Capturing the benefits of high performance computing for investment decisions in electricity markets: an emphasis on capacity expansion in a carbon-constrained

and uncertain future

Charles Ikenna Nweke (BEng)

Project submitted in partial fulfilment of the requirements for the degree of MSc (Energy and Resources) UCL School of Energy and Resources, Australia

I, Charles Ikenna Nweke confirm that the work presented in this report is my own. Where information has been derived from other sources, I confirm that this has been indicated in the report.

15 June 2012.

Abstract
As worldwide demand for energy continues to grow, the need for continuous expansion of global electricity supply the most usable form of energy - cannot be overemphasized. The drive to match demand with adequate supply has led to the restructuring of many electricity regimes around the world. Also the increasing awareness of the threats posed by greenhouse gas pollution is undoubtedly influencing operating and investment decisions in different electricity frameworks. For these and other reasons, investment in renewable energy technologies has resulted in major installations of wind farms across the world in the last decade. Meeting the demand growth in a sustainable way requires significant penetration of renewable energy sources which could be intermittent in nature (e.g wind and solar). In turn, capacity expansion planning (CEP) to accommodate the different technologies and perhaps market frameworks requires a shift from orthodox methods used in the past. Optimization models used in the past to aid investment decisions have always been constrained by computing performance hence allowing certain level of detail. The objective of this thesis was to assess the viability of a more thorough method of modelling demand in CEP by retaining chronology, against current enhancements in computing performance. The effectiveness of traditional modelling of load demand using Load Duration Curve (LDC) approximation was also measured against increasing level of intermittent generation using a South Australian electricity model. Based on this research it was established that the developments so far in the computer chip industry warrant a shift from less detailed models to capture the increasing complexities inherent in the changing electricity frameworks around the world. It was also found that the conventional modelling techniques do not adequately reflect the most economic investment decisions when the level of intermittent generation share becomes significant in a system. Results from a number of simulations comparing the traditional LDC versus a chronological demand model shows that increasing penetration of wind technologies incurs significant operation costs which the chronological modelling is better able to manage. While retaining chronology in CEP was shown to be viable at this time among other advantages, the traditional LDC method proved still to be a very efficient method of aiding decisions as it presents a hugely tractable option for any size or type of electricity system ii

being modelled. Nevertheless, this work exposes the frailties of the different methods that energy planners and analysts need to be wary of knowing that huge commitments will rely on the outcome of their models.

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Acknowledgement
This thesis is the outcome of countless hours of dedicated work guided by the trust, encouragement, ideas, and inspiration of others near and far. I am particularly indebted to my supervisor Dr. Mohan Kolhe for his input and guidance from the very beginning. Also I am very grateful to the academic staff at UCL School of Energy and Resources, Australia for their input in preparing me for this cross-disciplinary research I dared to embark on. Of course all these wouldnt have been a smooth sail without the impact of the non-academic staff at UCL SERAus, particularly Ms Maria Stavrinakis, whose unflinching support and reassurances kept me going in difficult times. I am very grateful to the management of Energy Exemplar pty and Mr Glenn Drayton (PhD) in particular for supporting this research and providing the platform necessary to access and utilize the endless data required for this work. Lastly I would like to acknowledge the backing and reinforcement from my family and friends who in one way or the other have helped me all through this programme.

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Table of Contents
Abstract...ii Acknowledgements.iii List of Figures. vi List of Tables.....vii Acronyms & Abbreviations.. viii Definition of Terms.x 1 1.1 1.2 1.3 1.4 INTRODUCTION ................................................................................................................. 1 Problem definition and motivation .................................................................................... 2 Objective and scope of the Thesis ...................................................................................... 3 Energy Exemplars Next-generation power market simulator........................................... 4 Overview and Work Flow of Thesis .................................................................................... 5

2 A PRACTICAL PERSPECTIVE ON HIGH PERFORMANCE COMPUTING (HPC) AND OPERATIONS RESEARCH (OR) ....................................................................................................... 8 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.7.1 2.7.2 2.7.3 2.8 Tools 2.8.1 2.8.2 2.9 Moores Law and Evolution of Computing Technologies ................................................... 8 Single Processors to Parallel Computing .......................................................................... 10 Multicore Processing ........................................................................................................ 10 Grid Computing ................................................................................................................ 12 Cloud Computing .............................................................................................................. 13 Grid versus Cloud Computing ........................................................................................... 14 Operation Research Methods .......................................................................................... 15 Practical Applications of Optimization Tools in Capacity Expansion ................................ 15 Decomposition Methods .................................................................................................. 21 Stochastic Programming................................................................................................... 24 Dealing with Uncertainties and Imperfections inherent with Decision Support 26 Scenario analysis .............................................................................................................. 26 Sensitivity analysis ............................................................................................................ 27 Representation of Load Profile by Support Tools ............................................................ 28 v

3 3.1 3.2 3.3 3.4 4 4.1 4.1.1 4.2 4.2.1 4.3 4.4 4.5 5 5.1 5.2 5.3 5.3.1 5.3.2 5.4 5.5 6 6.1 6.2 7 8 8.1 8.2 8.3

INVESTMENT DECISIONS IN ELECTRICITY MARKETS .......................................................... 34 Regulated Electricity Framework ..................................................................................... 35 Liberalized Electricity Industry ......................................................................................... 36 Implications of Capacity Imbalance.................................................................................. 39 Case Study: The Australian National Electricity Market (NEM) ....................................... 42 MODELLING LONG-TERM INVESTMENT DYNAMICS USING PLEXOS ................................. 45 PLEXOS LT Plan ................................................................................................................. 45 PLEXOS LT Plan formulation ............................................................................................. 46 Model Overview ............................................................................................................... 51 Bulls eye representation of model variables ................................................................... 51 Model Input ...................................................................................................................... 52 Scenario Analysis .............................................................................................................. 59 General Model Hypotheses .............................................................................................. 59 SIMULATION AND RESULTS ............................................................................................. 61 Simulation Parameters and Conditions ............................................................................ 61 Base Case Simulations ...................................................................................................... 62 Sensitivity Analysis ........................................................................................................... 67 Impact of market access ................................................................................................... 68 Emissions pricing and competitiveness of renewable investments ................................. 69 Solution Summary: Resource versus Results ................................................................... 72 Improving LT Chronological Execution Times................................................................... 75 CONCLUSIONS ................................................................................................................. 77 Findings and Recommendations ...................................................................................... 77 Prospects for Further Research Work .............................................................................. 79 REFERENCES .................................................................................................................... 81 APPENDIX ........................................................................................................................ xi APPENDIX I Model Overview and New Entrants Input................................................... xi APPENDIX II Carbon Pricing and LRET Scenario Input ...................................................xvi APPENDIX III Demand Projection Input Data .............................................................. xviii

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List of Figures

Figure 1-1: A 3-pointer high-level thesis work flow ............................................................................................... 6 Figure 2-1: Moore's law and the Intel chip evolution in the past four decades [15] ............................................. 9 Figure 2-2: A basic modern processor configuration [22] .................................................................................... 11 Figure 2-3: Capacity expansion planning optimization [37] ................................................................................. 16 Figure 2-4: Relationship between Benders' triplet and Decision triplet [47] ....................................................... 24 Figure 2-5: South Australian demand curve for March 2011 ............................................................................... 29 Figure 2-6: Load Duration Curve representation of Figure 2-5 ............................................................................ 29 Figure 2-7: A 12-block approximation of the LDC using least-squares method ................................................... 30 Figure 2-8: Chronological representation of the load profile using 50 blocks ..................................................... 31 Figure 2-9: 200-Block representation of the demand applied in this research.................................................... 32 Figure 3-1: Regulated electricity framework ........................................................................................................ 35 Figure 3-2: Participant stock and flow diagram in a liberalized electricity framework [56] ................................ 38 Figure 3-3: The Australian wholesale market reserve margin and peak prices after liberalization [3] ............... 40 Figure 3-4: The Spanish wholesale market after liberalization [3] ....................................................................... 40 Figure 3-5: Optimal mix and level of capacity ...................................................................................................... 41 Figure 3-6: Right capacity with sub-optimal base-load ........................................................................................ 41 Figure 3-7: Excess capacity with optimal base-load ............................................................................................. 41 Figure 3-8: The Australian NEM showing the 5 inter-connected regions [76] ..................................................... 42 Figure 3-9: Shift towards renewable energy sources in the last decade [79] ...................................................... 44 Figure 4-1: Bulls eye representation of the SA model ......................................................................................... 52 Figure 5-1: Base model simulations showing the input peak load, total capacity and reserve margin ............... 63 Figure 5-2: Comparison of capacity builds and retirements between LDC and Chrono executions .................... 64 Figure 5-3: Wind penetration levels for Chrono and LDC simulations ................................................................. 65 Figure 5-4: Production outcomes incurred from investment decisions ............................................................... 67 Figure 5-5: Simulations showing sensitivity of price with reserve margins ......................................................... 69 Figure 5-6: Capacity builds in the different scenarios .......................................................................................... 70 Figure 5-7: Scenario analysis of GHG productions under different investment regimes ..................................... 71 Figure 5-8: Publicly announced expected capacity additions in South Australia ................................................. 72 Figure 8-1: Model visualization showing existing generators and new entrants ................................................... xi

