Homepage for EE/Econ 458

Restructuring of
Wholesale Power Markets

Last Updated: 21 August 2009 Latest Course Offering: Spring 2009 Meeting Time: Tuesday/Thursday 5:30pm-7:00pm Meeting Place: Coover 1011 Instructor: Leigh Tesfatsion Professor of Econ, Math, and ECpE Department of Economics Iowa State University Ames, Iowa 50011-1070 http://www.econ.iastate.edu/tesfatsi/ tesfatsi AT iastate.edu Instructor Office/Office Hours: Room 375, Heady Hall Hours: Thursdays 12:30-3:40pm,    and by appointment Teaching Assistant: Ms. Qun Zhou (ECpE) Tel: 515-294-2525 zhouqun8508 AT gmail.com Teaching Assistant Office/Office Hours: Room 24, Active Learning Complex (ALC), Coover Hours: Tuesdays 10-12, and by appointment

Syllabus (Reading & Exercise Assignments) Accumulated Point Scores (5/12/09) General Resources on Electricity Restructuring

Course Objectives Topic Outline Structure (grading, exam schedule, etc.) Quiz Answer Keys (4/14/09) Disability Statement

Course Objectives

Wholesale power markets around the world are currently undergoing substantial changes in their structure and rules of operation. This process has come to be referred to as restructuring.

For example, twenty years ago most electricity in the U.S. was supplied by vertically integrated utilities operating under a regulatory compact whereby they agreed to provide an adequate supply of electricity for all users in return for receiving a fair rate of return on their capacity. In contrast, over 50% of generating capacity in the U.S. is now operating under a centrally administered wholesale power market in which electricity is priced in accordance with the location and timing of its injection into and withdrawal from the transmission grid.

Debates and controversy continue with regard to the exact form that restructured wholesale power markets should take. At the national level, regulatory agencies (such as the U.S. Federal Energy Regulatory Commission) are in the process of revising the entire regulatory framework within which these markets operate, with fiduciary responsibility for protecting against risks to national security. At the regional level, market administrators are devising and implementing new rules of operation in an attempt to ensure reliability as well as efficiency and fairness. At the level of participant traders, companies are developing new bid/offer strategies for the purchase and sale of energy and ancillary services in an attempt to enhance their net earnings while protecting against financial risks.

Some commentators continue to argue that this restructuring process has not produced the intended improvements in market efficiency while at the same time it has complicated the efforts of market administrators to ensure the reliability of market operations and the efforts of traders to protect themselves against financial risks. Given the extraordinary global financial crisis now taking place, it seems inevitable that calls will strengthen for a return to heavier regulation of wholesale power markets, possibly even for a return to administered cost-based pricing.

This power economics course will cover topics essential for understanding the current controversies surrounding the restructuring of wholesale power markets both here in the U.S. and abroad. Planned topics include: an historical overview of wholesale power market restructuring; microeconomic basics for power markets; strategic market behavior (game theory); optimization basics; wholesale power market operation over transmission grids; locational marginal pricing and optimal power flow; organization of restructured wholesale power markets (real-world examples); financial and operational risk management; system security and ancillary services; investment in new generation; financial transmission rights and transmission investment; and the potential for "green power."

Topic Outline

NOTE: See the on-line EE/Econ 458 Syllabus for a detailed listing of required readings and exercises.

1. Power Market Restructuring: Overview
2. Microeconomic Basics for Power Markets
   1. Market Principles and the Theory of the Firm
   2. Strategic Market Behavior (Game Theory)
   3. Markets, Risks, and Contracts
3. Optimization Basics for Power Markets
   1. Introduction to Constrained Optimization
   2. Optimization Tools for Economic Dispatch
4. Operation of Restructured Wholesale Power Markets
   1. Organization of Power Markets
   2. Power Market Trading Subject to Transmission Constraints
      1. Power Systems and LMP Fundamentals
      2. Bid/Offer-Based Optimal Power Flow
   3. Market Power Mitigation
   4. Real-World Examples: Policy Concerns
5. Financial and Operational Risk Management
   1. System Reliability
   2. Financial Transmission Rights
6. Investment for the Future
   1. Investment in New Generation
   2. Investment in New Transmission
7. Environmental Issues
   1. Emission Control
   2. Potential for "Green Power"
8. Future Prospects for Restructuring

Course Structure

Credits and Prerequisites

• EE/Econ 458 is co-listed as a 3-credit engineering and economics course. The prerequisites are EE 301 or Econ 301, or permission of the instructor.

