PSOC Unit 3

RESTRUCTURING OF POWER SYSTEM

(NOTES)
Introduction
The power industry across the globe is experiencing a radical change in its business as well as
in an operational model where, the vertically integrated utilities are being unbundled and
opened up for competition with private players. This enables an end to the era of monopoly.
Right from its inception, running the power system was supposed to be a task of esoteric
quality. The electric power was then looked upon as a service. Control consisting of planning
and operational tasks was administered by a single entity or utility. The vertical integration of
all tasks gave rise to the term – vertically integrated utility. The arrangement of the earlier
setup of the power sector was characterized by operation of a single utility generating,
transmitting and distributing electrical energy in its area of operation. Thus, these utilities
enjoyed monopoly in their area of operation. They were often termed as monopoly
utilities. Why were earlier utilities the ‘monopolies'? The reason for monopoly can be traced
right back to the early days when electricity was comparatively a new technology. The
skeptical attitude of the government towards electricity led to investment by private players
into the power sector, who in turn, demanded for the monopoly in their area of operation.
This created a win-win situation for both- government and the electrical technology
promoters. However, the government would not let the private players enjoy the monopoly
and exploit the end consumer and hence introduced regulation in the business. Thus, the
power industries of initial era became regulated monopoly utilities . The structure of a
conventional vertically integrated utility is shown in Figure 1.1. As evident from the figure,
there was only a single utility with whom the customer dealt with. Thus, only two entities
existed in the power business: a monopolist utility and the customer.
 Fig 1.1

What does ‘regulation’ mean? The regulations are generally imposed by the government or
the government authority. These essentially represent a set of rules or framework that the
government has imposed so as to run the system smoothly and with discipline, without undue
advantage to any particular entity at the cost of end consumer. All practical power systems of
earlier days used to be regulated by the government. This was obviously so. The old era
power industries were vertically integrated utilities and enjoyed monopoly in their area of
operation. Whenever a monopoly is sensed in any sector, it is natural for the government to
step in and set up a framework of way of doing business, in order to protect end consumer
interests. Some of the characteristics of monopoly utility are: 

1. Single utility in one area of operation enjoying monopoly.

2. Regulated Framework: The utility should work under the business framework setup
by the government.
3. Universal Supply Obligation (USO): Utility should provide power to all those
customers who demand for it.
4. Regulated Costs: The return on the utility's investments is regulated by the
government.

 In a nutshell, regulation is about checking the prices of the monopolist in the absence of
private players and market forces. 

