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Power System Economics – Lecture Note 3
Economics of Reliability of the Power Supply Industry
Introduction
Reliability of the power system is of paramount importance to industry operators and consumers.
Definition:Reliability is the overall ability of the system to perform its function to the satisfaction of operators and users of the power system. In other words, it’s the ability of the power system to meet its load requirements at any time.
For any economy, unreliable power supply results in both short and long term costs. Costs are measured in terms of loss of welfare and the adjustments that the consumers undertake to mitigate their losses.
Service interruptions may trigger loss of production, costs related to product spoilage and damaged equipment. In Nigeria, chronic electricity shortages and poor reliability of supply has made many consumers to install back-up diesel generator sets for use.
Reliability is a function of:
•System Adequacy – the ability of the electric system to supply the aggregate electrical demand and energy requirements of the customers at all times, taking into account scheduled and unscheduled outages of the system elements. •System Security – the ability of the electric system to withstand sudden disturbances such as electric short circuits or unanticipated loss of system elements.
Shortage of electric power and supply interruptions occur because of the following:
Shortfalls of delivered electric power even under the best conditions of the electric system, due to inadequate number of generating facilities capable of meeting demand at all times. Such shortfalls occur in developing countries like Nigeria, where peak demand is estimated at 10,500MW, but average available useful generating capacity is about 3,000MW (a shortfall of 7,500MW) – System Adequacy.
Unreliable supply due to non-availability of generating plants, or breakdowns in transmission and distribution system. Such unavailability can occur in varying degrees in any power system in the world – System Security.
Operating reserves are required to maintain system security by handling short term disturbances to the system.
Planning reserves are required to maintain system adequacy by meeting annual demand peaks. These two types of reserve are considered the basic inputs to generation side of system reliability
Fig 3.1 Estimate of the Cost of Power Interruptions by Customer Class in USA
Source K. H. LaCommare and J.H. Eto. Ernest Orlando Lawrence Berkeley National Laboratory, Berkeley, CA , USA, Sept 2004
Fig 3.2 Estimate of the Cost of Power Interruptions by Type of Interruptions
Valuing Cost of Interruptions
The cost of electricity to a consumer (i.e. the consumer’s evaluation of the worth of supply, whilst ignoring consumer surplus) is equal to payments for electricity consumed plus the economic (social) cost of interruptions.
Supply interruptions cause disutility and inconvenience, in varying degrees and in different ways, to different consumer classes (i.e. domestic, commercial and industrial). The costs and losses (L) of these interruptions to the average consumer are a function of the following:
Dependence of the consumer on the supply (C)Duration of the interruption (D)Frequency of its occurrence in the year (F)Time of the day in which it occurs (T)
i.e. L = (D d x Ff , T t ) x C
Where d, f, and t are constants, but vary from one consumer category to another.
Economic cost of Power Interruptions and Power Quality
Consumer surplus
Curve B is the marginal cost curve of reliability to the consumer and the society. Without supply, the social cost to consumer and society is large. Curve S is marginal cost curve of supply of electricity from the producer. The least cost strengthening scheme which would lead to same reliability. To ensure 100% reliability at all times, shows the huge cost involve. (Hence, no system can guarantee 100% reliability at all times. CA : long run marginal cost ≈ consumer tariffOECA is the direct benefit of electricity usage to the consumerACDK is the consumer loss of utility due to interruption in supply
Marginal Utility and marginal Cost of electricity availability
B S
E
A
C
D
K99.98% 100%0 Continuity (%)M
arg
inal
uti
lity
and
mar
gin
al c
ost
Figure 3.3
C: the equilibrium price where the marginal cost of reliable power intercept with the marginal cost of supply. The benefit of supplying reliable electricity to the consumer is the entire area under B and to the left of AC. Consumer Surplus: The area under curve B and above area OECA . This is the extra benefit to the society enjoyed by consumers for reliability of power supply.
Ultimately, the level of reliable power supply depends on much consumers are willing to pay for it. A very highly reliable system, cost more money, leading to higher tariff for consumers and the vice versa.
Consumers and producers of electricity needs to strike a balance between desirability of having highly reliable power supply and cost of providing such reliability.