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List of Tables
Table 2-1: Comparisons of grid and cloud computing ......................................................................................... 14 Table 2-2: Formats for a typical minimization linear program ............................................................................. 17 Table 4-1: LT Plan key formulation elements ....................................................................................................... 47 Table 4-2: Some common problem variables used in LT Plan .............................................................................. 48 Table 4-3: Description of variables used to define inter-temporal constraints ................................................... 50 Table 4-4: PLEXOS input objects and properties .................................................................................................. 53 Table 5-1: Successful wind penetration levels attained by 2010 compared with simulation results .................. 66 Table 5-2: Comparisons of computing demands for LDC and Chrono simulations .............................................. 74 Table 8-1: New entrants build Costs ($/kW) 2010-2030 [12] ............................................................................... xii Table 8-2: Input parameters for new entrant technologies [12] ......................................................................... xiii Table 8-3: New entrant gas prices 2010-2030 [85] .............................................................................................. xiv Table 8-4: Hypothetical improvements in heat rates (GJ/MWh) for new entrant thermal plants [12] ............... xiv Table 8-5: Fossil fuels and their GHG production rates from combustion [85] ................................................... xvi 2 2 Table 8-6: CO price trajectory ($/tCO -e) for financial years ending in 2030 [80] .............................................. xvi Table 8-7: Notional LRET targets for South Australia .......................................................................................... xvii Table 8-8:South Australian Winter maximum demand projections [79] ........................................................... xviii Table 8-9: Summer maximum demand projections [79] ................................................................................... xviii Table 8-10: Energy projections between 2010 and 2020 [79] .......................................................................... xviii Table 8-11: 2009-10 base year profile [79] .......................................................................................................... xix Table 8-12: Demand-side participation (DSP) set at different RRN prices for South Australia [80] .................... xix

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Acronyms & Abbreviations

AEMO CCGT CCS Chrono CEP CF CMOS CPT DP DSP EGS ESOO FO&M FOR GHG HPC HSA IaaS IEA LCOE LDC LP LRET LT MD

Australian Energy Market Operator Combined Cycle Gas Turbine Carbon Capture and Storage Chronological Capacity Expansion Planning Capacity Factor Complementary Metal-Oxide Semiconductor C02 Price Trajectory Dynamic Programming Demand-side Participation Enhanced Geothermal System Electricity Statement of Opportunities Fixed Operations & Maintenance Forced Outage Rate Greenhouse Gas High Performance Computing Hot Sedimentary Acquifers Infrastructure as a Service International Energy Agency Levelized Cost of Electricity Load Duration Curve Linear Programming Long-term Renewable Energy Target Long-term Maximum Demand

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MILP MLF MSL NEM NPV NTNDP OCGT OR POE RAM RHS RRN SA SRMC UC USE VO&M VOLL WACC WUR

Mixed-integer Linear Programming Marginal Loss Factor Minimum Stable Level National Electricity Market (Australia) Net Present Value National Transmission Network Development Plan Open Cycle Gas Turbine Operations Research Probability of Exceedence Random-Access Memory Right Hand Side Regional Reference Node South Australia Short Run Marginal Cost Unit Commitment Unserved Energy Variable Operations & Maintenance Value of Lost Load Weighted Average Cost of Capital Wind Utilization Ratio

Definition of Terms
Auxiliary Increment (Aux Incr): This describes the auxiliary loss per megawatt of generation in a station. It is computed from the auxiliary use which denotes the total of all station auxiliary loads or in-house energy consumption. Cache: A relatively small high-speed memory (usually situated within the processor) that improves computer performance. Capacity Factor: This percentage measures the utilization of the generation resource over a period of time. It is defined mathematically as Generation over a period/ (Total Capacity x time). Carbon Shadow Price: It is the notional price, which if implemented directly (through say, a tax) would achieve the same abatement as that targeted by the mitigation measures actually in place. It is defined as the social cost of emitting a marginal tonne of carbon or the social benefit of abating a tonne. Demand-side Participation (DSP): A situation where customers vary their electricity consumption in response to, specific requests, or a change in market conditions such as spot price. Economic Dispatch: This is the short-term determination of the optimal output of a number of electricity generation facilities, to meet the system load, at the lowest possible cost, while serving power to the public in a robust and reliable manner. It is similar but different from Unit Commitment (UC). Forced Outage: An unplanned outage of an electricity transmission network element (generator plant, transmission line, transformer, etc) Generation Capacity: This is the amount (in megawatts) of electricity that a generating unit can produce under nominated conditions. This may vary due to a range of factors like weather where most plants have higher capacities in the cold winter periods than in summer. Heat Rate: This measures the rate of conversion of energy from the fuel to electric output (total fuel consumed/total generation) in GJ/MWh. It denotes the thermal efficiency of generating plants.

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Integer: Defined as a whole entity in its complete integral state Integerization: It is a term used to describe enforcement of infrastructure builds/retirements to remain as integer quantities in capacity expansion planning. It could also be applied to unit commitment optimizations to ensure unit on/off decisions are integer-enforced. Interconnector: A line or group of transmission lines that links the transmission networks in adjacent regions. Intermittent: A term used commonly in this thesis to describe generating units which outputs are not readily predictable. These include solar generators and wind turbine generators. Levelized Cost of Electricity: This is the lifetime discounted cost of a generating asset expressed in cost per unit of power generated. Marginal Loss Factor (MLF): This is a multiplier used to describe the marginal electrical energy loss for electricity used or transmitted. Minimum Stable Level (MSL): the lowest capacity (MW) at which a generating unit can produce electricity without any significant technical difficulty; dispatch economics usually determine if the unit generates at or above the MSL. Non-zero Coefficients: It indicates the size of the problem in the mathematical formulation reached by the linear program. It refers to the number of non-zero entries in the matrix A and is proportional to the size of the problem. Probability of Exceedence (POE): The probability, as a percentage, that a maximum demand (MD) level will be met or exceeded (for example, due to weather conditions or other economic factors) in a particular period of time. RAM: The RAM is the portion of a computers memory thats used for creating, loading or executing programs and for temporary storage and manipulation of data; a very important factor which to a great extent determines the ability of computers to solve intensive problems. Unlike the permanent storage mediums, the RAM is volatile; hence contents are lost when power is turned off. Ramp rate (up/down): The rate (MW/minute) at which a unit is able to change between generation output levels above the MSL xii

Reliability of Supply: The likelihood of having adequate capacity (generation, DSP, or both) to meet demand. Run rate (up/down): This is the rate at which a generating unit ramps up/down generation level from an offline condition to the MSL and vice-versa (MW/minute). This is defined for the pre-conditions like hot, warm, and cold states; meaning that a generator may start-up faster when in hot state (within <8 hours of shutdown) than when in a cold state (say >48 hours of shutdown). Short-run Marginal Cost (SRMC): This is the change in total generation costs recorded per unit change in the quantity of power produced by a plant. Start-up costs: This accounts for the expenses (fuel, labour, emissions, etc.) involved in bringing a unit from an offline condition to any output level above the MSL. Unit Commitment (UC): This refers to a sequence of generator on/off decisions made over time (usually in the short-term). It seeks an optimal and feasible combination of on/off decisions for all generating units across a given horizon. Unserved Energy (USE): This defines the amount of energy that cannot be supplied due to insufficient generation capacity, demand-side participation (DSP), or network capability to meet demand. Under the provisions of the Reliability Standard, each regions annual USE can be no more than 0.002% of its annual energy consumption. WACC: The Weighted Average Cost of Capital describes the rate that a company is expected to pay to finance its assets. WACC is the minimum return that a company must earn on existing asset base to satisfy its creditors, owners, and other providers of capital. WACC is only applied to LT Plan where it is used in combination with Economic Life to compute an annuity equivalent to the defined Build Cost.

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INTRODUCTION

World energy demand has grown consistently over the past decades, yet one-fifth of the worlds population are currently without access to electricity.1 Global electricity demand according to the International Energy Agency (IEA) is expected to increase by more than 200% of the 2007 level in less than half a century [1]. In similar terms energy demand and CO2 emissions could double by 2050 [1]; a path unarguably unsustainable if this demand is to be met using conventional means alone. Addressing the global growth in electricity demand while gradually moving towards a low-carbon economy has led to an increasing reliance on renewable energy sources such as wind and solar energy [2]. For varying reasons ranging from energy security to environmental concerns, many countries have encouraged investment in renewable energy technologies which has resulted in major installations of wind farms especially, across the United States, Europe, Australia and China within the last decade. Fundamentally, electricity markets over the world have experienced various forms of restructuring over the last 20 years tending mainly towards a more liberalized framework [3] such as in the United Kingdom, New Zealand, California as well as in Australia among others. While this restructuring is being carried out to accommodate the complexities of economically and reliably meeting demand in a carbon-constrained world, the dynamics and uncertainties of liberalized markets add to the difficulties in matching supply and demand of electricity especially in the long-term [3, 6]. Capacity expansion of electricity infrastructure just like most energy expansion planning exercises involves sophisticated modelling of demand forecasts in tandem with various sector-wide economic parameters given the huge amounts of investment and the long lead times involved [8]. However, the obviously constrained storability of electricity, albeit still a highly preferred energy carrier [4, 5, 6], continues to draw attention towards improving the techniques that aid long-term planning and decision-making in electricity markets [6]. Key findings of the IEA Energy Technology Perspectives estimate investments in electricity infrastructure of up to USD 32.8 trillion over the next 40 years [1]. If these forecasts are to be taken seriously then there is enough reason to focus on improving decision-support

See IEAs World Energy Outlook 2011 on *89+.

tools that will aid in achieving minimal total costs of investment while maintaining adequate reliability hence avoiding consumer price hikes as much as possible. Historically, accurate decision-support models for electricity planning have been constrained by computing power [7, 8] among other issues. Even with the fairly predictable properties of conventional sources of generation there had been various levels of compromise between model detail and computing requirements [7]. Following the increasing share of intermittent generation in various parts of the world, modelling techniques used in capacity expansion planning (CEP) are being asked to cope with the complexities of the different technologies that are being integrated into electricity grids. New methods are expected to maximize computing resources within their physical constraints to ensure the highest possible accuracies for various purposes.