Required Textbooks (Bookstore):

• Daniel Kirschen and Goran Strbac, Fundamentals of Power System Economics, Wiley, 2004

• Timothy J. Brennan et al., Alternating Currents: Electricity Markets and Public Policy, Resources for the Future, 2002 (paperback).

Class Attendance:

You are strongly encouraged to attend and participate in class. As noted below, class attendance and participation in class discussions will count for extra credit in case of a borderline grade. If you must miss class, you will be responsible for all information presented and/or discussed in class; neither the instructor nor the TA will be under any obligation to provide you with this information (apart from hand-outs).

Class Lecture Schedule:

For the most part we will follow the order of topics in the required Kirschen/Strbac textbook. Required readings will be marked with two asterisks (**) at the online EE/Econ 458 syllabus. The instructor will also send out frequent class updates using the class mailing list reminding everyone about planned readings and assignments for the next segment of the course. Any changes to scheduled topics/readings will be highlighted at the online EE/Econ 458 syllabus using "new" or "updated" icons.

Take-Home Exercise Assignments:

• All take-home exercises assigned by the instructor will be handed out and/or posted at the online EE/Econ 458 syllabus.

• All take-home exercises are due at the beginning of class on the due date. Assignments handed in after discussion of exercise answers has commenced on the due date will be considered late. Late assignments will not be accepted for formal grading and inclusion in course grades -- no exceptions.

• Some exercises will be individual assignments, and some exercises will involve assigned teams. Exercise teams will be posted on-line for any team exercise assignments.

• You are strongly encouraged to work all assigned problems as preparation for the exams and quizzes.

Quizzes:

• Quizzes will be given on a selection of Tuesday class meetings at approximatly 6:00pm.

• Exact dates for the quizzes will not be announced in advance. No make-up quizzes will be given, but the lowest quiz score attained by each student will be dropped in the determination of their overall quiz performance.

• The intention of the quizzes is to encourage timely class preparation and good class participation.

Exams:

• There will be one midterm exam held during the semester during regular class hours, as well as a final exam. Packets for exam answers will be distributed at the exams, so students will not need to bring bluebooks/paper. Use of any electronic device during either exam will be strictly prohibited.

• The MIDTERM EXAM is scheduled for Thursday, March 5, 2009, during regular class hours, 5:50-7pm, in our regular classroom, Coover 1011. The midterm exam will be a closed book exam covering all required readings, exercises, and in-class lectures through the last class meeting prior to the exam date.

• ANSWER OUTLINE for Spring 2009 Midterm Exam

• The FINAL EXAM is scheduled for Thursday, May 7, 2009, in the evening from 7-9pm in our regular classroom, Coover 1011. The final exam will be a closed book exam covering all required readings, exercises, and in-class lectures through the last class meeting prior to the exam date.

• ANSWER OUTLINE for Spring 2009 Final Exam

• Absence from the midterm exam or the final exam will result in a grade of zero unless the instructor agrees there are verified extenuating circumstances such as a major medical emergency. In the latter case, the course grade will be determined on the basis of other work completed; no make-up exams will be scheduled. Any student missing both the midterm exam and the final exam will be asked to withdraw from the course.

Grading:

Your overall course grade will be computed on a pro-rated point basis as follows

• Homework Assignments: 20% of grade
• Midterm Exam: 25% of grade
• Quizzes (lowest score excluded): 20%
• Final Exam: 35% of grade
• Class attendance and participation will count for extra credit in case of a borderline grade

Letter grades will be determined according to the following guidelines

• 90 and above: A
• 80 to 90: A- / B+ / B
• 70 to 80: B- / C+ / C
• 60 to 70: C- / D+ / D
• 50 to 60: D- / F
• Below 50: F

As the course proceeds, you can check your accumulated point scores to date at the following site:

Accumulated Point Scores              

Communication:

Feel free to contact the instructor during office hours, class meetings, or through email if you have any questions or concerns. At the start of classes a mailing list will be established for use by all class participants (including the instructor and TA).

Quiz Answer Keys (Practice Questions):

Quiz 1 (1/27/09): Answer Outline (pdf,15K)

Quiz 2 (2/17/09): Answer Outline (pdf,15K)

Quiz 3 (3/31/09): Answer Outline (pdf,17K)

Quiz 4 (4/14/09): Answer Outline (pdf,36K)

Disability Statement:

If you have a disability and require accommodations, please contact the instructor early in the semester so that your learning needs may be appropriately met. You will need to provide documentation of your disability to the Disability Resources (DR) office, located on the main floor of the Student Services Building, Room 1076, 515-294-7220.