Using social welfare analysis,
Economic cost of electricity = (energy consumed in kWh x tariff) + social cost of energy interruptions (kWh interrupted x average cost to consumer per kWh curtailed)
Economic Modelling of System Adequacy
Assume no system security problem, a certain level of installed useful Generation Capacity K, Consumers load L, and generation outages (planned and unplanned) g
Operating Reserves = OR = K – g – L 3.1
If L > K, then the unserved load (i.e. Lost Load) is LL, making OR –ve
g is equivalent to extra load on the system
LL = max(-OR, 0) 3.2
Note: Load may be shed when OR > 0 (e.g. when there is network problem). Power interruption does not necessary correlate to when OR is –ve.
From 1.1 let the Augmented Load Lg = L + g
LL = max (Lg – K, 0).
LL equals the amount by which Augmented load Lg exceeds installed capacity K.
In Nigeria, K is 5,000MW, L is estimated at 10,500MW, g is about 2,000MW (on average). Hence Lg is about 12,000MW.
If retail price is N30,000/MWh, no one will by power from the electricity company (i.e. demand is zero) and increases linearly to 20,000MW at the retail price. Area ABC is the consumer surplus (i.e. total value of power to consumer). Consumers would pay the retail price for more and no more.
With load shedding (area ABD), there is reduction in total consumer surplus. Since demand is scaled back 10%, reduction in net social value is N30,000 divided by 2000MW, which is N15/h.
The reduction in consumer surplus caused by 1 MWh of shed load is VLL.
N/MWh
Retail Price
20,000MW18,000MW
30,000Unobservable demand function
Total surplus lost when 2000MW of lost load is shed (Net VLL)
Variable cost savings from lost load
0
A
B
CD
g
K is the installed useful capacity.
LLa is the average Lost Load over a period of time.
The greater the level of K, the smaller the area of LL. D LS is the duration for which Lg > K. The duration of load shedding. The higher the value of K, the smaller the D LS
VLL is Value of Lost Load (N/MWh). This is how much customers pay for supplying alternative power when the power from the system in interrupted, or amount they are willing to pay to ensure uninterrupted power supply. It varies amongst customer category.
Lg = L + g
MW
L
K
DLS0 1
Area = LLa (load shedding)
Duration
Figure 3.4
Increasing K would reduce the area LLa, and DLS
For the system, the average cost of Lost Load will reduce by N(VLL X DLS)/h
The average cost of adding a new capacity ACKN= FCN + DLS x VCN 3.3
If DLS is small, then FCN dominates and ACKN ≈ FCN.
In a developing country like Nigeria, K is small, DLS is large.
Then VLL x DLS > FCN. Hence, the cost to the society for adding new capacity to the system is less than the Value of Lost Load incurred by consumers (i.e. consumer surplus is small)
The optimal K, will be at the point when the cost of new additional capacity equals the cost of Lost Load.
VLL X DLS = FCN
Optimal value of DLS = FCN/VLL
Hence a reliability police must be in place to make sure DLS < FCN / VLL
Example:A power industry in a particular country has useful installed capacity of 12,000MW, with Augmented load of 18,000MW . The average fixed cost of its generating stations is N15/MWh, Duration of Load shedding in the system is 35h/year. Find the Value of lost load for the system, the average cost of new generation to meet demand requirement and recommend minimum level of installed capacity.
Installed capacity K = 12,000MW
Augmented Load L g = 18,000MW
Duration of Load shedding = 35h/year
Value of lost Load VLL = FC/DLS
= 15 /(35/8760) = N3,754.29/MWh
From figure 2, Cost of Load Shedding to the system =[ (DLS /2)* VLL *(Lg - K)] = (0.003995/2) * 3754.29 * (18,000-12,000) = N45,000/h
Additional Capacity requirement = Cost of Load Shedding / Average fixed cost of generation Station
= 45,000/15 = 3,000MW
Adequate Installed Capacity K’ = 18,000 + 3,000 = 21,000MW
Network
Consider the problem of choosing the method of protection of rural single feeder below
EF
ARAS
5 x 100KVA p.m. transformers
Three methods are discussed and costed:•Expulsion fuses (EF)•Auto-reclose circuit breakers (AR)•AR with automatic sectionaliser (AS) in the middle of the line.
The cost and predicted continuity performance of these schemes when applied to a particular rural network are summarised in Table 1.