Reasons for restructuring / deregulation of power industry 

The next obvious question is, “what is deregulation or restructuring of an industry?” From the
name, one can sense discontinuation of the framework provided by the regulation. In other
words, deregulation is about removing control over the prices with introduction of market
players in the sector. However, this is not correct in a strict sense. An overnight change in the
power business framework with provision of entry to competing suppliers and subjecting
prices to market interaction, would not work successfully. There are certain conditions that
create a conducive environment for the competition to work. These conditions need to be
satisfied while deregulating or restructuring a system. Sometimes, the word ‘deregulation’
may sound a misnomer. ‘Deregulation’ does not mean that the rules won’t exist. The rules
will still be there, however, a new framework would be created to operate the power industry.
That is why the word ‘deregulation’ finds its substitutes like ‘re-regulation’, ‘reforms’,
‘restructuring’, etc. The commonly used word in Europe is ‘liberalization’ of power industry;
‘deregulation’ is a more popular phrase in US. If the power industries worked successfully
with the regulated monopoly framework for over 100 years, what was the need for
deregulating or changing the business framework of the system? There are many reasons that
fuelled the concept of deregulation of the power industry. One major thought that prevailed
during the early nineties raised questions about the performance of monopoly utilities. The
takers of this thought advocated that monopoly status of the electric utilities did not provide
any incentive for its efficient operation. In privately owned utilities, the costs incurred by the
utility were directly imposed upon the consumers. In government linked public utilities,
factors other than the economics, for example, treatment of all public utilities at par,
overstaffing, etc. resulted in a sluggish performance of these utilities. The economists started
promoting introduction of a competitive market for electrical energy as a means of benefit for
the overall powerector. This argument was supported by the successful reform experiences of
other sectors such as airlines, gas, telephone, etc. Another impetus for deregulation of power
industry was provided by the change in power generation technology. In the earlier days,
cost-effective power generation was possible only with the help of mammoth thermal
(coal/nuclear) plants. However, during the mid eighties, the gas turbines started generating
cost effective power with smaller plant size. It was then possible to build the power plants
near the load centers and also, an opportunity was created for private players to generate
power and sell the same to the existing utility. This technology change, supposed to have
provided acceleration to the concept of independent power producers, supported the concept
of deregulation further. This technology change is supposed to have provided acceleration to
the concept of independent power producers. This further supported concept of deregulation.
This was specifically true where the financial losses were apparently high which was
prevalent in some of the developing countries. It should be noted that these are the indicative
or major reasons for introducing the concept of deregulation in power industry. There are
many other reasons as well. One of the important reasons is the condition under which power
systems were regulated, did not exist any more. There was no wind of skepticism about the
electrical technology and all the initial investments in infrastructure were already paid back.
Further, the deregulation aims at introducing competition at various levels of power industry.
The competition is likely to bring down the cost of electricity. Then, the activities of the
power industry would become customer centric. The competitive environment offers a good
range of benefits for the customers as well as the private entities. It is claimed that some of
the significant benefits of power industry deregulation would include: 

1. Electricity price will go down: It is a common understanding that the competitive

prices are lesser than the monopolist prices. The producer will try to sell the power at
its marginal cost, in a perfectly competitive environment.
2. Choice for customers: The customer will have choice for its retailer. The retailers will
compete not only on the price offered but also on the other facilities provided to the
customers. These could include better plans, better reliability, better quality, etc.
3. Customer-centric service: The retailers would provide better service than what the
monopolist would do.
4. Innovation: The regulatory process and lack of competition gave electric utilities no
incentive to improve or to take risks on new ideas that might increase the customer
value. Under deregulated environment, the electric utility will always try to innovate
 something for the betterment of service and in turn save costs and maximize the
profit.

 The deregulation of the industry has provided electrical energy with a new dimension where
it is being considered as a commodity. The ‘commodity’ status given to electrical power has
attracted entry of private players in the sector. The private players make the whole business
challenging from the system operator’s point of view, as it now starts dealing with many
players which are not under it’s direct control. This calls for introduction of fair and
transparent set of rules for running the power business. The market design structure plays an
important role in successful deregulation of power industry. 

Understanding the restructuring process

 The process of deregulation has taken different formats in different parts of the world. Also,
the reasons for power sector to adopt the reforms vary from country to country. For the
developed countries, introduction of competition to achieve social welfare was probably the
most important reason. On the other hand, the developing countries mainly banked on the
capacity addition through entry of private players. It is observed that neither, there is lone
reson for driving deregulation of power industry nor is there a single objective of the
same. The restructuring process starts with the unbundling of the originally vertically
integrated utility. This essentially leads to separate the activities involved in an integrated
power system leading to creation of functional partition amongst them. For example, the
unbundling of power industry involves separating transmission activity from the generation
activity. Further, distribution can be separated from transmission. Thus, these three mutually
exclusive functions are created and there are separate entities or companies that control these
functions. Then, the competition can be introduced in the generation activity by allowing
other private participants in this segment. In contrast to the vertically integrated case where
all the generation is owned by the same utility, there is a scope for private players to sell their
generation at competitive prices. The generators owned by the earlier vertically integrated
utility will then compete with these private generators. The transmission sector being a
natural monopoly is most unlikely to have competing players in the sector. This is because
for natural monopolies like transmission companies, the business becomes profitable only
when output is large enough. Figure 1.2 shows the representative structure of deregulated
power system. In contrast to the vertically integrated utility structure, it can be seen that there
are many alternative paths along which the money flows. It is evident that there are many
more other entities present, apart from the vertically integrated utility and the customers. It
should be noted that there can be many more versions of deregulated structure.
  