1.1 Problem definition and motivation

Electricity generation accounts for a third of total worldwide fossil fuel use and contributes about 41% of global energy-related CO2 emissions; hence efforts to significantly curb GHG emission will no doubt be achieved through a transformation of the sector [1]. The overall objective of minimizing total costs in the midst of uncertainties inherent in long-term planning can involve conflicting mini-objectives of minimizing expected total system costs (inclusive of social cost of unserved energy, and environmental externalities), excess capacity, as well as levelized electricity prices [7,8]. In theory the more detailed a model is able to account for uncertainties, the bigger the problem formulation becomes and subsequently the more accurate results are expected; but the size of the problem formulation is significantly constrained by computing performance. Ku [7] views capacity expansion planning as long term investment decisions made based on short term optimal operating solutions in response to the immediate changes in the system. In other words, the effects of short term properties like unit commitment and economic dispatch as well as medium to long term inputs like build costs, economic life of infrastructure, outage and maintenance rates, among others are all factored into maximizing investment decisions. Due to computational limits, long term planning has been commonly carried out using an aggregated but computationally efficient data representation method load duration curve (LDC) [7, 9]. For instance, approximating demand using the LDC approach, where chronological load profile is arranged in hierarchy of magnitude, has proven sufficient over time given the fairly predictability of output from

conventional thermal systems [7, 8]. This method reduces the resolution of system variations such as the intermittency effects of distributed renewables on inter-temporal impacts of outages and commissioning of thermal plants, leading to a loss of resolution that may produce sub-optimal solutions to the original detailed problem. Chronological modelling of the demand on other hand significantly improves the modelling of intermittency effects on unit-commitment optimization of conventional plants [9] but at a cost higher computational time and requirements. There are no doubts whatsoever that the electricity mix is gradually changing (with preference given to cleaner but unorthodox technologies like wind turbines), and at the same time there have been significant improvements in computing performance over the years. More so historical trends where single processor performance upgrade was paramount are tending towards parallel multi-core systems [10]. It is in this light that this research looks into the increasing complexity of accurately modelling the growing percentage of intermittent generation by effectively utilizing these advancements in computing. Retaining the chronological information of detailed models in long-term planning is fast becoming indispensable if unit commitment decisions are to be considered [6, 9] in finding the optimal future technology mix in line with policies aimed at decarbonizing the world economy. The need for new robust tools to adequately assess long-term energy infrastructure planning [71, 72] as well as the relative paucity of information devoted to modelling investment in electricity systems with different competition levels [6, 14] adds to the motivation to partake in this research area. Ventosa et al [6] point out that the few long term modelling of perfect and imperfect competitive markets carried out by authors in their review of literature gave similar outcomes. This thesis will not take into account the result of imperfect competition in the market; nevertheless it opens up prospective research work helped by the possible benefits of chronological modelling that can be captured with available expected future computing developments.

1.2 Objective and scope of the Thesis

Recent proposals in Australia bordering carbon pricing and issues surrounding the Green Grid in South Australia [11] for instance are being debated for various reasons including doubts to the credibility of modelling outcomes, parameters used, and the assumptions such proposals were based on. In contribution to the veracity of the foundations upon which decisions will be made towards a sustainable energy path, this research aims at

unlocking possible benefits of recent improvements in computing performance and infrastructures for broad purposes. This thesis focuses on answering important questions like: What share of unpredictable renewable injection in a market is permitted after which more robust and apprehensive modelling technics will be needed in capacity expansion planning? How do the different levels of renewable integration affect marginal costs of electricity in a wholesale market with and without considering intertemporal effects in the model; and how does it affect investment in other options? What are the benefits of chronological modelling over the aggregated load duration curve (LDC) approach given the present developments in computing technology and what are the likely trade-offs assuming Moores theory holds for the evolution of processing power in the near future? Overall this research aims predominantly at retaining chronological information for production and capacity constraints in a bid to show how decisions could be aided in the long term which could potentially lead to huge savings following future investments paths. Also this report is expected to contribute to the dearth in published literature in this area particularly as regards the interdependencies between operations research, energy planning and the area of computing.

1.3 Energy Exemplars Next-generation power market simulator

Energy Exemplars PLEXOS for Power Systems (PLEXOS) is a proven simulation tool used in power market analysis and design by market and system operators, consultants, regulators, energy analyst among others, in no less than 200 sites spanning over 25 countries in Europe, America, Africa and the Asia-Pacific regions. Developed by Glenn R. Drayton in 2000 [12], PLEXOS embrace of cutting-edge mathematical programming, scalable data handling, and stochastic optimization techniques in its framework for providing solutions has continuously given rise to the widespread demand of the tool around the world. Powered by the latest commercial solvers PLEXOS capabilities include portfolio optimization, market and transmission analysis, security constrained unit commitment (SCUC), data and risk management, and capacity expansion featuring cost-based analysis, Monte Carlo simulations, cloud simulation services, etc. It offers flexible long, medium and short term timescales with resolutions as detailed as 5-minute intervals. Breakthroughs 4

enabling the incorporation and conversion of real-time wind-speed forecasts into wind generation forecasts are but some of the recent improvements in PLEXOS, allowing market traders and operators more accurately anticipate swings of up to several thousand megawatts in wind generation and the corresponding impact on market prices *13+. The foundation of this research work with Energy Exemplar centred on seeking ways to improve not only accuracy of decision support tools but also the credibility of such imperfect but effective techniques. This research work employs the many benefits of the constantly evolving PLEXOS platform including its use of stochastic optimisation of the growing uncertainties helped by the efficient utilisation of Mixed integer linear programming (MILP) techniques [14].With expert support from the Energy Exemplar team this work effectively probes the status quo in long term planning and the orthodox contribution of decision-support tools with respect to technology constraints. The question of whether new methods are well overdue in the planning process makes the subject of this report and will be investigated over the coming sections, employing high resolution simulations on a developed South Australian test model.

1.4 Overview and Work Flow of Thesis

This thesis report summarizes ideas, learning opportunities, and conclusions drawn from rigorous electricity market data aggregation and hundreds of simulations carried out over a period of nine months. Although findings and recommendations proffered at the end of this report are drawn from experiments carried out with the South Australian electricity model, motivation and concepts have been tapped from my experience with the Australian NEM setup, Irish Single Electricity Market (SEM), South African ESKOM framework, among others given the immense exposure and support from Energy Exemplar. Chapter 2 introduces Moores law in relation to the evolution of computing architectures in the past few decades and links the different frameworks to varying computing performance indices. Capacity expansion planning is introduced and linked to the practicality of operations research methods particularly regarding optimization techniques. The compromise between realistically representing electricity behaviour and model tractability is argued while also shedding some light on literatures describing the benefits and drawbacks of retaining chronology in capacity expansion planning.

In Chapter 3, the two most distinctive electricity frameworks are compared and contrasted in relation to their explicability using discussed mathematical methods. The impact of capacity expansion outcomes are discussed in detail, citing arguments for present and future generations, vis--vis investment capital and payback responsibilities. Finally, a case study of the investment trends over the period of a decade in restructured markets is analysed with particular emphasis on the Australian NEM and policies driving the investment patterns observed.

End Closing Phase:

Analyse results of simulations Draw conclusions and make recommendations Finalize thesis report

Execution Phase:
Drafting of thesis body Update Model/database Develop and simulate experiments/scenarios

Initiation Phase:
Propose Objectives Data aggregation and preparation of model Drafting of thesis introduction

Start

Figure 1-1: A 3-pointer high-level thesis work flow

Chapter 4 introduces the model objects, variables and constraints used to design the South Australian electricity framework and ongoing or anticipated policies. The mathematical representation of the relationship between the model parameters are described showing how PLEXOS optimization is carried out in capacity expansion planning. Furthermore, the additional constraints that distinguish chronological modelling from the aggregated load duration curve approach are introduced. At the end of the chapter, the model assumptions are highlighted while also shedding some light on some scenario developments used in the model.

In Chapter 5, results of the CEP simulations carried out on the described model are compared and contrasted using LDC approximation against Chronological representation of demand. Sensitivity analysis is performed on some key variables to show the model appropriateness for this study as well as reflect impact of regulatory decisions on the framework represented. Finding a compromise between model accurateness and tractability is further discussed following analysis carried out for solving CEP problems in chronological fashion. Chapter 6 outlines the conclusions of this research work, including suggestions for prospective research and further investigation. The Appendix summarizes important model data and parameters that make up the South Australian Model. Other hypothetical data included in the model are outlined in the Appendix as well.

A PRACTICAL PERSPECTIVE ON HIGH PERFORMANCE COMPUTING (HPC) AND OPERATIONS RESEARCH (OR)

Advancements in computing technologies particularly with the commensurate affordability of processor components and wares have been enjoyed in virtually every work of life [15]. The past four decades has seen processor frequency grow arguably in par with Moores predictions [15], however that steep growth seem to be stalling in recent times due to thermal constraints with the Complementary metal-oxide semiconductor (CMOS) technology [16]. Nonetheless the seemingly insatiable growth for more computing power has meant that processor chip manufacturing companies like Intel and AMD are leaning towards multi-core processing and network-distributed parallel computing, widely viewed as cloud computing in recent times. The application of HPC in power systems operation and planning requires significant computing performance particularly with the need to consider more uncertainties and variables from the liberalization of markets and the growing share of generation from renewables. Some applications of HPC in power systems include real-time N-x contingency analysis for power market solution feasibility tests [16], security-constrained optimal flow (SCOPF) [17], capacity expansion [7], as well as in weather forecasting [18] whose role in power systems is becoming more critical in short term unit commitment decisions.

2.1 Moores Law and Evolution of Computing Technologies

The last four decades has seen a total transformation of integrated circuits which forms the backbone of every processor chip. Intels 4004 microprocessor chip with about 2300 transistors in 1971 kicked off an evolution that has now shrunk more than two billion transistors into single core processors [15]. Within that timeframe processor speed has increased ten-thousand folds from 400 KHz to about 4GHz while the cost of a unit megabyte of memory (DRAM) has reduced in similar fashion to less than a cent from about $400 US dollars [15]. In most ways, Moores law, which predicts that in roughly every two years the number of transistors which can be economically crammed into an integrated circuit will be doubled [19], did guide the evolution of processor chip composition during the past 40 years. However some arguments [15, 20] have reiterated that it didnt 8

necessarily follow the increase in computing performance as figure 2-1 shows. Note a steep growth between 1995 and 2005 preceded by a steady growth rate in processor speed from 1971. A more recent study by Stutter [20] on the development pattern followed by chip compositions (number of transistors per chip), clock speed of processors, power requirements, and the parallelization of instructions between 1970 and 2010 showed similar and very interesting results. Whereas the number of transistors continued to increase in exponential fashion, the other characteristics in contrast have flattened out right from the early 2000s. These plateaux explain the difficulty chip vendors have endured in exploiting greater clock speeds viz: excessive heat generation, increasing power consumption as well as issues with leakage of current [20, 21]. It also means that the advent of multicore processing has the capability of enabling higher performance computing while keeping power requirements fairly constant. The challenge however is that, applications will have to be redesigned if there are any chances of taking full advantage of the parallelization benefits multicore processors bring to the fore [20]. This work does not discuss the validity or otherwise of Moores law notwithstanding that it is based on the arguments that the law may no longer hold water in the coming years or within the next decade. Hence this thesis looks to discuss the likely effect of the expected flattening of computing performance on computing-intensive applications and the adaptations necessary for the future of HPC applications such as in CEP.