Scheme Protection Cost Probable cons h per annum
H per consumer
1 Expulsion fuse N500 24h x 500 cons. = 12,000
24
2 Auto-reclose N3,500 24h x 500 = 2000 43 Auto-reclose
sectionaliseN5,500 1 x 300 + 4 x 200 =
11002.2
Employment of EF with an expenditure of N500 on network protection involve 12000 consumer hours lost and an interruption of 24h per consumer per annum (plus main network interruption).
An expenditure of N3,500 on auto-reclose will save 10,000 consumer hours (12,000 – 2,000), at a marginal cost of N0.30 [(3,500-500)/10000]
Investment in AR and Auto sectionalise will save 900 consumer hours from scheme 2 and reduce interrupted hours to 2.2 h per consumer, at a marginal cost of N2.22 [(5,500-3,500)/900]
Conclusion:
From the calculation, depending on the customer type and location the power company will have to choose between schemes 2 and 3. If it is a rural location, with no sensitive customers, scheme 2 will be chosen. For areas with sensitive load, e.g. an hospital, an industrial area, airport, security facilities, etc. scheme 3 will be chosen. This type of problem necessitates detailed evaluation of the cost to the consumer of aborted energy (i.e. impact on the consumer supply, area under curve B in Figure 1)
Evaluation of choice of Transformer
Power System engineers are faced with choice of transformer. Engineers are faced with the option of trading off a higher price facility against operational cost over its life span.
Example:
Two transformer offers have the following technical characteristics
Size (MVA) Voltage (kV) Losses (kW)Iron Copper
Transformer A 40 132/33 55 400Transformer B 40 132/33 76 360
Their quoted prices and payment conditions are as follows
Price (N1000s)
Payment (N1000s) on contract
Payment (N1000s) on delivery
Transformer A 450 225 225Transformer B 470 70 400
In both cases the delivery is one year after contract. Commissioning is six months after delivery. The transformers are assumed to be loaded at 50% of full load at the first two years of service, and at 75% of full load in the following two years (i.e years 3 & 4), afterwards it is fully loaded. The cost of electricity is N3.5/kWh. The transformers have a load factor of 60%, expected life of 30 years and a discount rate of 10% is considered, reliability and maintenance costs of the transformers the same.
Solution:
In order to choose the least cost solution, it is required to consider the total cost of the project over its expected life span. This includes the price of the two transformers plus their discounted cost of the losses: fixed losses (iron losses) and load losses (copper losses).
Load factor = 60%Life time = 30 yearsDiscount rate = 10%
For the transformer A annual copper losses at half load for years 1 & 2
Copper losses (C) = full load copper loss x(demand/rated capacity)2
= 400kW (20MVA/40MVA)2 = 100kW
Annual energy (Copper) losses = peak losses x (0.15 + 0.85 x 0.6) = 100 x 8760 x0.66
= 578MWhIn years 3 & 4, Transformers loaded to 75%
Copper losses = 400 (30/40)2 = 225kW
Annual Copper losses = 225 x 8760 x 0.66 = 1300MWh
For years 5 to 30, Copper losses = 400 x 8760 x 0.66 = 2313 MWh
Iron losses = 55 x 8760 = 482MW
Similar calculation is done for Transformer B
Year Cost(N1000s)
Losses (MWh)Iron Copper
Total Losses (MWh)
-1 225
0 225
1 482 578 1060
2 482 578 1060
3 482 1300 1782
4 482 1300 1782
5 482 2313 2795
. .. .
. .. .
. .. .
29 482 2313 2795
30 482 2313 2795
Transformer A
Transformer B
Year Cost(N1000s)
Losses (MWh)Iron Copper
Total Losses (MWh)
-1 70
0 400
1 666 520 1186
2 666 520 1186
3 666 1170 1836
4 666 1170 1836
5 666 2081 2747
. .. .
. .. .
. .. .