Various Entities Involved in Deregulation: 

The introduction of deregulation has introduced several new entities in the electricity market
place and has simultaneously redefined the scope of activities of many of the existing players.
Variations exist across market structures over how each entity is particularly defined and over
what role it plays in the system. However, on a broad level, the following entities can be
identified: 

1. Genco (Generating Company):  Genco is an owner-operator of one or more generators that runs
them and bids the power into the competitive marketplace. Genco sells energy at its
sites in the same manner that a coal mining company might sell coal in bulk at its
mine.
2. Transco (Transmission Company): Transco moves power in bulk quantities from where it is
produced to where it is consumed. The Transco owns and maintains the transmission
facilities, and may perform many of the management and engineering functions
required to ensure the smooth running of the system. In some deregulated industries,
the Transco owns and maintains the transmission lines under the monopoly, but does
not operate them. That is done by Independent System Operator (ISO). The Transco is
paid for the use of its lines.
3. Discom (Distribution Company): It is the owner-operator of the local power delivery system,
which delivers power to individual businesses and homeowners. In some places, the
local distribution function is combined with retail function, i.e. to buy wholesale
electricity either through the spot market or through direct contracts with Gencos and
supply electricity to the end use customers. In many other cases, however, the Discom
does not sell the power. It only owns and operates the local distribution system, and
obtains its revenue by wheeling electric power through its network.
4. Resco (Retail Energy Service Company): It is the retailer of electric power. Many of these will be the
retail departments of the former vertically integrated utilities. A Resco buys power
 from Gencos and sells it directly to the consumers. Resco does not own any electricity
network physical assets.
5. Market Operator: Market operator provides a platform for the buyers and sellers to sell and
buy the electricity. It runs a computer program that matches bids and offers of sellers
and buyers. The market settlement process is the responsibility of the market operator.
The market operator typically runs a day-ahead market. The near-real-time market, if
any, is administered by the system operator.
6. System Operator (SO): The SO is an entity entrusted with the responsibility of ensuring the
reliability and security of the entire system. It is an independent authority and does
not participate in the electricity market trades. It usually does not own generating
resources, except for some reserve capacity in certain cases. In order to maintain the
system security and reliability, the SO procures various services such as supply of
emergency reserves, or reactive power from other entities in the system. In some
countries, SO also owns the transmission network. The SO in these systems is
generally called as Transmission System Operator (TSO). In the case of a SO being
completely neutral of every other activity except coordinate, control and monitor the
system, it is generally called as Independent System Operator (ISO).
7. Customers: A customer is an entity, consuming electricity. In a completely deregulated
market where retail sector is also open for competition, the end customer has several
options for buying electricity. It may choose to buy electricity from the spot market
by bidding for purchase, or may buy directly from a Genco or even from the local
retailing service company. On the other hand, in the markets where competition exists
only at the wholesale level, only the large customers have privilege of choosing their
supplier.