Figure 2-1: Moore's law and the Intel chip evolution in the past four decades [15]

2.2 Single Processors to Parallel Computing

Parallel computing and multicore computers are emerging as the preferred option needed to deal with the computational workload from power system models [16] given the physical constraints vendors have had to deal with in improving performance of single processors. The irony however has been that parallel processing has not really lived up to the expectations in terms of linear gains in performance over the single core likes. Say for instance using a dual core chip does not necessarily provide twice the performance of a similar single chip processor. This is partly due to coordination and handshaking between the cores and the architecture of the applications running on the parallel processing chip [20]. Over the past four decades performance throughput has been achieved by CPU designers (mostly using single core processors) based on clock rate or speed, cache size, and execution enhancement [20, 21]. In contrast, recent trends have shown an inclination toward a multi-core or many-cores era which is being helped by improvements in cache designs and hyper-threading abilities in chips and applications [20, 21].

2.3 Multicore Processing

This is arguably the driver for high performance computing as the use of more cores per chip mirrors other methods of providing for increased performance via grid computing in the past, and more recently the development of cloud computing. These single chip components are built with two or more independent processors onto an integrated circuit die or chip multiprocessor [21] as referred to by Intel Corporation. Common commercially available multicore processors being used presently in desktop applications are mostly dual cores (2 processors on a chip) and quad cores (4 processors); with up to 128 cores and 512 cores expected in desktop computers and CPU servers by 2017 [22]. The hindrances in scalability of performance in single monolithic processors gradually paved way for multiprocessing with the advent of hyper-threading which involves running more than a single thread of instructions in parallel inside a single processor [20]. The Intel Pentium 4 is one of such single processors with hyper-threading capability [21]. This means that with more cores (allowing parallel execution of instructions) in a machine the physical limitations posed by power requirements and heat management can be dealt with while boosting performance [20, 21, 22]. However performance scaling will not only be achieved from the chip vendors alone as single threaded applications have to be re-compiled into 10

multi-threaded applications to take advantage of the performance gains. Depending on the compatibility of the hardware configuration for various purposes, well-written multithreaded applications were expected to offer performance boost of up to 40% in 2005 [20]. So far Microsoft and Apple operating systems have led the race among operating systems compatible with multicore chip processors [22]. High performance growth in computing is not only reliant on drivers like multi-cores and hyper-threading. Feeding the high-performing cores with the required amounts of data necessary to prevent latency and bottlenecks requires a proportional expansion of on-chip memory and/or faster access to data in memory subsystems *21+. The notion that Cache is king indeed summarizes the extreme importance of the on-chip cache size in performance gains by greatly reducing processor latency during data execution and transfer [20]. Figure 2-2 shows a modern generic processor configuration showing the relationship between the on-chip Level 1 (L1) Cache and the off-chip Level 2 (L2) Cache in a core. The challenge has always been with increasing the sizes of the memory blocks closer to the processor given the relative difference in their magnitudes. For example, most computer systems have memory configuration of the range: L1 ~ 32KB, L2 ~ 2MB, Memory (RAM) ~ 4GB and Hard Disk ~ 500 GB [22].

Core

Processor
L1 Cache

L2 Cache

Main Memory (RAM)

Input/ Output

Hard Disk

Figure 2-2: A basic modern processor configuration [22]

With multiple cores expected to compete for cache access it is indispensable that caches may have to be flexible in their configurations; hence while some specific cores require 11

dedicated caches others being shared by groups of cores or globally by all cores will have to be done in such a way that does not counteract the expected gains in performances [21].

2.4 Grid Computing

Just like electrical grids where electric current is available for end-use in a pool injected from centralized and distributed plants, so also does a computational grid provide computing resources (particularly processing power and data storage systems) for carrying out complex problems [23]. Grid computing is an unconventional form of HPC2 which originated in the 1990s after a ground-breaking publication by Ian Foster and Carl Kesselman [24]. This concept has since been embraced as a cost-effective option for tackling CPU-intensive problems in organisations and also across geographical locations, adopting what has become volunteer computing [24]. Grid computing has served to address two major needs: making IT assets remotely available and cumulating computing power [23]. Accomplishing these needs has been made possible through the use of applications capable of farming out bits of a program to thousands of several heterogeneous computers, examples of which include the SETI@home project [23, 34] and the Globus Toolkit [24, 25, 34]. Grids have been applied to computationally-intensive scientific and academic problems requiring HPC like in economic analysis, climate forecasting [24], as well as in power systems optimization [29]. A specific and perhaps one of the biggest applications of grid computing is by EGEE (Enabling Grids for E-scienceE), through which about 80,000 processor cores have been harnessed by over 10,000 users over a span of 50 countries to provide reliability and scalability for intensive tasks [26]. Another factor driving distributed HPC perhaps from a business and environmental point of view is the skyrocketing costs of maintaining data centres, linked mostly to their electricity demands for powering and cooling such centres [34]. As expected, the increasing demand in computing power coupled with larger storage requirements and more robust transmission networks to handle complex scientific tasks, incurs proportional negative effects on the environment as a result of its carbon footprints [34]. Expansion of data centres around the world has threatened to make IT the most significant contributor of greenhouse emissions and one of the largest emitters of GHGs by 2020, producing about
2

Grid computing and the likes of which cloud computing is now born has been referred to as distributed high performance computing (DHPC) systems in the past. See Coddington [30] for further explanation.

12

3% of the total emissions [34]. Hence it is pertinent that the insatiable longing for more computing performance required to optimize operations and decision-making, in a carbonconstrained world we find ourselves at the moment, be treated with concern in order not to incur a rebound effect in the energy efficiency of the supposed solution. This I believe is where distributed high performance computing (DHPC) has a huge role to play through more patronage of grid and cloud computing.

2.5 Cloud Computing

This is similar to grid computing but it goes a step further in its method of resource provisioning [35]. Cloud computing offers in addition to grid computing, utility models for processing capacity, business, and software functionalities [27] as value-added services by vendors to customers. Among Stanoevska-Slabeva et als [34] review of cloud computing includes a definition that cloud computing is a large-scale distributed computing paradigm that is driven by economies of scale, in which a pool of abstracted, virtualized, dynamically-scalable, managed computing power, storage, platforms, and services are delivered on demand to external customers over the Internet. The cloud is increasingly being patronized by companies for its ease of scalability, reliability and readily available services. One common service offered by IT giants Amazon on its Elastic Compute Cloud also known as the EC2, is the Infrastructure as a service (IaaS), which provides on-demand access to raw computing power and storages resources [25, 28]. Other cloud services on offer include software as a service (SaaS) in which the cloud vendor provides all the support of a particular application accessible by the user through browser-based interfaces such as salesforce.com; platform as a service (PaaS), where a sort of value-added computing and application combination is offered on a platform albeit managed by the user; and the business process as a service (BaaS), a relatively newer service which will outsource functional processes to the vendor and the customers are charged for services delivered [27, 28]. The IaaS is of the most relevance to this thesis given its provisioning of resources as far as HPC is concerned. As long as planning of energy systems continues to demand exponential computing power, cloud computing offers a similar path as does parallel computing, and perhaps seems the economically astute solution for decision support tools in the long term. However the success of cloud computing as a viable option for planning and decisions of 13

future power systems [29] arguably will depend majorly on the architecture of modelling applications to harness its infrastructural scalability; not diminishing its perceived promise of reducing carbon footprints of the IT industry [35].

2.6 Grid versus Cloud Computing

Questionably two of the most common forms of DHPC being used for computationally complex and data-intensive problems, grid and cloud computing have a handful of similar characteristics as well as peculiarities between them. The fact that many have argued3 that cloud computing evolved from grid computing means that they easily share similarities like their ease of scalability. For both systems, CPU, network bandwidth and storage utilization fluctuates with user demands and are scaled through load balancing of applications running on separate systems [35]. Another obvious similarity of both DHPC systems are their multitasking and multi-tenancy attributes which allows customers to perform concurrent single or multiple applications at various instances [35]. Some differences between grid and cloud computing are summarized in table 2.1 below.
Table 2-1: Comparisons of grid and cloud computing

Grid Computing Means of utilisation [34] Single tasks allocated on multiple servers

Cloud Computing Leverages virtualization to compute tasks concurrently on the same server

classic usage pattern [34] Level of abstraction [34] Storage Flexibility [35]

Typically executes jobs in limited timeframes Exposes higher level of detail of jobs executed More suited for dataintensive storage; uneconomical for small storages

Commonly used for support of long-running services Provides more abstraction to tasks

More flexible data storage range (1 byte up to 5 Gigabyte)

See Staneovska-Slabeva et al [34]

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2.7 Operation Research Methods

Operations research (OR) have applications in all works of human endeavours particularly as it concerns decision making in economic, engineering, healthcare, military and in transportation processes [31, 32]. Kaufmann and Faure [32] defines OR as the art of applying precise reasoning to problems which, for a variety of reasons, cannot be formulated in the usual precise terms of science. OR seeks to find a best or an optimal solution out of a number of suitable practical solutions to any given problem [31]. The roots of OR are dated as far back as during the world war II when scarce resources had to be optimally distributed, and its application has since evolved following the increasing intricacy and specialty of organisations from the industrial revolution up to this present time [31]. The relevance of OR in energy planning can be traced to its numerous optimization tools, particularly linear programming, which are now highly computer-based due to the complexity of the tasks involved in real-life problems [31, 33]. Arguably one of the most renowned science breakthroughs of the 20th century, linear programming still dominates a large share of all scientific computations handled by computers [7, 31] and can be argued as one of the drivers (alongside other OR tools) for breakthroughs in the processor chip manufacturing industry over the decades4 as far as computing performance is concerned. 2.7.1 Practical Applications of Optimization Tools in Capacity Expansion

Optimization simply aims to maximize or minimize given set(s) of function also known as the objective function subject to given constraints [7]. It is frequently used in a

deterministic sense where similar outcomes are expected for respective initial states of a problem. Non-deterministic optimizations are increasingly being carried out using stochastic programming to account for highly uncertain variables like load demand that could cause different outcomes in complex real-life problems. A typical short term unit commitment problem is shown in (2.1). Minimize: Overall production costs of meeting demand (2.1a)

Moores predictions *19+ the following decade may have been driven by the demands of OR tools on computing power following the multi-disciplinary applications of OR on growing organizations and economies from the 1950s [31].

