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Power System Economics: Designing Markets for Electricity

ISBN: 978-0-471-15040-4
496 pages
May 2002, Wiley-IEEE Press
Power System Economics: Designing Markets for Electricity (0471150401) cover image


The first systematic presentation of electricity market design-from the basics to the cutting edge. Unique in its breadth and depth. Using examples and focusing on fundamentals, it clarifies long misunderstood issues-such as why today's markets are inherently unstable. The book reveals for the first time how uncoordinated regulatory and engineering policies cause boom-bust investment swings and provides guidance and tools for fixing broken markets. It also takes a provocative look at the operation of pools and power exchanges.
* Part 1 introduces key economic, engineering and market design concepts.
* Part 2 links short-run reliability policies with long-run investment problems.
* Part 3 examines classic designs for day-ahead and real-time markets.
* Part 4 covers market power, and
* Part 5 covers locational pricing, transmission right and pricing losses.
The non-technical introductions to all chapters allow easy access to the most difficult topics. Steering an independent course between ideological extremes, it provides background material for engineers, economists, regulators and lawyers alike. With nearly 250 figures, tables, side bars, and concisely-stated results and fallacies, the 44 chapters cover such essential topics as auctions, fixed-cost recovery from marginal cost, pricing fallacies, real and reactive power flows, Cournot competition, installed capacity markets, HHIs, the Lerner index and price caps.

About the Author
Steven Stoft has a Ph.D. in economics (U.C. Berkeley) as well as a background in physics, math, engineering, and astronomy. He spent a year inside FERC and now consults for PJM, California and private generators. Learn more at www.stoft.com.
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Table of Contents

List of Results and Fallacies.


Acronyms and Abbreviations.


Part 1: Power Market Fundamentals.


Why Deregulate?

What to Deregulate.

Pricing Power, Energy, and Capacity.

Power Supply and Demand.

What Is Competition?

Marginal Cost in a Power Market.

Market Structure.

Market Architecture.

Designing and Testing Market Rules.

Part 2: Reliability, Price Spikes and Investment.

Reliability and Investment Policy.

Price Spikes Recover Fixed Costs.

Reliability and Generation.

Limiting the Price Spikes.

Value-of-Lost-Load Pricing.

Operating-Reserve Pricing.

Market Dynamics and the Profit Function.

Requirements for Installed Capacity.

Inter-System Competition for Reliability.

Unsolved Problems.

Part 3: Market Architecture.


The Two-Settlement System.

Day-Ahead Market Designs.

Ancillary Services.

The Day-Ahead Market in Theory.

The Real-Time Market in Theory.

The Day-Ahead Market in Practice.

The Real-Time Market in Practice.

The New Unit-Commitment Problem.

The Market for Operating Reserves.

Part 4: Market Power.

Defining Market Power.

Exercising Market Power.

Modeling Market Power.

Designing to Reduce Market Power.

Predicting Market Power.

Monitoring Market Power.

Part 5: Locational Pricing.

Power Transmission and Losses.

Physical Transmission Limits.

Congestion Pricing Fundamentals.

Congestion Pricing Methods.

Congestion Pricing Fallacies.

Refunds and Taxes.

Pricing Losses on Lines.

Pricing Losses at Nodes.

Transmission Rights.




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Author Information

STEVEN STOFT has a BS in engineering mathematics and a PhD in economics from the University of California at Berkeley, and over ten years of experience in power market analysis and design. He has held positions at FERC, the University of California's Energy Institute, and the Lawrence Berkeley National Laboratory. He is currently a consultant to the Pennsylvania-New Jersey-Maryland ISO (PJM), California's Electricity Oversight Board, the U.S. Department of Energy, and an independent power producer.
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"This book is for anyone seeking to understand how cost/price relationships involved in electrical energy production and distribution may ideally be determined." (Electrical Apparatus, August 2002)

"...the quality of its content deserves a wide readership..."(Power System Economics The Journal of Energy Literature, Vol.V111, No.2, 2002)

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