INTRODUCTION TO ISSUES INVOLVED IN DEREGULATION

Electricity, as a commodity, can not be compared with any other commodity traded in the market.
This is because it has some distinguishing characteristics of its own, which demand satisfaction of
technical constraints before accomplishing the commercial trades. Two important features of
electricity as a commodity are: need for real time balance and inability to wheel the commodity
through desired path (in bulk). Hence, a set of principles laid down by standard micro-economic
theory can not be mapped directly to the electricity commodity markets. Tackling network congestion
is one of the challenging issues of the de-regulated era. Transmission network provides the path
through which transactions are made in a power market. But each transmission network has its own
physical and operating limits like line flow limits, bus voltage magnitude limits and more. The power
injection and withdrawal configuration should be such that no limit gets violated. If the network is
operated beyond these limits, it may, even, result in the entire system blackout. Therefore, any
arbitrary set of transactions can’t be organized on the power network. This has given rise to a new
problem under the restructured power system environment, referred to as congestion management.
There are many ways in which congestion is formally defined but to explain in simple words, when
some components in a power network appear to be overloaded due to a trading arrangement, that
particular arrangement is said to create congestion on the network. The purpose of congestion
management is to make necessary corrections in order to relieve congestion. It can be easily
appreciated that under the vertically integrated structure, network congestion, in fact, is not a
challenging task. This is because all the resources in the system are under the direct control of the
monopolist. Thus, this is the sole responsibility of the monopolist to maintain its transmission
network. Provision of ancillary services is another tough task carried out by the system operator under
the deregulated framework. Ancillary services are defined as all those activities on the interconnected
grid that are necessary to support the transmission of power while maintaining reliable operation and
ensuring the required degree of quality and safety. Under the deregulated power system environment,
the system operator acquires a central coordination role and carries out the important responsibility of
providing for system reliability and security. It manages system operations like scheduling and
operating the transmission related services. The SO also has to ensure a required degree of quality and
safety and provide corrective measures under contingent conditions. In this respect, certain services,
such as scheduling and dispatch, frequency regulation, voltage control, generation reserves, etc. are
required by the power system, apart from basic energy and power delivery services. Such services are
commonly referred to as ancillary services. In deregulated power systems, transmission networks are
available for third party access to allow power wheeling. In such an environment, the ancillary
services are no longer treated as an integral part of the electric supply. They are unbundled and priced
separately and system operators may have to purchase ancillary services from ancillary service
providers. Then, there are certain issues like market design and market power which need regulatory
intervention. Issues pertaining to market design revolve around choice made in the selection of
dispatch philosophies, choice of various pricing schemes, choice between number of markets with
multiple gate closures, etc., from various alternatives. The market architecture, which maps various
markets on timeline, is also an important sub-topic of market design process. Existence of market
power shows the signs of deviation from the prefect competition. In general, market power is referred
to as ability of market participants to profitably maintain the market price above or below the
competitive level for a significant period of time. To tackle the situation, an indirect regulatory
intervention in the form of market design rules is needed. Thus, as mentioned earlier, deregulation
does not mean ceasing to have rules. It is the ‘restructuring’ of the power business framework. More
rigorous treatment to these issues is given in further chapters. 

