Power System Economics - Unilag Lecture Notes 3 Auto Saved]

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