29 666 2081 2747
30 666 2081 2747
Annuity factor for 30 years at 10% discount factor = 9.427Annuity factor for 4 years at 10% discount factor = 3.170Annuity factor for 2 years at 10% discount factor = 1.736Annuity factor for the period 5 – 30 years at 10% discount factor = 6.257
Transformer A
Copper losses = 578(1.736)+1300(3.170-1.736)+2313x6.257 = 1003 + 1864 + 14472 = 17339MWhTotal = Copper losses + Iron Losses = 17,339 + 4,544 = 21,883 MWh
Cost of losses = 21,883 x 103 x 3.5 x 10-2
= N765,900
Total Cost of project = 225,000 + (225,000 x 1.1) + 765,900 = N1,238,400
Transformer B
Copper losses = (520 x 1.736) + 1170 x (3.170 – 1.736) + 2081 x 6.257 = 15,602 MWh
Total losses = Copper loss + Iron loss = 15,602 + (666 x 9.427) = 15, 602 + 6,278
= 21, 880 MWh
Cost of losses = 21,880 x 103 x 3.5 x10-2
= N765,813
Total cost of project = 400,000 + (70,000 x 1.1) + 765,813 = N1,242,813
ConclusionThe life span cost of Transformer A (N1,238,400) is less than Transformer B (N1,242,813), although the difference between the life span cost of the two transformers are small. Hence, Transformer A should be selected.
Electricity Industry Deregulation
Production, Transmission and Distribution of Electricity
pump
Combine Cycle System with Gas Turbine, Heat Recovery and Stem Turbine
Condenser
Cooling water
Fuel
Gas Turbine
Heat Recovery Unit
Power
PowerExhaust HeatSteam Turbine
pump
Power Operations
•Electricity cannot be stored.
•Electricity operation requires real-time balancing of supply and demand.
•Instantaneous supply and demand must always balance, otherwise system integrity will be compromised.
Supply of electricity involves these activities;
GenerationTransmission (High and Low voltage)Ancillary Services (Balancing)Monitoring and Control
Generation Plants Transmission Network Distribution Networks
ONE VERTICALY INTEGRATED ORGANISATION - NEPA
Coal, Gas, Hydro,Nuclear etc.
>= 132KV network <= 132 KV network
Structure of the Electricity Industry
Electricity Industry in Nigeria
Generation (PHCN’s Asset only): Thermal Station (MW) (4 stations) 3,950
Hydropower (MW) (3 stations) 1,938
Total Installed Capacity (MW) 5,888 from seven Generating Stations
Available Peak Capacity (MW) 4,000
TransmissionVoltage levels - 330kV & 132kV
DistributionVoltage levels - 33kV, 11kV & 0.415kV
Frequency50 +/-10%
NATIONAL DEMAND (ESTIMATE) 9,000MWNATIONAL GENERATION DEFICIT 5,000MW
Global Power Generation by Fuel Type
39%
17%2%17%
17%
8%
Coal Hydro Other Renewables Nuclear Natural Gas Oil , Diesel
Nigeria Power Generation by Fuel Type
31.28%
67.53%
1.20%
Coal Hydro Other Renewables Nuclear Natural Gas Oil , Diesel
Centralised Power Generation by Fuel Type
Current Situation of Nigeria’s Energy RequirementDemand (MW)
9,000
4,000
3,500
2,000
Hours p.a0
Estimated National Demand (including suppressed load)
Available peak NEPA Capacity
Ave lowest PHCN generation
Optimum PHCN generation
8760Ha Hb Hc
10% of rural households and approximately 40% of Nigeria’s total population have access to electricity.
This leaves 76 million people without electricity.
Source: IEA World Energy Outlook 2004
KWALE
UGHELLI
SHIRORO
MAMBILA
HYDROPAPALANTO
EGBINOKITIPUPA
ALAOJI-ABA
IBOM POWER
ZUNGERU
IKOT-ABASI
OKPAI
ABUJA
AJAOKUTA
KAINJI
JEBBA
AFAM
SAPELE
GURARA
TO THE NORTH
TO THE NORTH
PROPOSED POWER STATION
EXISTING POWER STATION
FEDERAL CAPITAL
DESTINATION OF POWER
Existing and Future Power Stations in Nigeria
Electricity Transmission Network in Nigeria
Challenges facing Nigeria’s Power Industry
•Slow expansion of power infrastructures
•Poor reliability of poor infrastructure
•Poor customer service
•Low operational efficiency
•Inadequate short and long term investments
•Inadequate manpower (i.e. skills) capabilities
US$ 1- 2 billion annual investment for next 10 years require in power sector to satisfy country’s energy requirements*.