15

Subject to: Physical, technical, and environmental constraints, etc (2.1b) Such a problem would generally be tackled using optimization tools like linear programming or dynamic programming. Depending on the nature, size and complexity of the problem, further optimization techniques like decomposition methods [7, 36] may be applied to make the problem computationally tractable and efficient, whereas stochastic optimization techniques could be employed to enhance the correlation between the model and its real-life problem through its peculiar modelling of probabilistic elements hence increasing accuracy [7, 33,]. Capacity expansion planning (CEP) generally refers to determining the optimal location, capacity, and timing of new generation and/or transmission builds and retirements. Optimization models typically seek answers to the where, how much and when the capitally-intensive resources need to be built and/or retired by minimizing expected expansion costs subject to operational and technical constraints [37]. The total expansion costs here involves investment costs as well as production costs of meeting short term demands as shown in figure 2-3. The curves give an illustration of the opposite slopes between the net present values of each investment plan and the minimal cost of operation/production for the corresponding plan in each sub-problem [37]. The

investment decisions are more based on economics whereas the production cost reflect not only economics but also reliability criteria of the system. Optimization methods are well suited to CEP in markets with perfect competition where minimization of cost or net benefit maximization is the objective of the problem [6].

Figure 2-3: Capacity expansion planning optimization [37]

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2.7.1.1 Linear Programming (LP) Linear programming comprises the planning of activities to achieve an optimal result, among reasonable options, that most replicates a mathematical model [31]. Typically aiming to maximize or minimize an objective function, LP utilizes some mathematical assumptions like proportionality, additivity, divisibility, and certainty or determinism [31, 36] to obtain an optimal solution without violating any of the binding constraints. While the linear formulation of most practical models satisfy majority of these assumptions, satisfying the certainty assumption is hardly the case hence the wide application of sensitivity analysis [31, 7]. A typical linear program is pre-formulated into either standard or canonical formats depending on the nature of its variables and the constraints [36], after which an appropriate mathematical algorithm solves the model. An example of these formats for a minimization linear program from Bazaraa et al [36] is written as shown in table 2-2.
Table 2-2: Formats for a typical minimization linear program

Standard form Minimize Minimize

Canonical form

subject to

subject to

All constraints are equalities (=) and all All constraints are of the inequality () type variables are nonnegative and all variables are nonnegative.

In a CEP problem, the objective function (usually represented in the form

) would

typically comprise minimizing NPV of costs of generator and transmission resource builds 17

and/or retirements, fuel costs, other fixed and variable maintenance costs, environmental externalities, as well as social costs of unserved energy. The constraints would generally include supply/demand adequacy, capacity reserve requirements (based on forced outage and maintenance rates of the plants), emission constraints, and other system technical restrictions like transmission line capacity. The earliest applications of optimization in the 1950s for capacity planning were modelled using linear programming to find least cost expansion solutions within constrained operational boundaries [7, 14]. Recent improvements to the LP theory now permit automatic recovery from infeasible problems whereby the supported solvers are able to efficiently relax some constraints in order to repair the infeasibilities [41]. However one key challenge that linear programming faces in solving CEP problems is the presence of integer variables associated with investment decisions [37] or unit starts/stops decisions [43] for instance, as well as non-linear constraints that define power flow equations [37]. In summary some major shortcomings of linear programming with respect to CEP that make it less attractive as a stand-alone method include the following [7]: 1. Its tendency to approximate or round up discrete elements like the capacity of generating units or those representing integer or binary on/off decisions, minimum stable level, min uptime and downtimes, and so on, makes the solution less accurate 2. The inability of LP to accurately model non-linear effects like economies of scale and reliability speaks of its rigid linearity conditions 3. It is inappropriate for handling the probabilistic nature of forced outages, and business risks 4. Uncertain input variables like demand profiles as well as climate conditions which generally determine the generation profiles of renewable plants arent well modelled by linear programming 5. LP cannot cope with the multi-staged nature of CEP due to its inability to handle uncertainties. However with over half a decade past, mixed integer linear programming (MILP or MIP) is fast becoming the preferred method for aiding decision-making as far as capacity planning is involved [37].

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2.7.1.2 Mixed integer linear programming (MILP) This is an enhanced form of linear programming which is able to handle problems where some of the decision variables are restricted to integers in the optimal solution [37]. An MILP generally expands the scope or size of an optimisation problem by the inclusion of integrality constraints which otherwise would be treated by a linear relaxation (LR) program. This ensures that some limitations of LP as described in (1), (2), and (5) above are treated more accurately; of course at exponential computational costs [37, 7]. For instance binary decision variables (whether to build or not to build, to start or shutdown plants, etc.) makes CEP a combinatorial optimization problem whose solution space grows exponentially with the variables [37]. To reduce the computational burden MILP-based models employ heuristics as well as the branch and bound technique. The branch and bound algorithm works by adopting a wishful approach that ignores the integrality constraints at the start and hopes that the LP relaxation solved would meet the necessary integer requirements [37, 38]. If the relaxation does not meet the integer requirements the branch and bound method picks one of such variables and branches, creating sub-problems with the integrality constraint of the variable hardened; the sub-problems are solved and the process repeated to satisfy all the integer variables [37]. MILP has been proven to provide robust optimization for CEP purposes and is widely used in major energy planning applications like PLEXOS [37] which is being used to carry out this research. One of the inherent advantages of MILP is its ability to take advantage of multithreading or multi-processing technologies [41] provided by some of the latest solvers. PLEXOS uses commercial solvers such as IBMs CPLEX and MOSEK ApS MOSEK [12] among others for its optimization problems. 2.7.1.3 Dynamic Programming (DP) Dynamic programming is a mathematical technique which is able to solve a sequence of interrelated decisions that are combinatorial in nature through a recursive method [7, 31]. Its properties are based on Bellmans principle of optimality [7, 31, 32] which states that: A policy is optimal if, at a given period, whatever the previous decisions have been, the decisions still to be taken constitute an optimal policy, regard being paid to those which have already been taken[32].

19

Unlike linear programming, dynamic programming starts by solving a sub-problem for its optimal solution and gradually expands the problem by finding the following optimal solution from the preceding one until the problem is solved completely [7, 31]. DP is characterized by the way its problems are handled. Hillier and Lieberman [31] characterizes DP problems as follows: They are divisible into stages where decisions are made for every stage sequentially; Each stage is defined by a finite or infinite states representing the possible conditions the system could take at such stages; The policy decision at each stage serves to transform the current state to a state associated with the beginning of the next stage with the optimal solution of the overall problem expected to be solved at the final stage. This way, optimal solutions for the remaining stages are independent of decisions adopted in preceding stages. Possess a recursive relationship that identifies the decision for stage , given the decision for stage , is available; in which case the solution proceeds in a

backward manner finding the solution at the initial stage. Dynamic programming overcomes some of the challenges of LP in its ability to handle capacity constraints of individual generating technologies, more flexibility in handling nonlinear approximations and convexity requirements, as well as in its relatively improved handling of demand and cost uncertainties [7]. Its advantage of directly resolving intertemporal constraints like minimum up and down times, as well as minimum stable limits for individual generators improves execution times significantly for models dealing with unit commitment decisions, although this advantage diminishes with increasing number of units in the system treated using DP algorithm [41]. Furthermore, DPs

consideration of different states and their combinatorial effects within every stage has serious implications on the computational efficiency of its problem, a phenomenon widely referred to as the curse of dimensionality *7, 31+. Aside its dimensionality constraints, DP is still not ideal for handling uncertainties in capacity expansion and its sequential method of optimization does not allow for effective handling of multi-stage decisions [7]. Recent applications of DP in capacity expansion still face the curse of dimensionality as a result of the computational strain such models place on present processing systems. To 20

account for this, DP algorithm applies some form of heuristic rules to simplify problems by way of eliminating some feasible states which may affect the accuracy of the decisions reached [37]. As an example, STRATEGIST energy modelling software reduces the computational burden on DP problems by specifying a limit to the feasible states that is treated in single years of a capacity expansion problem [37]. 2.7.2 Decomposition Methods