Reasons and objectives of deregulation of various power systems

across the world 
Restructuring or deregulation is a broad term and can have different meanings in different countries.
This is because the changes essential for betterment of power sector depend on the prevailing
conditions in the power sector of respective countries. Further, the word – betterment can be looked
upon subjectively. For example, well developed, industrialized countries can expect price to go down
and these countries can treat the change in the prices as betterment. On the other hand, the developing
countries need to make radical changes in the policy and regulation such that barrier to entry for
private players is removed. The effective betterment can be looked upon from this perspective for
developing countries. In this section we will see, in brief, the issues that led to restructuring of the
power industry for following regions / countries: US , UK , Nordic Pool and developing
countries. The US The US electric utilities, from the very beginning were privately owned and
worked in a vertically integrated fashion. The developed countries like US had well functioning and
efficient electricity systems. However for some systems, so long as consumers were concerned, they
were not satisfied with the rising costs of electricity. For some other systems, utility management
found that running the system was not viable due to low tariff. In some systems, pressure from
smaller players to open up the business for competition played a major role. By and large,
deregulation took place in developed countries by pressure to reduce costs while simultaneously
increasing competitiveness in the market. Existence of market power shows the signs of deviation from the prefect
competition. In general, market power is referred to as ability of market participants to profitably
maintain the market price above or below the competitive level for a significant period of time. To
tackle the situation, an the indirect regulatory intervention in the form of market design rules is
needed. Thus, as mentioned earlier, deregulation does not mean ceasing to have rules. It is the
‘restructuring’ of the power business framework. More rigorous treatment to these issues is given in
further chapters. The UK The transformation of the British power sector proceeded along three paths
in 1990. First, the traditional industry was unbundled both vertically and horizontally. High-voltage
transmission assets were transferred to a new National Grid Company (NGC). Coal and oil fired units
were divided among two companies National Power and PowerGen. Nuclear Electric retained control
of all nuclear units. At the outset, National Power had 52 percent of total generating capacity,
PowerGen had 33 percent, and Nuclear Power had the remaining 15 percent. The second set of
changes involved ownership. Both National Power and PowerGen became private companies in 1991,
whereas the difficulties associated with nuclear power resulted in continued government ownership of
all nuclear units. Approximately 30 percent of shares in National Power and PowerGen were sold to
the public,an equal amount to foreign and institutional investors. The remaining 40 percent was held
by the government until 1995. The third set of changes sought to open the system to competition,
wherever possible, while continuing necessary regulations. Vertical and horizontal restructuring of
power generation was based on the assumption that generation had become workably competitive and
would become increasingly so with new market entrants. A report on reform process was floated by
the regulator in 2001 which stated that wholesale electricity prices had not fallen in line with
reductions in generators’ input costs and that a lack of supply side pressure and demand side
participation; and inflexible governance arrangements had prevented reform of the arrangements. The
Nordic Pool The reforms in Nordic countries were inspired by the electricity market reforms in
England and Wales in 1989, as well as by widely held beliefs that increased competition would raise
power industry efficiency to the benefit of consumers. Norway was first amongst the Nordic countries
to liberalize its electricity market in 1991, but without privatization. The Norwegian electricity sector
remains almost entirely in public hands. Rather than implement national reforms, the other Nordic
countries chose to reform by merging with the existing Norwegian market, Sweden joining the
expanded Nordic pool in 1996, Finland in 1998 and Denmark in 1999. The Developing Countries The
case of developing countries is different from that of other countries. In these countries, the electricity
supply is treated as a social service rather than a market commodity. The ownership of the power
sector in these countries is directly under the governments of respective countries. These state owned-
controlled systems have led to the promotion of inefficient practices over a period. The power sectors
of these countries are marked by supply shortages. There has been an inability to add to the generating
capacity. The subsidies and high transmission and distribution losses are the major concerns before
these systems. Another consequence of state control over electric utilities was the high level of
overstaffing. The inability to raise funds for capacity addition invited financial support from
international financial institutions like World Bank. These institutions mandated opening of the power
sector for private companies which were contracted under build, own, operate and transfer (BOOT)
scheme. 

  Transmission Congestion Management 

Congestion management in a multi-buyer/ multi-seller system is one of the most involved
tasks if it has to have a market based solution with economic efficiency. In a vertically
integrated utility structure, activities such as generation, transmission and distribution are
within direct control of a central agency or a single utility. Generation is dispatched in order
to achieve the system least cost operation. Along with this, the optimal dispatch solution
using security constrained economic dispatch eliminates the possible occurrence of
congestion. This effectively means that generations are dispatched such that the power flow
limits on the transmission lines are not exceeded. One should not expect things to be as
simple in a deregulated power environment. In a deregulated environment, every buyer wants
to buy power from the cheapest generator available, irrespective of relative geographical
location of buyer and seller. As a consequence of the this, the transmission corridors
evacuating the power of cheaper generators would get overloaded if all such transactions are
approved. Congestion is then said to have occurred when system operator finds that all the
transactions can not be allowed on account of overload on the transmission network.
Congestion management is a mechanism to prioritize the transactions and commit to such a
schedule which would not overload the network. Despite these measures, congestion can still
occur in real time following a forced outage of transmission line. The system operator then
handles this situation by means of real time congestion management. Thus, congestion
management involves precautionary as well as remedial action on system operator’s part, as
follows: 

 Allow only that set of transactions which, taken together, keeps the transmission
system within limits.
 Even if this care is taken, in real time, the transmission corridors may get overloaded
due to unscheduled flows. The system operator has to take some remedial action.

