Consortium Title:
Project Duration -- Sept. 1998 to Sept. 2000
Dr. Marija D. Ilic , Principal Investigator
Mr. Stephen R. Connors , Supporting Investigator

Background Research Tasks References
Deliverables Funding

This is a proposal for multi-sponsored project concerned with operations, planning and pricing in a deregulated electric power industry. The research tasks proposed here are outgrowth of the MIT/McGill Consortium on Transmission Provision and Pricing Under Open Access performed during the period September 1, 1996 -- September 1, 1998 [1]. The major emphasis of this project has been on re-formulating basic objectives of power systems operations and planning under open access. As transmission unbundles from generation and distribution, it is necessary to define objectives for each part of the business. We find that these objectives strongly depend on the market structure in place [2]. While a majority of the research literature assumes a coordinated "PoolCo" structure, the formulations developed in [3] stress the fact that the actual energy markets are generally multilateral, with various degrees of coordination. Particularly interesting is the mapping described in [3] from a virtual transactions network into the bus data typically used by engineers for analyzing system conditions.
The second topic that has been studied is the development of new concepts for transmission provision and pricing. As the MIT/McGill Consortium approaches its completion, two specific ideas have emerged.
  1. The two-level provision of electricity under open access (one for generation and the other for transmission) and its pricing, allowing for functional unbundling of transmission provision from the energy market.
  2. Peak-load pricing approaches which promote transmission system investments.
Both are described in the Final Report [6].
Assessment of the work done during the first two years indicates that we have only begun to develop what is really needed. One thing is certain: We have identified problems which deserve further work. The proposed work is intended to do just that. Keeping in mind what we have learned so far, we propose the following tasks to work on over the next two years.  

