Module 7 : Power System Structures
Lecture 33 : Structure of a Deregulated Industry
Objectives
In this lecture you will learn the following
Structure of a deregulated industry.
Different entities in a deregulated industry
Ancilliary Service Management
Overview of A Deregulated Industry
Unbundling of traditionally vertically integrated utility.
One of the principal characteristics of a competitive structure is the identification and separation of the
various tasks which are normally carried out within the traditional organization so that these tasks can be
open to competition whenever practical and profitable.
This process is called unbundling .
An unbundled structure contrasts with the so-called vertically integrated utility of today where all tasks are
coordinated jointly under one umbrella with one common goal, that is, to minimize the total costs of
operating the utility.
One of the first steps in the restructuring process of the power industry has been the separation of the
transmission activities from the electricity generation activities.
The subsequent step was to introduce competition in generation activities, either through the creation of
power pools, provision for direct bilateral transactions or bidding in the spot markets.
On the other hand, the transmission system has significant economics of scale (i.e., it is economical to have
a common bulk transmission system of a large capacity rather than individual small capacity transmission
links). Consequently it was suited to be a natural monopoly and a separate entity. It was felt necessary to
introduce regulation in transmission so as to prevent it from overcharging for its services. The transmission
system thus became a neutral, natural monopoly subject to regulation by public authorities. And to
overcome the monopolistic characteristic, the trend has been to establish new legal and regulatory
frameworks offering third parties "open access" to the transmission network subject to technical constraints.
An important point to note is that the restructuring process was however not uniform in all countries. While
in many instances, it started with the breaking up of a large vertically integrated utility, in certain other
instances restructuring was characterized by the opening up of small municipal monopolies to competition.
In brief, Electric utilities are expected to split apart into unbundled companies, with each utility re-aligning
itself into several other companies that respectively focus on each part of the new industry, i.e., power
delivery and retailing. This is known as Disaggregation.
Under deregulation, the vertically integrated utility, one giant company that generates, transmits, distributes
and sells electricity in coordinated manner will become thing of the past. To function in an open access
system, such utilities will have to rearrange their operational organization to match the unbundled functions
they must perform. Each part of the company will need to work in its new form. Generation will have to
compete in the competitive power generation market place. T & D will have to operate as an open provider
of delivery services. Competition will be present in retailing.
Generally, the governments advocating deregulation want competition in energy production, and they want
to see significant levels of customer choice in the retail market for electricity. At the same time, it
recognizes that it is best to have only one transmission and one distribution system in any one area.
, Therefore, the purpose of deregulation is to restructure the electric industry so that power production and
retail sales are competitive, while delivery is still a regulated, monopoly franchise business.
Structure of deregulated industry
The figure below shows the typical structure of a deregulated electricity system with links of information and
money flow between various players.
The configuration shown in the figure is not a universal one. There exist variations across countries and
systems.
Different power sellers will deliver their product to their customers (via retailers), over a common set of T & D
wires. These operations are supervised by an independent system operator (ISO). The generators, T & D utility
and retailers communicate with the ISO. Mostly, customers communicate with a retailer, demanding energy. The
retailer contacts the generating company and purchases the power from it and makes it transferred to its
customer’s place via regulated T & D lines. The ISO is the one responsible for keeping track of various
transactions taking place between various entities. A customer can also enter into a bi-lateral contract with a
generator directly for supply of the required energy.
In the vertically integrated environment, the electricity bill consisted of a single amount to be paid towards the
generation, transmission and all other costs. But, in the restructured environment, the electricity price gets
segregated into the following:
Lecture 33 : Structure of a Deregulated Industry
Objectives
In this lecture you will learn the following
Structure of a deregulated industry.
Different entities in a deregulated industry
Ancilliary Service Management
Overview of A Deregulated Industry
Unbundling of traditionally vertically integrated utility.
One of the principal characteristics of a competitive structure is the identification and separation of the
various tasks which are normally carried out within the traditional organization so that these tasks can be
open to competition whenever practical and profitable.
This process is called unbundling .
An unbundled structure contrasts with the so-called vertically integrated utility of today where all tasks are
coordinated jointly under one umbrella with one common goal, that is, to minimize the total costs of
operating the utility.
One of the first steps in the restructuring process of the power industry has been the separation of the
transmission activities from the electricity generation activities.
The subsequent step was to introduce competition in generation activities, either through the creation of
power pools, provision for direct bilateral transactions or bidding in the spot markets.
On the other hand, the transmission system has significant economics of scale (i.e., it is economical to have
a common bulk transmission system of a large capacity rather than individual small capacity transmission
links). Consequently it was suited to be a natural monopoly and a separate entity. It was felt necessary to
introduce regulation in transmission so as to prevent it from overcharging for its services. The transmission
system thus became a neutral, natural monopoly subject to regulation by public authorities. And to
overcome the monopolistic characteristic, the trend has been to establish new legal and regulatory
frameworks offering third parties "open access" to the transmission network subject to technical constraints.
An important point to note is that the restructuring process was however not uniform in all countries. While
in many instances, it started with the breaking up of a large vertically integrated utility, in certain other
instances restructuring was characterized by the opening up of small municipal monopolies to competition.
In brief, Electric utilities are expected to split apart into unbundled companies, with each utility re-aligning
itself into several other companies that respectively focus on each part of the new industry, i.e., power
delivery and retailing. This is known as Disaggregation.
Under deregulation, the vertically integrated utility, one giant company that generates, transmits, distributes
and sells electricity in coordinated manner will become thing of the past. To function in an open access
system, such utilities will have to rearrange their operational organization to match the unbundled functions
they must perform. Each part of the company will need to work in its new form. Generation will have to
compete in the competitive power generation market place. T & D will have to operate as an open provider
of delivery services. Competition will be present in retailing.
Generally, the governments advocating deregulation want competition in energy production, and they want
to see significant levels of customer choice in the retail market for electricity. At the same time, it
recognizes that it is best to have only one transmission and one distribution system in any one area.
, Therefore, the purpose of deregulation is to restructure the electric industry so that power production and
retail sales are competitive, while delivery is still a regulated, monopoly franchise business.
Structure of deregulated industry
The figure below shows the typical structure of a deregulated electricity system with links of information and
money flow between various players.
The configuration shown in the figure is not a universal one. There exist variations across countries and
systems.
Different power sellers will deliver their product to their customers (via retailers), over a common set of T & D
wires. These operations are supervised by an independent system operator (ISO). The generators, T & D utility
and retailers communicate with the ISO. Mostly, customers communicate with a retailer, demanding energy. The
retailer contacts the generating company and purchases the power from it and makes it transferred to its
customer’s place via regulated T & D lines. The ISO is the one responsible for keeping track of various
transactions taking place between various entities. A customer can also enter into a bi-lateral contract with a
generator directly for supply of the required energy.
In the vertically integrated environment, the electricity bill consisted of a single amount to be paid towards the
generation, transmission and all other costs. But, in the restructured environment, the electricity price gets
segregated into the following:
