Case Study Management Economics

Here and Now
Distributed power generation will end the long-distance tyranny of the grid. For
decades, control over energy has been deemed too important to be left to the markets.
Politicians and officials have been dazzled by the economies of scale promised by ever
bigger power plants, constructed a long way from consumers. They have put up with
the low efficiency of those plants, and the environmental harm they do, because they
have accepted that the generation, transmission and distribution of power must be
controlled by the government or another monopoly. Yet in the beginning things were
very different. When Thomas Edison set up his first heat-and-power co-generation
plant near Wall Street more than 100 years ago, he thought the best way to meet
customers’ needs would be to set up networks of decentralized power plants in or near
homes and offices. Now, after a century that saw power stations getting ever bigger,
transmission grids spreading ever wider and central planners growing ever stronger,
the wheel has come full circle. The bright new hope is micro power, a word coined by
Seth Dunn of the WorldWatch Institute in an excellent report.* Energy prices are
increasingly dictated by markets, not monopolies, and power is increasingly generated
close to the end-user rather than at distant stations. Edison’s dream is being revived.
The new power plants of choice the world over are using either natural gas or
renewable energy, and are smaller, nimbler, cleaner and closer to the end-user than
the giants of yesteryear. That means power no longer depends on the vagaries of the
grid, and is more responsive to the needs of the consumer. This is a compelling
advantage in rich countries, where the digital revolution is fuelling the thirst for high-
quality, reliable power that the antiquated grid seems unable to deliver. California
provides the best evidence: although the utilities have not built a single power plant
over the past decade, individuals and companies have added a whopping 6gW of
nonutility micro power over that period, roughly the equivalent of the states installed
nuclear capacity. The argument in favour of micropower is even more persuasive in
developing countries, where the grid has largely failed the poor. This is not to say that
the existing dinosaurs of power generation are about to disappear. Because the
existing capital stock is often already paid for, the marginal cost of running existing
power plants can be very low. That is why America’s coal-fired plants, which produce
over half the country’s power today, will go on until the end of their useful lives, perhaps
decades from now – unless governments withdraw the concessions allowing them to
exceed current emissions standards. While nobody is rushing to build new nuclear
plants, old ones may have quite a lot of life left in Market structure and pricing 311
them if they are properly run, as the success of the Three Mile Island nuclear power
plant in Pennsylvania attests. After the near-catastrophic accident in 1979 that
destroyed one of the plant’s two reactors, the remaining one now boasts an impressive
safety and financial record. Safety and financial success are intimately linked, says
Corbin McNeill, chairman of Exelon and the current owner of the revived plant. He
professes to be an environmentalist, and accepts that nuclear power is unlikely to be
the energy of choice in the longer term: ‘A hundred years from now, I have no doubt
that we will get our energy using hydrogen.’ But he sees nuclear energy as an essential
bridge to that future, far greener than fossil fuels because it emits no carbon dioxide.
GOOD OLD GRID

The rise of micro power does not mean that grid power is dead. On the contrary,
argues CERA, a robust grid may be an important part of a micro power future. In poor
countries, the grid is often so shoddy and inadequate that distributed energy could well
supplant it; that would make it a truly disruptive technology. However, in rich countries,
where nearly everyone has access to power, micro power is much more likely to grow
alongside the grid. Not only can the owners of distributed generators tap into the grid
for back-up power, but utilities can install micro power plants close to consumers to
avoid grid bottlenecks. However, a lot of work needs to be done before any of this can
happen. Walt Patterson of the Royal Institute of International Affairs, a British think-
tank, was one of the first to spot the trend toward micro power. He argues that
advances in software and electronics hold the key to micropower, as they offer new
and more flexible ways to link parts of electricity systems together. First, today’s
antiquated grid, designed when power flowed from big plants to distant consumers,
must be upgraded to handle tomorrow’s complex, multi-directional flows. Yet in many
deregulated markets, including America’s, grid operators have not been given
adequate financial incentives to make these investments. To work effectively, micro
power also needs modern command and communications software. Another
precondition is the spread of real-time electricity meters to all consumers. Consumers
who prefer stable prices will be able to choose hedged contracts; others can buy and
sell power, much as day traders bet on shares today. More likely, their smart micro
power plants, in cahoots with hundreds of others, will automatically do it for them. In
the end, though, it will not be the technology that determines the success of distributed
generation, but a change in the way that people think about electricity. CERA
concludes that for distributed energy, that will mean the transition from an equipment
business to a service business. Already, companies that used to do nothing but sell
equipment are considering rental and leasing to make life easier for the user. Forward-
looking firms such as ABB, a SwissSwedish equipment supplier, are now making the
shift from building centralized power plants to nurturing micro power. ABB is already
working on developing ‘micro grids’ that can electronically link together dozens of micro
power units, be they fuel cells or wind turbines. Kurt Yeager of the Electric Power
Research Institute speaks for many in the business when he sums up the prospects: ‘
Today ’s technological revolution in power is the most dramatic we have seen since
Edison’s day, given the spread of distributed generation, transportation using electric
drives, and the convergence of electricity with gas and even telecoms. Ultimately, this
century will be truly the century of electricity, with the microchip as the ultimate
customer.’ * ‘Micropower: the next electrical era’, by Seth Dunn. WorldWatch Institute,
2000.
Questions
1.) Explain why power generation has traditionally been a monopoly in all developed
countries.
Power generation was always a tradition a monopoly due to the features of a natural
monopoly with the greatest capital investments which includes the setup cost along
with a high fixed cost in which it will continue to reduce while the company grows
in size and customers base of retaining a large number of customers which plays
the role to facilitate spreading of fixed cost to approve the facility at a reasonable
price for the consumer. Whenever the electricity production were to separate within
two companies which had a separate power source setup and more power lines
are to be distributed, this would lead for a double price which finally need to be paid
by the consumers and may be extremely feasible for an appropriate commodities.
Therefore, electronic companies being monopolies it is provided by the government
to control and ensure the corporate greed is not allowed a free rein eves if the
company would double the price of electricity consumers must pay with no
alternative option for revealing an essential service.
2.) What is meant by a transmission grid? How is this feature related to a monopolistic
market structure?
The grid is a system of transmission lines, generators, and distribution channels