Decomposition, as the name implies, refers to the breaking down of large complex problems into smaller problems for better tractability and more efficiency while preserving the focus of the problem [7, 33, 36]. Real-life problems including CEP applications present linear programs with millions of columns and rows which represent the variables that need to be reduced into sub-problems of manageable sizes. Decomposition methods (e.g Dantzig-Wolfe technique [36], Benders method [7, 39, 47], and Langrangian relaxation [36]) are but some common ways of handling such problems. Another method of breaking down solution complexity include the branch and bound technique [37, 38] among others. As one of the approaches for solving optimization problems, decomposition is not an entirely new concept. Ku [7] portrayed decomposition methods as an alternative to linear programming whereas more recent publications by [36], [39] and [40] have treated decomposition techniques as reinforcements to linear programming problems. Hence the later publications have described the decomposition principle as a way of systematically solving complex linear programs by isolating general constraints from specific constraints which are solved separately in two sets as the master problem and the sub-problem respectively [36]. In general, decomposition techniques have ensured that some previous challenges of linear programming such as its inherent inefficiency in handling nonlinearities and multi-stage planning [7] as well as in stochastic optimization of linear programs [39, 40] are overcome. 2.7.2.1 Benders Decomposition Benders decomposition is a technique that exploits mathematical problems with a special structure called complicating variables; the problems are then made significantly more tractable by temporarily fixing these variables [39, 48]. It stands out from the other decomposition techniques for its flexibility in breaking down large problems functionally and temporally; an attribute that makes its application very wide spread in power systems decision problems [47]. This method of decomposition was proposed by J. F. Benders in 21

1962 (hence the name Benders decomposition) and reviewed by Geoffrion [48] a decade later creating a method now known and applied across various industries as the Generalized Benders decomposition [47]. Other forms of Benders decomposition have been discussed based on their applications across different fields and include the stochastic Benders decomposition [40], as well as the logic-based Benders decomposition and the combinatorial Benders decomposition [39]. This thesis however emphasises the generalized Benders decomposition method which has been key not only in power systems decision problems but specifically in its algorithm similarity with CEP problem formulations [47, 49]. Hence it offers a lot more computational efficiency (due to its ability to exploit parallel computing); its generalized form makes it relevant to different types of decision problems (such as in power systems operations, maintenance scheduling and in planning); and its flexibility and scalability makes it ideal for integrating into existing applications [47]. The generalized Benders decomposition algorithm decomposes large-scale mixed-integer programming (MIP) problems into a master problem (which could take linear, non-linear, integer or continuous forms) [47, 48] and a sub-problem (which may be a linear or nonlinear convex program) that serves to feedback linear constraints, known as Benders cuts to the master problem [39]; a characteristic [47] referred to as linear coupling between the master and sub-program. Applying the Benders decomposition as described by [47] shows a general problem of the following structure: ( ) ( ) ( ) This problem can be represented as a two-stage problem of the form: 1st Stage: ( ) ( ) The master problem decides on a feasible (2.4a) (2.4b) considering constraint (2.3b). is an ( ) (2.3a) (2.3b) (2.3c)

approximation of the optimal value from the 2nd stage as a function of the 1st stage variable

22

; and

is a lower bound of the initial problem (2.3a) and is updated iteratively by the 2nd

stage problem. To check if constraint (2.3c) is satisfied based on the decision , a slack vector is

introduced to test the feasibility of the sub-problem. If any violations occur in the subproblem, a feasibility cut5 is added to the master problem and it is then re-solved. 2nd Stage: ( ) ( ) The sub-problem decides on a feasible given (2.5a) (2.5b) considering the initial constraint (2.3c) with the

from the 1st stage problem. If the solution is not optimal, an optimality cut6 is

added to the master problem and it is re-solved. These iterations are repeated as new feasibility and optimality cuts are generated until the process converges to an optimal solution in a finite number of iterations [39]. The generalized Benders decomposition is well amenable to power system decision problems which typically try to optimize three conflicting objectives in economy, reliability, and risk as shown in figure 2-4 [47]. This relationship is represented in a high level problem form thus [47]: (2.6a) (2.6b) Where tolerance in (2.6b) represents the relaxation of the reliability constraint In CEP, the master problem determines the optimal investments in new capacity infrastructure while the sub-problems serve to determine the minimum cost and reliability of the trial system in each period (usually in years) of the planning horizon [49]. In this case the feasibility cuts feeds back to the master problem infeasibilities surrounding reliability constraints such as load curtailment, operation violation, and so on; while the optimality cuts informs the master problem how to adjust the guess of the second stage problem [47].
5

Benders feasibility cut is a constraint that is added to the master problem to enforce necessary conditions for feasibility of the primal sub-problem [39]. 6 Similarly, the Benders optimality cut is added to the r elaxed master problem based on the optimality conditions of the sub-problem [39]

23

Generalized Benders approach has been proven to suit analyses involving thermal units, limited energy and storage units, as well as non-dispatchable generators, and load management services. Its application in generation planning using the Electric Generation Expansion Analysis System (EGEAS) to adequately estimate incremental costs of meeting allowed unserved energy reliability targets was acknowledged by the International Atomic Energy Agency (IAEA) [8].

Figure 2-4: Relationship between Benders' triplet and Decision triplet [47]

The decision triplet is time-decomposed in an optimization problem as they can be treated separately for different periods of the horizon. Also, each service in the decision triplet can typically be functionally-decomposed; hence leaving a lot of positives yet be leveraged with the Benders decomposition as far as parallel computing continues to evolve into the future. 2.7.3 Stochastic Programming

Mathematical programming techniques are ideally deterministic in nature [42,] making them relatively less credible for making decisions that involve many uncertainties. This is where stochastic optimization comes into play which adopts a random approach towards making decisions that are based on probability distributions of uncertain variables. Linear programming has been used to model uncertainty right from the mid-1950s as a two-stage form in what is now referred to as stochastic programming with recourse [7]. A decision taken in the first stage is followed by a sequence of a random event and then a second stage (or recourse) decision that compensates for the effects of the first stage decision [7, 43]. In this context, the first stage investment decision vector x, classified as here-andnow is taken before the random events are treated after which the operating (second stage) decision vector y are taken in a wait-and-see approach [7]. Just like LP, a stochastic integer programming (SIP) problem is formed where any of the first or second stage decisions must be integers.

24

One application of the two-stage SP in CEP is the scenario-wise decomposition. This form of Stochastic optimization decomposes all possible paths (or scenarios) of a problem based on discrete probability functions which they follow [43]. This assumes that the distributions of the random parameters are represented by discrete finite scenarios * probabilities * +, with +. The equation (2.7) is a standard representation of a two-stage

scenario-wise SIP formulation [44].

Minimize:
Subject to: ( ) (2.7)

Where: are nonnegative integer with represent first- and second-stage decisions respectively The parameters ( distribution ) are actual realization of the random event with known to the second stage

, which feeds uncertain data

denote real and integer values respectively represent the non-anticipativity constraint which guarantees that the first-stage decisions are identical across all scenarios

Stochastic optimization has applications in all phases of energy planning such as in Long-, medium-, and short-term scheduling. For instance using simulation methods like Monte Carlo (see extensive literature in [45] and [46]), uncertain inputs w, like load, fuel prices, natural hydro inflows, wind speed, etc., can be modelled across a number of S samples; in practice limited by computing memory [43]. That is to say, in a long-term planning or CE problem, a first-stage decision to build or retire generating and transmission infrastructure at a certain time is optimized against S samples of discrete scenarios reflecting possible outcomes that could affect second-stage decisions like economic dispatching of the 25

resultant capacity mix. Hence the problem becomes S times larger than a deterministic case [43]; however parallelization of the optimization process by most solvers on multicores ensures that such problems are not necessarily S times less tractable.

2.8 Dealing with Uncertainties and Imperfections inherent with Decision Support Tools
Decision making in practice is subject to different sources of uncertainty regardless of the magnitude of the impacts of such decisions. In the same vein, models that try to mimic reality are only simplifications of the many uncertainties that abound in real-life decisionmaking. These uncertainties for instance stem from input data to a model (data uncertainties), parameters used in simulating the model (parameter uncertainties), and the approximations of reality that such a model represents (model uncertainties) [50]. Some ways these uncertainties have been dealt with particularly for long-term decisions include the use of scenario analysis and sensitivity analysis. 2.8.1 Scenario analysis

The Oxford English Dictionary defines a scenario as a sketch, outline, or description of an imagined situation or sequence of events which could include a synopsis of future hypothetical incidents, the course of action to be taken, and a scientific model intended to account for such imaginary occurrences. In an energy planning exercise, these uncertainties abound and range from demand variations to future demand growth rates, weather conditions to seasonal and climatic evolutions, as well as the economics of energy prices over time. As a result, a broad prediction of possible outlooks can help identify where a system or project being modelled is more vulnerable; hence such vulnerabilities can be evaluated and contingency plans elaborated to control the risks [37] or exploit the opportunities that may surface. Scenario analysis is described in [37] as the construction of a possible, coherent and relevant set of scenarios in order to represent different visions of the future, with the objective to analyse the impact and evaluate the risk of each scenario over a system or a particular project. Ku [7] gives a more detailed literature review of the origin and applications of scenario analysis with more emphasis to capacity expansion. It involves the construction of each 26

scenario to reflect a possible future outlook, and then assessing the implications of each scenario [7, 37]. An example of a scenario analysis using modelling tools is the

development and assessment of the Australian Large-scale renewable energy target (LRET) in the NEM. A scenario could be constructed to evaluate the effect of meeting the overall LRET target in 2020 through a fifty percent contribution from investments in Wind generation in South Australia. 2.8.2 Sensitivity analysis

Unlike scenario analysis that tries to deal with uncertainties by evaluation of hypothetical future occurrences, sensitivity analysis is more concerned with identifying the relative effects of the various components of a decision support process. Saltelli et al in [51] defines Sensitivity analysis as a study of how uncertainty in the output of a model (numerical or otherwise) can be apportioned to different sources of uncertainty in the model input. It can be carried out to screen input and output data for a model, the model parameters, as well as the overall effectiveness of a model for a particular purpose. A method to perform sensitivity analysis to deal with data uncertainties is explicitly described in [52]. Bertsch et al [50] focuses on testing the sensitivity of parameters for multi-criteria decision analysis (MCDA) models. I introduce sensitivity analysis here for the benefit of understanding its purpose and importance towards arguments that will be based on results of a decision support tool which will be used for this thesis. As important as a sensitivity analysis is towards the users and potential users of a particular tool, or even the public who eventually bears the effects of decisions made following output of a model, some have argued a few weakness of this process. Ku [7] argues that sensitivity analyses are only rigorous enough to validate deterministic models in particular. Also its inability to handle multi-staged simulations and characteristic sequential handling of factors, among others make sensitivity analysis unideal for use on its own [7]. However the fact that it is common place amongst most experts that models are probably never validated but rather known to withstand a number of tests [51] is one reason to argue for the relevance of sensitivity analysis, especially when used alongside other processes like scenario analysis and perhaps risk analysis7.

