even if not designed as part of the current project because they are a vital part of the market's architecture. Linkages between designed and naturally occurring or preexisting submarkets are crucial to the health of the entire market. XI. REASONS FOR INCLUDING A SUBMARKET An entire market typically consists of a set of closely related end-product markets and the intermediate-product markets that feed into them. For a power market, the end product markets might be only a single wholesale electricity market in a particular region. Wholesale markets include all forward, hours, and options markets. The difficult task is to decide which public markets should be created. While there are no clear-cut rules, several possible motivations should be considered: 1. Nondiscriminatory access. 2. Completeness (trading of a product not otherwise traded). 3. Reduced trading costs. 4. A publically known price. 5. Transparent operation. Nondiscriminatory access may be guaranteed by the governance structure of a public market and is usually of most importance to small consumers and producer. Completeness is most relevant in the case of public goods such as reliability services. It may also apply to natural-monopoly goods and services such as the unit commitment service. A public centralized market, such as an exchange, will typically have much lower trading costs than a private decentralized market but not necessarily lower than a private exchange. A publically known price serves two different purposes. First, it is a required assumption of the Efficient-Competition Result and is quite helpful to traders in making efficient trades.3 Second it can be used as a benchmark for other transactions, both regulated and private, such as settling financial futures. Transparent operation is essential when market power is a potential

problem and needs to be monitored. There are also drawbacks to public markets, all of which seem related to the lack of proper incentives for regulators. A public market may offer products that are not well designed or are too limited, or transactions costs may be higher than necessary. XII. MARKET TYPES There are two basic ways to arrange trades between buyers and sellers. They can trade directly, one buyer and one seller making a "bilateral" trade, or suppliers can sell their product to an intermediary who sells it to end-use customers. Both bilateral and mediated markets come in several types with bilateral markets usually less organized but with some overlap in this regard.

Fig 1 Market type Entire markets often use a mixture of types. For example, the used car market is a mixture of direct search, bulletin board, and dealer markets. The term "pool" has a special meaning with regard to power markets. For years, utilities in some regions have organized their production in power pools, some of which used a centralized dispatch. In a deregulated market, a pool is an exchange in which the supply bids are complex, and the system operator carries out a complex calculation to select and pay the winners. Some markets work better as one type and some as another. In the heat of debate, those favoring bilateral markets often imply that exchanges are in some way like central planning, socialism, or even communism, but these analogies contribute little. Often the right answer is for an entire market to utilize both approaches side by side. The long-term energy market utilizes a bilateral forward market that trades individualized forward contracts and centralized futures exchanges that trade standardized futures contracts. The transaction cost of trading in the forward market is greater but provides flexibility while trading in the futures market provides no flexibility in contract form but
4

is inexpensive. Bilateral markets can be either direct search markets or brokered markets and can be more or less centralized. If the market is brokered, as is the housing market, the brokers do not actually buy or sell in the market but are paid a commission for arranging a trade. Some forward energy markets, thanks to the Internet, are now organized as bulletin-board markets which are just a partially centralized variety of a direct-search market. With the exception of the bulletin-board approach, bilateral markets need little design. They require an enforcement mechanism for complex contracts, but this is provided by the preexisting legal framework. A dealer market is the most rudimentary type of mediated market. Unlike a broker, a dealer trades for his own account, and usually maintains an inventory. He buys the product and holds it before reselling. There is no brokerage fee, but at any point in time the dealer buys for a price that is lower than the price he sells for. This difference is called the spread. An exchange provides security for traders by acting as the counter party to all trades, eliminating traders' concerns over creditworthiness. Exchanges utilize auctions and are sometimes called auction markets. An advantage of auction markets over dealer markets is that one need not search to find the best price for a good." Because an exchange interposes itself between buyers and sellers, the two halves of the market can operate independently, although they are linked by what is called a double auction. An exchange can have a number of advantages over a bilateral market. It can reduce trading costs, increase competition, and produce a publically observable price. Depending on design and circumstances, it can also facilitate collusion and generally provides less flexibility than a bilateral market. Power marketers often favor bilateral markets because without an exchange there is more room to earn commissions as brokers and to appropriate the spread when they act as dealers. XI. MARKET LINKAGES Implicit linkages are most often produced by arbitrage, the most important example being the arbitrage-induced between a forward price for delivery at time T and the expected spot price at that time. The selection and arrangement of submarkets can take advantage of implicit links as when ancillary-service markets are sequenced so

that excess supply in one spills into the next. Alternatively, multiproduct markets can be designed with explicit linkages, sometimes increasing efficiency but also adding complexity. XIII. ARCHITECURAL CONTROVERSIES Three architectural controversies have plagued the design of power markets. All three surfaced early and remain in dispute. Each has a decentralized side (listed first) and a centralized side. These are: a. Bilateral markets vs. centralized exchanges and pools. b. Exchanges vs. pools. c. Zonal pricing vs. nodal pricing. XIV. CONCLUSION The conclusion today, seventeen years later, is essentially the same. Industries differ one from the other, and the optimal mix of institutional arrangements for any one of them cannot be decided on the basis of ideology alone. The central institutional issue of public utility regulation remains. Power market becomes competitive and efficient. XV. REFERENCES [1] Stoft Steven, Power system economics: designing markets for electricity, john Wiley and sons,pp no. 356-456, USA, July 2002 Wilson Robert, Architecture of Power Market, IEEE Transaction on Power System, Vol. 15, No. 1708, USA, September 2001. Sahaidepour Mohammad, Almosh Muwaffaq, Restructured Electrical Power System: Operation, Trading and Volatility vol. 15, no. 2, pp. 838843, May 2000. Silva E. L. da, Schilling M. T., and M. C. Rafael, Generation Maintenance Scheduling Considering Transmission Constraints, IEEE Transaction on Power System, USA, June 2004. William W. Hogan, Electricity market restructuring: markets, market design and RTOsAvailable:http://ksghome.harvard.e du/~.whogan.cbg.ksg/ , Cited On
03/May/2013. 5

[2]

[3]

[4]

[5]