Challenges facing power industry prompts Government to remove its industry monopoly.
Involve private sector participation and deregulate the structure and operation of the industry.
Deregulation requires industry participants to organise, manage and develop their operations in a completely new way.
Ver
tica
l In
tegr
atio
n
Five Levels of
Operations
Generation
Transmission
System Operation
Distribution
Supply/Retail
Functions of a Traditional Monopoly
Differences Between Vertical Integration and Unbundling
VerticalIntegration
Unbundled Structure
Physical ProductFlows
Internally co-ordinatedLittle motivation toreduce inventoryand cycle time
Determine in the marketRequire a higher skill set toevaluate, select and manageSuppliers and Customers
Money Flow Transfer pricesGovt. approvedbudgets with capon spending, fixedmarginpercentagesDisincentive toreduce cost
Price determined by Supply andDemand in the marketUn-competitive entities areacquired by other parties ordissolve
Information Flows Internal reportingwith someinformationrequired by Govtor regulators
Market reporting servicesInformation to stakeholders ,reporting on financial success
Forces for Unbundling / Deregulation
A successful economy needs adequate power supply at affordable price.
Nigeria Government embark on the process of reform of its electricity industry.
Unbundling is possible because of the following developments:
Technological Advancements
Political Developments
Economic Developments
Technological Advancements
•Advancement in operating High Voltage Transmission networks
Development and operation of 500 to 850 KV Transmission lines.
•Improvement in CCGT technology => Efficiency gain
Thermal efficiency of modern CCGT from 40 -55%
Easy Entry in generation
•Advancement in Information and Computing Technology
Quantum leap in computing processing power
Huge reduction in computing and telecomm costs
Political Developments
•Triumph of Free Market Economics
Increase Competition and Consumer Choice
Reduction/elimination of subsidy
•World wide Acceptance of Democracy / Transparency in Government
Collapse of Communism
•Attitude of Multilateral lending institutions
World Bank / IMF urging government to privatise
•Concern for the environment
Global warming - Less emission from CCGT than Coal Stations
Economic Developments
•Low Start up and operating cost of CCGT
Investment cost of typical CCGT btw 400 - 600 US$/KW against 800 -
1,400 US$/KW for coal station •Spreading of risk / decision making
Risks spread out amongst participants under unbundling
•Reduction of national debt
Govt sell companies to raise fund and pay debt
•Elimination of cross-subsidies
Minimise corruption in state owned enterprises
•Globalisation / Free Trade
Economic Rationale for Unbundling
GenerationGeneration TransmissionTransmission DistributionDistribution Retail/MarketingRetail/Marketing
Encouragement Encouragement of investment in of investment in generationgenerationTransparency of Transparency of pricingpricingImprove Improve operational operational efficiencyefficiency
True CompetitionTrue Competition
Transparency of Transparency of chargeschargesOpen AccessOpen AccessImprove Improve operational operational efficiencyefficiencyReduction of Reduction of losseslosses
System OperatorSystem Operator
(monopoly)(monopoly)
Improve Improve efficiency in the efficiency in the provision of provision of servicesservicesTransparency Transparency of pricingof pricingReduction of Reduction of losseslosses
Regional Regional monopolymonopoly
Increase customer Increase customer service and choiceservice and choiceTransparency and Transparency and reduction of pricingreduction of pricing
Open market / Open market / competition competition according to according to deregulation deregulation programmeprogramme
Deregulation and Restructuring requires utilities to organise, manage and develop the business in a completely new way
This involves new Business Architecture to include:
StrategyOrganisation StructureResourcesBehavioursEnd-to-end processesTechnologyInformationCustomer Relationship Management
Benefits and Costs of ReformBenefits
• Increase Productivity, Efficiency & Service
• Increase Plant Avail• Reduced Industry cost• Wider risk sharing amongst
industry participants • Foreign investment• Govt. sale receipt • Open Access• Stock Market placement
Costs• Weak co-ordination of long term
planning (e.g. risk of inadequate generation capacity)
• Job losses at old inefficient stations.
• Susceptible to ’gaming’ / abuse• Incidence of price volatility• High transaction costs• Stranded costs at inception