Risk analysis is concisely described in [7].

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2.9 Representation of Load Profile by Support Tools

The demand profile for a region whether short-term (periodically, daily), medium term (weekly, monthly, seasonal) or long term is arguably the most significant data in modelling exercises. The most important factor and of course one peculiar to this industry is the relatively non-storable nature of electricity, meaning that generation is required to follow load variations instantaneously. This makes planning for capacity expansion for electricity industries a herculean task owing to the significant effort put towards adequate representation of load over long periods. Such forecast may consider many natural and cross-sectoral factors that influence demand such as weather and climatic conditions as well as the elasticity of demand over the planning horizon. With the growing share of intermittent renewable sources of generation across the world, there is increasing focus on the short-term temporal load variations in CEP to ensure that reliability is not just achieved but at the least cost, based on the optimal expansion of capacity mixes8. For its efficiency, relative accurate representation of seasonal effects, and computational tractability, load duration curve (LDC) approximations have been widely adopted in support tools for modelling load demand. The support tools are able to build LDCs by dividing and reordering the chronological load profiles into different time periods according to the probabilities of particular loads being exceeded [37, 73]. This implies that costs and supply availability depend solely on magnitude of load and not on the time at which the load occurs [7]. Figure 2-5 shows a half-hourly chronological load profile for South Australian demand in the month of March 20119 with its LDC representation shown in Figure 2.6. As an approximation of the temporal characteristics of the load profile, the LDC does not model unit commitment decisions and inter-temporal constraints like ramp-rates, start-up costs, and minimum up and downtimes at all; hence the short-term chronology needed to capture time-scale relationship between consumer load and the growing intermittent generation is not preserved [37, 74]. One method of accounting for the renewable intermittency, but not to address these chronological constraints, discussed in [9] is by subtracting the total renewable generation from the load before the LDC is created in the simulation run. This method however has been criticised for not taking into account the probabilistic nature of such intermittent generation, meaning that the uncertainty in amount of generation from wind and solar plants have to be known beforehand to be included in the LDC formulation upfront.
8 9

The effect of capacity imbalance is discussed in section 3.3. Coined from [41]

28

Figure 2-5: South Australian demand curve for March 2011

Figure 2-6: Load Duration Curve representation of Figure 2-5

Over time the accuracy of the LDC approximation in long term studies have been improved by increasing the resolution of curve representation up to limits of computational tractability. For example earlier models have used one block per LDC per week while a more recent exercise carried out for the New Zealand market used five blocks per LDC per month for a planning horizon of 18 years [37]. PLEXOS uses statistical methods like weighted least squares methods among others for fitting blocks to the LDC as shown in

29

figure 2-7. Increasing the number of blocks per LDC as well as the concentration of LDCs in the planning horizon improves the approximation to the original load profile. For instance modelling with one LDC per week obviously approximates the load better than with one LDC per month (using the same number of blocks); in which case commissioning and decommissioning of plants can only be made weekly or monthly respectively.

Figure 2-7: A 12-block approximation of the LDC using least-squares method

With advances in computing power, retaining chronological information of demand profiles in long-term studies is becoming an area of interest not only to capture the effects of the intermittent renewables on the dispatching of thermal plants, but also for more accurate modelling of emissions from fossil plant generation during start-ups and run- up or down10. This wasnt the case in the past where intermittent energy sources had insignificant shares in generation mixes. Also a couple of recent literatures have focused on ramp rates alone in considering chronological load variations in their analysis11. It is possible to capture more intertemporal properties like start and shutdown costs (reflecting generator preconditions say, under hot, warm or cold states), run up rates, start fuels, etc. However depending on the size of the problem, computation is still an issue as chronologically solving long-term models consumes exponentially more resources.
10

For instance in capturing start-ups of fossil and non-fossil generation, emissions can be accounted for where different sources of fuels are used during start up as well as emissions from auxiliary startup plants like boilers, etc. 11 As revealed by the University of Cambridge Electricity Policy Research Group in [75].

30

Chronological method generally requires more blocks than the LDC approach with minimum resolutions of two blocks per day to ensure daily peak/off-peak cycles are captured [41]. PLEXOS approximates the time-dependant load by fitting blocks into the curves; the more blocks defined the more temporal characteristics are accounted for in the planning horizon and the more computational resources and time demanded by the model simulation.

Figure 2-8: Chronological representation of the load profile using 50 blocks

Assuming a 30-day months load profile is represented using 200 blocks fitted across the demand then the chronology is only retained up to:

This means that roughly 7 troughs of chronology per day is observed in the simulation although the demand slicing uses sophisticated weightings as shown in figure 2-9 where the same south Australian demand is simulated using 200 blocks per month of chronological fitting through weighted least squares method.

31

Figure 2-9: 200-Block representation of the demand applied in this research

Comparing the slicing of the demand curve in Figure 2-8 and 2-9, one can clearly see that using more blocks is likely to increase the accuracy of the simulation results given that the troughs are better reflected in sliced load representation of fig 2-9 with 200 blocks than fig 2-8 with 50 blocks. In summary, this chapter has reviewed all areas of literature that relates the importance of High Performance Computing (HPC) to decision making process in the energy industry through capacity expansion planning in electricity systems. In other words, the impact of future investment pathways can be tested using optimization techniques like linear programming, stochastic programming, among others. The level of input detail modelled is somewhat proportional to the accuracy of the results expected, hence with advancement in computing performance notwithstanding more complexity of energy systems; one would expect critical investment decisions to be based on more rigorous modelling exercises. Unfortunately, chip evolution has taken a different turn (multi-processing) which means decision-support tools used a few years ago will have to be re-designed to tap the advancements so far. This will ensure that the tractability excuse normally given for dwelling decisions on simplistic and unrealistic models should not be the case anymore.

32

In this research the use of time-dependent demand profiling (chronological demand) over aggregated load duration curves (LDC) is used to demonstrate how the present computing systems is able to accommodate more complex and realistic models to aid better decisions.

33

INVESTMENT DECISIONS IN ELECTRICITY MARKETS

Energy policies are being introduced by states and regions around the world for various reasons including improved reliability and security of supply, environmental concerns, and to exploit the economic benefits of competitiveness in energy markets. Electricity is arguably the most useable form of energy, perhaps the reason why its market is very closely linked with economic growth and social well-being of a people [1, 7, 53]. The past four decades has recorded an average annual growth of 3.5% in electricity demand globally [14]. The next four decades on the other hand anticipates that up to 20% of the total world energy investments (USD 32 trillion dollars) will be committed to the electricity sector [1]. These investments when analysed individually follow market signals like prices and supply/demand dynamics [54] as one would expect, but most importantly tend to be influenced by the frameworks under which such markets operate such as in monopoly, oligopoly or in liberalized markets. The peculiar nature of investments in energy infrastructures, particularly in electricity generation makes it a worthwhile area for more attention. The huge capital commitments, long payback periods, long-run uncertainties, irreversibility of investments, and openness of investment options [56], are some of these characteristics of investment in electricity infrastructures that warrant the best possible decision support. Traditionally, investment decisions were part of centralized regulation of electricity structure geared towards providing electrical energy to customers economically and within acceptable reliability and safety levels [7, 8, 55]. Security of supply, and efficiency gains through economies of scale were the priorities [7], while risks were more or less borne by the end-users [3, 72] under such structures. This followed the inclusion of environmental considerations sanctioned internationally by the Kyoto protocol in the 90s and also a widespread restructuring of electricity regulations for better cost competitiveness through deregulation [3, 7, 53]. However in the competitive markets, decisions to invest in generation infrastructure (in particular) are based on decentralized initiatives of private market players [3, 7, 58] and require special treatment as will be discussed subsequently in this chapter. This chapter treats the representation of the wholesale market elements using decision support tools and the implication of the generic frameworks on investment decisions from a benefit maximization point of view. The objectives, risks, constraints, and uncertainties of 34

the monopoly and liberalized frameworks are discussed and reviewed. The different mechanisms currently adopted in these markets and their effects on capacity expansion and investment decisions are discussed focusing on the Australian (NEM) perspective.

3.1 Regulated Electricity Framework

The idea of a regulated framework is very common in a monopolistic system whereby a vertically integrated utility controls generation, transmission and distribution of electricity to customers in a region. For a monopolistic electric utility, the obligation to meet demand at a certain reliability level implies a responsibility of investing in new infrastructure [59]. Figure 3-1 shows a simplified generic representation of an electricity monopoly structure that illustrates the relationship between a single utility and the end-users or a major market player with monopolistic influence in a market. In a vertically integrated regulated monopoly the utility controls all business functions and is obligated to meet entire customer demand in the region; there is no competition hence the need for government regulation of the monopoly to prevent abuse of power [60]. A regulated framework could also have some form of competition particularly at the generation level however

monopolistic behaviour usually dominates the retail level [60].

