GENCO Investment Strategies by Simulation for Demand-Side Role for Investments and Capacity Adequacy

GENCO Investment Strategies by Simulation for Demand-Side Role

for Investments and Capacity Adequacy

Submitted for a graduate level course “Power Systems Planning” on April 24th, 2006.

Abstract:

 This project will present an applied and game-like approach to simulating the load growth, investment decisions by two types of generation technologies, demand-price responsiveness, and reliability, of a test-case power system. The simulation begins as a 9-bus system with existing generation (3 generators) and transmission lines (8 lines). System topology can be viewed in a figure throughout the game with the yearly generation and load at each bus. In addition, dynamic color-coding is used to highlight transmission lines that exceed MVA ratings and highlight bus voltages that violate any limits. The winning objective of the player company (you) is to maximize his profit. Reliability can be tracked by viewing the N-1 generator and line contingencies every year, but this does not influence profits. There are two generation technologies used: coal and gas turbine. Each technology will have a similar competitor in the simulation. The competitor can bring down the market price and reduce the player’s profits significantly. The clock starts at T=0 in the investment game with a historical record of past prices and projected prices based on lack of investment. As time moves forward in yearly increments, the load, prices, investment costs, and other variables are adjusted to that of the player’s performance. The player has the opportunity to study various profitable and unprofitable investment alternatives each year of the simulation. If he invests at the right location, and in the right planning year, his company can make windfall profits. Competitors randomly participate in adding extra generation in random areas of the system based on the competition level settings. The challenge for the user is to study the effects of his investment decisions on market prices, reliability, and his profitability.

Introduction

There are two extreme options for ensuring adequate generation supply and maintaining reliability: the energy-only market option and the regulatory authority/ISO-based option.  – Alex D. Papalexopoulos – “Supplying the Generation to Meet the Demand”

Background

The demand for cost efficiency, which has caused an upsurge of deregulation and liberalization initiatives in the power industry, will play a key role in current and future market designs. The objective behind power system deregulation is to increase the competition, and with that the economic efficiency in the building and operation of the electrical power system. Liberalized markets focus on profit maximization in lieu of cost minimization as under regulation. Uncertainty in the power market spot prices and decentralized decisions bare more risk on the investors than under the traditional regulation where utilities were allowed to recover their risk under rates.  A common challenge among market designers and policy makers is how to keep a competitive energy market that can ensure sufficient generation supply to meet the demand and ensure reliability.

Although capacity in the electricity infrastructure was adequate for 2005, many still see resource adequacy as a growing concern because rate of investment in generation and transmission is seen by some as too low to meet future requirements. Better infrastructure investment choices, especially from the generation sector which was the main focus of wholesale markets, should offer potential savings and operating practices. This is a directive for evaluating electricity restructuring. If markets do not produce better investment choices than those experienced under the vertically integrated monopoly model, then electricity restructuring will fail. Investors would be expected to do a better job than regulators in balancing location and composition of generation because they would be risking their own money without the safety net that regulators had under rates. Without right incentives for investors, the electricity restructuring would fail.

Defective market design is a problem because it still relies on planners and not markets to keep the demand supplied reliably. However the focus should not be on investors following the directives of central planners. Critical market failures like inadequate scarcity pricing and flaws need to be fixed before the central planner can distance himself from the investor. Limited intervention will be the true liberalization of investors from central planners to maintain the anticipated benefits of electricity restructuring.

The focus of this paper and project is based on an energy-only market. Under this market there is no capacity guarantee put in place to ensure sufficient generation supply. Energy prices fluctuate and when they are high enough, justify new investments. There are many energy-only electricity markets around the world, including the original California market, Nordpool, and the Australian Victoria pool. A shortage of capacity will have the effect of increased prices and increased investment; excess capacity will drive the market prices down to marginal costs. The price volatility in an energy-only market has high political involvement and has challenged both politicians and regulators. With this market, there is no central resource planning in place to protect resource shortages and make reserves available. Investors will respond only to short-term or spot market price signals. Little investment will take place in low price years causing shortages to develop like what happened in California in the late 1990’s. New capacity takes time to build and when there is a lack of planning and coordination, there is generally overbuilding which can lead to very low market prices and deter new investments thus starting the cycle over again. A more price-responsive demand may help moderate these cycles. The energy-only market model will ultimately fail to ensure system reliability and may cause market power concerns.

Overview of Project

Power system reliability, at the transmission level, combined with unit commitment optimal power flow, have been common topics in many of my graduate courses. However, economics and present value analysis studied in this course have opened a new perspective into the past, present, and future infrastructure of the electric grid. My project goal was to combine these three perspectives and to see the effects that individual investors may have on prices, scarcity, reliability, and demand-response. I spent several weeks developing a sophisticated C-based program in MATLAB to simulate investments, competition, load growth, price response, optimal investment strategies, reliability, and profit analysis all based on user direction. The user of course, is you, or anyone who so desires to execute the program. Based on initial settings, many of which can be changed by a simple sub-menu, the program progresses through a certain period of planning years. During the simulation, the user is given load and price forecasts along with a detailed analysis of investment alternatives. Reliability can be tracked via the contingency analysis option.  There will be two main decisions the player (user) can make every year through each time period: invest in new generation, or do not invest in new generation. Competitors, which can be customized in the settings sub-menu, may invest in new generation decreasing the price forecasts and your profits. The objective for the company players is to, of course, maximize profits. However, if an investment decision is precarious, the player risks losing millions of dollars.

The paper will discuss the simulation process and program functions in detail. High-level flow charts along with pseudo code and tables, will explain the program components. An example simulation will then be presented to illustrate the simulation process. A few different scenarios based on customized settings in the sub menus will be presented along with summaries. Applicable uses, enhancements, and other possible program functions will be discussed. Lastly, some concluding remarks will summarize the project work. Appendices contain all applicable code.

Download

Report: GENCO Investment Strategies by Simulation.pdf

Presentation: GENCO Investment Strategies by Simulation.ppt

Code: PowerSim.zip