  Brief summary of the proposed research tasks  
Task 1: Development of software for real-time transactions management.
Task 2: Reactive power/voltage control as a commodity.
Task 3: Direct power flow control and its pricing.
Task 4: Software for dealing with uncertainties under open access.
Task 5: Research on the relative market impact between generators and transmission providers in trying to capture transmission rents.
Task 6: The use of technology to help establish enforceable and tradeable property rights over alternating current networks.
Task 7: Examining the relationship between operating and security criteria and the primary energy markets.
Task 8: Modeling of competitive behavior and price dynamics on the energy market.
Task 1: Development of software for real-time transactions management.
This is a very broad subject in its own right. One fundamental question is how much of the real-time system management should and will be done on by forming active markets for system services (such as power balancing, managing security, voltage support, reserves, etc) and how much will have to be coordinated by a real-time operator, such as an Independent System Operator (ISO). We have already seen proposals for forming transmission companies and minimizing the role of ISOs.
A very careful look into the fundamentals of power systems operation is needed to answer this problem in an objective way. The questions range from developing sound criteria for transactions curtailment when required (the separation of reliability and efficiency caused actions remains a difficult technical and regulatory question), through criteria for must-run equipment, criteria for connecting new participants to the existing system and, in particular, criteria for coordination with the neighboring ISO's for reliability and efficiency. Some recent energy price fluctuations raise basic questions about how demand will be served in the least expensive way in an interconnection comprised of several ISOs.  
Task 2: Reactive power/voltage control as a commodity.
Only recently there has been recognition of the fact that reactive power compensation and voltage control tools may play critical role in facilitating market needs. Most of the transfer bottlenecks are related to the lack of voltage support, instead of, as it is commonly believed, to the thermal limits of the transmission lines.
Under this task we review present strategies for providing reactive power/voltage control of the US interconnection. The need for this service in the new industry can be unbundled into customers' needs for non-unity power factors and the reactive power loss compensation in order to transfer power over long electric distances.
We suggest that it is possible to provide this service through a well-defined market for reactive power support. Defining the rules of such market is the main objective of this research task.
A particularly interesting fact is that most of the tools for this service do not display economies of scale and are therefore easier to price in a competitive way than the large transmission equipment investments. We also seek to explore the implications of not having an active market for this service. The results will be illustrated on several large systems.  
Task 3: Direct power flow control and its pricing.
The present common approach to wheeling power across administratively divided areas is to actively curtail the transactions which cause overflow on the interconnecting tie-lines. As an alternative, one could think of developing a market for transmission congestion elimination. Physically, this is done by creating counter-flow and, therefore, enabling transactions which would otherwise create congestion. The application of this concept could be in a single ISO consisting of several zones defined by congestion bottlenecks, or in an interconnection comprising several ISOs. Under this task we explore the principles of such a market (bidding strategies, rules, rights and responsibilities). We also demonstrate on medium size systems how this could work, and its implications with coordinated generation management. A typical problem with this approach is that congestion locations vary with market conditions. To avoid this problem, we will develop so-called dynamic zones, which are recomputed as necessary. The software for creating dynamic zones and using them for transmission congestion management will be illustrated on realistic size systems.  
Task 4: Software for dealing with uncertainties under open access.
We have already shown in our work that with so-called perfect information many approaches to transmission provision and pricing will generally lead to the same, or very similar, results. The real differences arise because market conditions as well as the system equipment conditions are quite uncertain.
In order for a transmission service provider to play a pro-active role in serving the energy market, it is necessary to develop methods and software for learning and publicly projecting likely system bottlenecks. In this task we are concerned with the type of information necessary to identify to the general public future transmission needs to induce investments in transmission under the competitive market conditions, and improve overall system performance.
These tools would help minimize arbitrage opportunities created by uncertainties. It is important to have tools of this sort for short-term (day, or week ahead) operational, as well as long-term investment purposes. At present very little is publicly known about the likely needs for transmission system enhancements. Without this information, it is practically impossible to achieve benefits for customers.
Particularly critical is the question of asymmetric roles of generation provision (competitive, market-based), and transmission (still fully regulated). This situation creates particularly difficult questions when it comes to the minimal information necessary to be made public under open access, and still maintain sufficient confidentiality.
In other words, technical, economic and regulatory solutions are needed for dealing with uncertainties in the competitive power industry. Since power system conditions are constantly evolving (demand varies over many time horizons) it is not possible to talk about a single economic equilibrium -- instead, the system is in constant flux. This fact requires a detailed study of the impacts of uncertainties, since general results from competitive economics are not directly applicable.  
Task 5: Research on the relative market impact between generators and transmission providers in trying to capture transmission rents.
Some researchers have a theory that generators in a constrained exporting region will consistently bid up the price in the constrained region to the market price at the other end of the line. This bidding would effectively capture the value of the line from the exporting generators by equalizing the spot market prices.
As a transmission company, one should naturally be concerned about this possibility. One option proposed in Australia is transport bidding, in which the transmission provider can bid their transmission capacity into the spot market. The transmission provider (and the holders of transmission rights) would be allowed to bid their share of the line rating into the spot market. If the transport bid was accepted, the Power Exchange (PX) would collect the transport fee from the importing region, and reimburse the transmission provider. Each node would have a marginal price set by the lesser of (1) the marginal local generation and (2) the least cost import, recognizing transport bidding.
One idea of interest to us might be to discuss how a PX could work with transport bidding. An intuitive sense is that transport bidding could be readily incorporated into most PX's but this needs to be developed.  
Task 6: The use of technology to help establish enforceable and tradeable property rights over alternating current networks.
All of the ideas for decentralized transmission system development require well-defined property rights (since they are the basis of financing the transmission system), and yet AC networks are very dynamic and non-linear.
A catalog of "flow controlling" transmission technologies (FACTS), with some indication of their current capabilities, would be useful. We will also discuss how security-constrained system operation might incorporate those technologies, and the transport bidding described above.  
Task 7: Examining the relationship between operating and security criteria and the primary energy markets.
Operating criteria do vary across the US, complicating transmission service over multiple regions. An ISO's operating rules and criteria will have unequal commercial impacts on different generators. We do not believe many generators and traders are aware of those impacts. For example, changes in transmission criteria will change ATC, and that will impact a trader's ability to fulfill local sell contracts with remote generation. A trader selling in New England from capacity in New York could be significantly hurt by changes in operating criteria that reduce ATC from NY to NE, but we would bet that most traders are not fully aware of these risks. While we could go on and on (e.g. the interface issues between the "last minute" financial markets and the physical markets, we believe that these topics are of the greatest interest to transmission providers of the future.  
Task 8: Modeling of competitive behavior and price dynamics on the energy market.
This task focuses on developing a unified model of the energy market, incorporating the inter-temporal aspects of power trading, as well as the effects of external factors on market price. The task of analyzing price dynamics on electricity markets provides a set of unique challenges. In order to develop products that meet the demands of this emerging market, it is essential to have a good understanding of the fundamental technical and economic processes which govern the trade of electric power. Specific aspects of the model to be conducted are:
Quantitative Modeling: Study the impact of a series of factors such as weather, available transmission capacity, reservoir water levels, generator and line outages etc. on market price. By developing simple linear or discrete relationships between these models and price levels, then combining these relations into a unified system model, one is able to get a clear overview of how the system evolves.
Qualitative Modeling: Model the process by which buyers and sellers compete on the electric power market. This behavior cannot be described by the same rigorous models used to judge the impact of physical factors. Instead one needs to develop indexes describing when the market is performing efficiently, and under which conditions it is susceptible to gaming. In the latter case one can provide bounds on the degree to which gaming can influence market price. Such a function would prove highly useful to both market participants trading for profit, and to regulatory entities evaluating the efficiency of the market.
Inter-Temporal Modeling: In order for traders and power producers to position themselves effectively in the market they need a good understanding of the short term dynamics between the day-ahead, hour-ahead, and real-time markets, as well as the interdependence of prices on the energy, capacity and transmission markets. In addition one needs to study the underlying economic interdependence of the markets, taking into account both equilibrium conditions and dynamic constraints.  