that was built for one purpose: move energized electrons from a central production
plant to homes, businesses, and industry as efficiently as possible. As such,
historically electricity was provided by a regulated monopoly utility, an entity that
vertically integrated all aspects of producing and delivering electrons. In this
paradigm, a single company was responsible for operating generation facilities,
maintaining transmission lines, and delivering and selling the final product to its
customers much in the same way that water or early telecommunication services
were governed. Although far from a perfect system, regional grids were run this
way for the better part of the 20th century with relatively few blackouts and
reasonable electricity prices.
During the latter half of the century the government experimented with
“deregulating” industries that had previously been sanctioned monopolies –
industries like the airlines and telecommunications. This means that where once
companies were given exclusive domain over a certain market, competition was
now allowed under the theory that it would provide more efficient and effective
service to the end user and to society at large. Although the term “deregulation”
would seem to imply that government stepped out of the picture, the reality is closer
to a “reregulation” – rules closely governing the provision of these services still
applied, but the market was restructured to give those involved greater incentive to
minimize costs. Controversial at first, this initiative was met with success in the
industries in which it was tried.
3.) What is meant by micro power? What are its implications for grid systems?
A micro grid is a localized group of electricity sources and loads that normally
operates connected to and synchronous with the traditional wide area synchronous
grid (macro grid), but can also disconnect to "island mode" — and function
autonomously as physical or economic conditions dictate. In this way, a micro grid
can effectively integrate various sources of distributed generation (DG), especially
Renewable Energy Sources (RES) - renewable electricity, and can supply
emergency power, changing between island and connected modes.
Micro grids support a flexible and efficient electric grid by enabling the integration
of growing deployments of distributed energy resources such as renewables like
solar. In addition, the use of local sources of energy to serve local loads helps
reduce energy losses in transmission and distribution, further increasing efficiency
of the electric delivery system.
4.) What are the implications of micro power for the environment?
Advanced real-time energy management system is proposed in order to optimize

micro-grid performance in a real-time operation. The proposed strategy of the
management system capitalizes on the power of binary particle swarm
optimization algorithm to minimize the energy cost and carbon dioxide and
pollutant emissions while maximizing the power of the available renewable energy
resources. Advanced real-time interface libraries are used to run the optimization
code. The simulation results are considered for three different scenarios
considering the complexity of the proposed problem. The proposed management
system along with its control system is experimentally tested to validate the
simulation results obtained from the optimization algorithm. The experimental
results highlight the effectiveness of the proposed management system for micro-
grids operation.
5.) How do you think changes in technology will affect the market structure of the power
generation industry?
Greater dialogue among regulators, micro power advocates, and distribution

companies can help build micro power markets. By collectively identifying benefits
of small-scale power as well as barriers that stand in their way and then developing
supportive policies, these groups can build demand for these systems. While some
utilities may not support micro power without external prodding, and could continue
to take defensive steps to slow its spread, a growing number do see the business
opportunities and are willing to work with other groups to determine how the new
technologies can meet their needs.

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Here and Now

GOOD OLD GRID

The grid is a system of transmission lines, generators, and distribution channels

Advanced real-time energy management system is proposed in order to optimize

Greater dialogue among regulators, micro power advocates, and distribution

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