 The scope of transmission congestion management in the deregulated environment involves

defining a set of rules to ensure control over generators and loads in order to maintain
acceptable level of system security and reliability. The rules should ensure market efficiency
maximization with short term as well as long term horizons. The robustness of rule set is
important as under open market structure a set of players will always be looking for
loopholes in the mechanism to exploit it. In a deregulated structure, the market must be
modeled so that the market participants (buyers and sellers of energy) engage freely in
transactions and play as per market forces, but in a manner that does not threaten the security
of the power system. Thus, irrespective of the market structure in place, congestion
management has universally become an important activity of power system operators.
Universally, the dual objectives of congestion management schemes have been to minimize
the interference of the transmission network in the market for electrical energy and to
simultaneously ensure secure operation of the power system. This chapter is aimed at
explaining various congestion management schemes employed under various market
structures. The chapter provides classification of congestion management schemes based on
the economic efficiency associated with each one of them. Definition of
Congestion Whenever the physical or operational constraints in a transmission network
become active, the system is said to be in a state of congestion. The possible limits that may
be hit in case of congestion are: line thermal limits, transformer emergency ratings, bus
voltage limits, transient or oscillatory stability, etc. These limits constrain the amount of
electric power that can be transmitted between two locations through a transmission network.
Flows should not be allowed to increase to levels where a contingency would cause the
network to collapse because of voltage instability, etc. The peculiar characteristics associated
with electrical power prevent its direct comparison with other marketable commodities. First,
electrical energy can not be stored in large chunks. In other words, the demand of electric
power has to be satisfied on a real time basis. Due to other peculiarities, the flexibility of
directly routing this commodity through a desired path is very limited. The flow of electric
current obeys laws of physics rather than the wish of traders or operators. Thus, the system
operator has to decide upon such a pattern of injections and take-offs, that no constraint is
violated. How Transfer capability is limited?  Congestion, as used in deregulation parlance,
generally refers to a transmission line hitting its limit. The ability of interconnected
transmission networks to reliably transfer electric power may be limited by the physical and
electrical characteristics of the systems including any or more of the following: 

 Thermal Limits: Thermal limits establish the maximum amount of electrical current

that a transmission line or electrical facility can conduct over a specified time period
before it sustains permanent damage by overheating.
 Voltage Limits: System voltages and changes in voltages must be maintained within
the range of acceptable minimum and maximum limits. The lower voltage limits
determine the maximum amount of electric power that can be transferred.
  Stability Limits: The transmission network must be capable of surviving disturbances
through the transient and dynamic time periods (from milliseconds to several minutes,
respectively). Immediately following a system disturbance, generators begin to
oscillate relative to each other, causing fluctuations in system frequency, line
loadings, and system voltages. For the system to be stable, the oscillations must
diminish as the electric system attains a new stable operating point. The line loadings
prior to the disturbance should be at such a level that its tripping does not cause
system-wide dynamic instability.

 The limiting condition on some portions of the transmission network can shift among
thermal, voltage, and stability limits as the network operating conditions change over time.
For example, for a short line, the line loading limit is dominated by its thermal limit. On the
other hand, for a long line, stability limit is the main concern. Such differing criteria further
lead to complexities while determining transfer capability limits. Importance of congestion
management in the deregulated environment If the network power carrying capacity is
infinite and if there are ample resources to keep the system variables within limits, the most
efficient generation dispatch will correspond to the least cost operation. Kirchoff’s laws
combined with the magnitude and location of the generations and loads, the line impedances
and the network topology determine the flows in each line. In real life, however, the power
carrying capacity of a line is limited by various limits as explained earlier. These power
system security constraints may therefore necessitate a change in the generator schedules
away from the most efficient dispatch. In the traditional vertically integrated utility
environment, the generation patterns are fairly stable. From a short term perspective, the
system operator may have to deviate from the efficient dispatch in order to keep line flows
within limits. However, the financial implications of such re-dispatch does not surface
because the monopolist can easily socialize these costs amongst the various participants,
which in turn, are under his direct control. From planning perspective also, a definite
approach can be adopted for network augmentation. However, in deregulated structures, with
generating companies competing in an open transmission access environment, the
generation / flow patterns can change drastically over small time periods with the market
forces. In such situations, it becomes necessary to have a congestion management scheme in
place to ensure that the system stays secure. However, being a competitive environment, the
re-dispatch will have direct financial implications affecting most of the market players,
creating a set of winners and losers. Moreover, the congestion bottlenecks would encourage
some strategic players to exploit the situation. The effects that congestion is likely to cause
are discussed next. Effects of Congestion The network congestion essentially leads to out-of-
merit dispatch. The main results of these can be stated as follows: 