  Expected Deliverables

Multi-sponsored projects work best when there is a good dialogue and level of interaction between sponsors and researchers. The main deliverable will be in terms of these interactions which usually take form of regular quarterly workshops. We would like to also encourage visits to individual sponsors by the researchers directly working on the task of interest to the member company. This is a good way of information dissemination as well as obtaining access to future engineers graduating from MIT.
More specifically, the following are deliverables under this project:
  1. Quarterly workshops to review the research in progress. (At these meetings we also have regulators and industry speakers evaluate our ideas and estimate their merit.)
  2. Masters and PhD students graduating from MIT with a unique background ranging from engineering through economics and policy. (Several of our recent graduates are currently hired by FERC and ISOs in forming.)
  3. Theses, technical papers and reports.
  4. New concepts for operating and pricing in the new industry.
  5. Access to analytic models developed.
  6. Access to software for testing the concepts developed. (Depending on the specific task, this software could be of limited use for relatively small systems and/or could be ready to test on realistic size power systems.)  

  Funding Requirements

We seek from each participant $75 000/year for two years. The number of actual project participants will determine which of the above tasks will be pursued first and level of detail
Roughly one participant per task-year is required, at the minimum. The definition of tasks can be refined based upon sponsors' interest.  


[1]  Consortium Research Project entitled "Transmission Provision and Pricing under Open Access", Principal Investigator: Marija Ilic, MIT, Supporting Investigator: Francisco Galiana, McGill University, September 1996-September 1998.
[2]  Ilic, M. and F.D. Galiana, "Power Systems Operation: Old vs. New," in Electric Power Systems Restructuring: Engineering and Economics, Kluwer Academic Publishers, 15-107, 1998.
[3]  Galiana, F.D. and M.D. Ilic, "Framework and Methods for the Analysis of Bilateral Transactions," in Electric Power Systems Restructuring: Engineering and Economics, Kluwer Academic Publishers, 108-128, 1998.
[4]  Coxe, R. and M. Ilic, "System Planning Under Competition," in Electric Power Systems Restructuring: Engineering and Economics, Kluwer Academic Publishers, 285-335, 1998.
[5]  Younes, Z. and M. Ilic, "Transmission Networks and Market Power," in Electric Power Systems Restructuring: Engineering and Economics, Kluwer Academic Publishers, 337-386, 1998.
[6]  Final Report on [1], September 1998.  

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