Features of Power Sectors

This chapter provides an overview of key features of deregulated power sectors. The major participants in power markets are consumers and suppliers of electricity. Basic information about the behavior of these participants is summarized in the demand and supply functions (curves). We describe how individual participants make their decisions by maximizing consumer or producer surplus. We next show the aggregated outcome of individually heterogenous market participants from two perspectives. First, a market equilibrium is characterized as a result of a decentralized action of each participant. Second, the market equilibrium is expressed as solutions to the centralized maximization of social surplus. We demonstrate that the decentralized equilibrium is equivalent to the solutions to the centralized system if the industry is perfectly competitive without any market failures. An independent system operator (ISO) can be regarded as playing the centralized role to maximize overall social welfare in deregulated power markets, considering the constraints associated with power system operation. In particular, transmission constraints are crucial for the congestion management of power systems. We discuss the basic elements of a physical network and power flows including Kirchhoff’s laws. The last two sections in this chapter provide an overview of two factors that could affect the market outcome in power sectors, namely the incorporation of environmental policies and the market power of suppliers. This chapter serves as a foundation to prepare readers to proceed with subsequent chapters.