 Market Inefficiency: Market efficiency, in the short term, refers to a market outcome

that maximizes the sum of the producer surplus and consumer surplus, which is
generally known as social welfare. With respect to generation, market efficiency will
result when the most cost-effective generation resources are used to serve the load.
The difference in social welfare between a perfect market and a real market is a
measure of the efficiency of the real market. The effect of transmission congestion is
to create market inefficiency.
 Market Power: If the generator can successfully increase its profits by strategic
bidding or by any means other than lowering its costs, it is said to have market power.
Imagine a two area system with cheaper generation in area 1 and relatively costlier
generation in area 2. Buyers in both the areas would prefer the generation in area 1
and eventually the tie-lines between the two areas would start operating at full
 capacity such that no further power transfer from area 1 to 2 is possible. The sellers in
area 2 are then said to possess market power. By exercising market power, these
sellers can charge higher price to buyers if the loads are inelastic. Thus, congestion
may lead to market power which ultimately results in market inefficiency.

 In multi-seller / multi-buyer environment, the operator has to look after some additional
issues which crop up due to congestion. For example, in a centralized dispatch structure, the
system operator changes schedules of generators by raising generation of some while
decreasing that of others. The operator compensates the parties who were asked to generate
more by paying them for their additional power production and giving lost opportunity
payments to parties who were ordered to step down. The operator has to share additional
workload of commercial settlements arising due to network constraints which, otherwise,
would have been absent. One important thing to be noted is that creation of market
inefficiency arising due to congestion in a perfectly competitive market acts as an economic
signal for network reinforcement. The market design should be such that the players are made
to take a clue from these signals so as to reinforce the network, thus mitigating market
inefficiency. Desired Features of Congestion Management Schemes Tackling the congestion
problem takes different forms in different countries. It really depends on what type of
deregulation model is being employed in a particular region. Certain network topologies,
demographic factors and political ideologies influence the implementation of congestion
management schemes in conjunction with overall market design. Any congestion
management scheme should try to accommodate the following features: 

 Economic Efficiency: Congestion management should minimize its intervention into

a competitive market. In other words, it should achieve system security, forgoing as
little social welfare as possible. The scheme should lead to both, short term and long
term efficiency. The short term efficiency is associated with generator dispatch, while
long term efficiency pertains to investments in new transmission and generation
facilities
 Non discriminative: Each market participant should be treated equally. For this, the
network operator should be independent of market parties and he should not derive
any kind of benefit from occurrence of congestion. Otherwise it provides perverse
signals for network expansion.
 Be transparent: The implementation should be well defined and transparent for all
participants.
 Be robust: Congestion management scheme should be robust with respect to strategic
manipulation by the market entities. This again refers back to principle of economic
efficiency

 Though a variety of forms of congestion management schemes are practiced throughout the
power markets of the world, the nodal pricing or the optimal power flow based congestion
management scheme is said to satisfy most of the desired features of the same, especially the
feature of economic efficiency. Each practiced method has strengths and flaws and also
interrelationships to some extent. Each maintains power system security but differs in its
impact on the economics of the energy market.