Figure 3-1: Regulated electricity framework

The South African electricity structure (see the IAEA [61] and [62]) where ESKOM plays a monopolistic role is a typical example of a monopoly framework, which like most other

35

monopolies in practice fall, somewhere between the vertically integrated and the unbundled monopoly described in [60]. The level of regulation in monopolized markets is seen to be critical in the scientific representation of these markets as it reduces a great deal of uncertainties in capacity expansion planning. With limited competition in the market, an optimization exercise carried out for the monopolies (being regulated) should yield similar results with one carried out by government regulators (for instance) seeking benefit maximization of all players in the market. This is supported by the fact that uncertainties like load demand growth, discount and interest rates, and even future electricity prices are more harmonized giving the planning process more of a deterministic outlook. In effect, monopolistic players are less exposed to investment risk in exchange for lower returns while the customers bear the consequences of bad investment decisions [59, 57] one way is through an imposition of cross-subsidized prices on the customers12 [57]. This guaranteed return for investors also hinders technological innovation; a scenario which is unlikely to happen in the liberalized markets where competition breeds incentives for breakthroughs [59]. The non-existence of a market means that prices do not accurately reflect supply adequacy. In addition investments in transmission tends towards eliminating congestion entirely which may not be economically and socially optimal for the system [63]. The relatively less uncertainties involved in modelling regulated systems makes known techniques such as optimization tools and multi-criteria decision analysis adequate for carrying out long term planning. In this case exogenous variables like weather conditions and fuel prices bear most of the uncertainty and these could be dealt using scenario and sensitivity analysis to acceptable degrees of confidence [67].

3.2 Liberalized Electricity Industry

Deregulation of the electricity industries around the world only started to take shape in the late 1980s following Britains disintegration of its hitherto vertical structure. Within a decade of the UKs electricity sector restructure, a couple of countries around the world followed suit including Australia, Brazil, Canada, New Zealand, parts of the United States and some other European countries [7]. At the time expectations of the benefits of vertically unbundling ranged from introduction of competition among generators, cheaper
12

Monopoly players are likely to adopt a pricing method called cross -subsidy whereby their bulk customers are offered attractive cheap prices and the small consumers are charged more to enable recoupment of lost income [57].

36

electricity for customers as well as freedom of negotiation with suppliers of choice, and a better reflection of demand/supply relationships through the adoption of spot markets. Whether all of these objectives have been achieved so far in the liberalized frameworks mentioned above remains to be seen; however distortions from regulations such as the implementation of price ceilings among others are likely hindrances to these objectives [72]. Due to the complexity of electricity networks, horizontal unbundling of supply utilities have more or less been carried out on the generation and retail levels. Ownership and control of transmission and distribution infrastructure in liberalized frameworks is mainly that of the regulatory authority or market operator who have as important a role as the generators in the overall sustainability of unbundled markets. Unlike in the monopolized framework, decisions to invest and retire capacity are made in a decentralized profit-oriented move by the competitors in the industry. Market participants are forced to draw conclusions from price signals and face numerous uncertainties which mean imperfect foresight of future market conditions [3, 58]. This framework incurs higher risk profiles to planners who not only have to tend with uncertainties in exogenous variables like fuel cost and demand but also with short-term and strategic behaviours of competitors and the regulatory authorities [67]. Future revenue streams are not guaranteed as generators earnings are based on cost competitiveness with other generators and also the fact that this framework does not allow investment risks to be passed down to consumers [3]. The stock and flow diagram in figure 3-2 gives the interrelationships among different components of an electricity structure. It shows a connection between uncertain long-term market variables such as the reserve margins, prices, operation costs, and profitability that each participant in a liberalized market is faced with. The first delay, 1 represents investment decision delay which is the wait for more information on the profitability of possible investment options while time lags due to permitting and construction times of new capacity is denoted by 2 [56]. The uncertainties and complexity of investments in the liberalized market is not peculiar to the competition alone. Regulators have to deal with ensuring that market efficiency is not jeopardised while creating a level playing ground that incentivises participants to invest in generation capacity; this of course has to be carried out with limited certainty about the strategic direction of other market players [67]. The more recent need to incorporate a sustainability model for the market structure by regulators based on supply security and environmental pollution increases the burden and risks involved in ensuring adequate 37

reliability levels by the operators [64, 67]. Ironically, market dynamics and economic theory which are the basis upon which the liberalized frameworks are proposed appear imperfect due to inherent characteristics of energy infrastructures namely: its investment lumpiness and the non-linear benefits of economies of scale [58].

Figure 3-2: Participant stock and flow diagram in a liberalized electricity framework [56]

The dilemma of incentivising participants to provide optimal level of investments, keeping electricity prices at a minimum and constraining carbon emission while meeting demand at certain reliability levels among others in liberalized markets across the world has forced markets to adopt various kinds of market models. Some common models include the energy-only13 market as adopted in the Australian NEM, capacity payments14, and the capacity obligation15. Other models include the expected price approach and operatingreserve approach discussed in [3]. Modelling these market models are carried out differently regardless of whether it is being done for welfare maximization (from the market operators point of view) or for profit maximization (participants). The use of the widely adopted multi-agent based modelling techniques as well as system dynamics (discussed in [67]) which are able to capture competitive behaviour among participants, are fast becoming the preferred way of modelling long-term investments in liberalized systems.

13 14

Detailed review of this approach is treated in [3], [65], and [66]. Same as in 13; its adopted in Spain, Argentina, Colombia, etc. 15 Treated extensively in [65] and [66] and as capacity market approach in [3]; used in regional electricity markets around the USA like the Pennsylvania-New Jersey market (PJM)

38

3.3 Implications of Capacity Imbalance

The objective of an optimal expansion plan is to expand capacity to a (equilibrium) point such that marginal cost exceeds the benefit of retaining the status quo [58]. There have been a number of literatures comparing the electricity frameworks and their ways of dealing with demand uncertainty as well as their implications on the reserve margins of various electricity industries around the world. Ku [7] and Haynes et al [69] discussed the pros and cons of under- and overcapacity from a CEP perspective; however, Green [68] discusses the implications of investment in the different capacity mixes (i.e. baseload, intermediate and peak generation) on market prices. Kilanc and Or [54] have argued based on experiments carried out, that investments in power markets do not always go in tandem with demand growth and capacity retirements due to imperfect foresight as well as investment decision and construction delays among others. Here I synopsize the effects of capacity inadequacy and imbalance that need to be considered while modelling long term investment decisions for electricity markets. Capacity over-design or overcapacity has enjoyed the better share of arguments over time and have actually occurred more in practice [58, 69]. However the majority notion that competitive frameworks tend to favour under-design decisions while monopoly players tend to exploit benefits of economies of scale leading to overcapacity, seems very logical. This phenomenon can be shown for example by the decreasing margins experienced in most markets after liberalization such as the PJM, Nordpool, Spanish wholesale market, Australian NEM, and so on.16 This reduced margins in most cases forced extreme peak prices in these markets as portrayed in figures 3-3 and 3-4. Aside from the reduced marginal costs of incremental units that come with a larger system size, the relatively cheap cost of foregoing additional capacity due to error possibilities in demand projections, and the possible stimulus for industrialization and growth of a region are some of the other benefits of overcapacity regardless of the framework. On the other hand under-capacity allows the flexibility of adjusting to changes in demographic or demand growth profiles; offers the benefit of potentially exploiting technological improvements leading to financial and/or efficiency gains; and also arguably treats inter-generational equity17 considerably hence maximizing welfare gains for present and future generations [69].

16 17

See [68] Capacity under-design to an extent forces future generation to pay for the extra capacity they require unlike in overdesign situations where earlier generations bears costs of capacity they might not utilize and hence offers no welfare gains.

39

Figure 3-3: The Australian wholesale market reserve margin and peak prices after liberalization [3]

Figure 3-4: The Spanish wholesale market after liberalization [3]

In liberalized models where spot markets determine prices of electricity, Greens *68+ evaluation of the impacts of capacity mixes on prices gives a finer perspective from which planners need to consider the effects of under- and over-capacity issues. This model adopts a mix of baseload and peaking plants to illustrate effects of bad capacity configurations in a

40

competitive market with respect to the demand profile in a region. Figures 3-5, 3-6, and 3-7 summarize the results of the capacity model discussed in [69].

Total Revenue Total Cost

Figure 3-5: Optimal mix and level of capacity

Total revenue curve is higher than the total cost beyond period T* meaning the base-load generators will operate at super-normal profit

Figure 3-6: Right capacity with sub-optimal base-load

Surplus capacity forces both the peaking and base load generators into loss hence impossible to recover investment costs

Figure 3-7: Excess capacity with optimal base-load

41

3.4 Case Study: The Australian National Electricity Market (NEM)

The Australian NEM began operations in 1998 after restructuring of the previous framework leading to a competitive wholesale electricity market. It boasts of the worlds longest interconnected power system with a distance spanning about 5,000 kilometres, connecting five regions viz: New South Wales, South Australia, Queensland, Victoria, and Tasmania. The NEM records electricity transactions of more than $10 billion annually in meeting demands of over eight million users in the Eastern part of Australia. The Australian Energy Market Operator (AEMO) is charged with operating the NEM as well as coordinating the planning of infrastructure for the efficiency, reliability, and security of the system based on the National Electricity Law and Rules [76].

Figure 3-8: The Australian NEM showing the 5 inter-connected regions [76]

The design of the NEM is founded on four main principles [76, 77] spanning: Marginal pricing; Spot pricing; Locational pricing; and Decentralised decision-making and risk management.

42

Marginal pricing is reflected in the incremental increase/decrease in generation or demand in a spot market where AEMO dispatches generators18 to meet demand at 5-minute intervals. The (marginal) dispatch prices are averaged every half-hour to determine the spot prices for each trading interval upon which generators are paid for their supply in each region. The spot prices though dictated by supply and demand balance (also considering system and transmission constraints) are capped, as prescribed by the National Electricity Rules (NER); presently at a maximum of $12,500/MWh and a minimum of negative

$1000/MWh. By way of considering system reliability and transmission constraints into pricing, the NEM adopts an approximate form of locational pricing by the use of marginal loss factors (MLF)19 calculated at every node based on the generation to demand ratio at the nodes20. These locational signals inform market participants about energy variation within the nodal locations hence guiding the operation of existing generation while affording new entrants the opportunity of making more informed decisions regarding loss reduction in the choice of location and technology of plants [77]; this serves the overall efficiency of the market in a decentralised decision-making pool of participants. While investment decisions can be seen as decentralized strategic moves by the competing market participants in the NEM, AEMO retains planning and coordination of the market to ensure that its long term efficiency is not jeopardized and also to steer the market in the same direction envisioned by national objectives. Key policies impacting generation investment in the NEM include the Australian Governments carbon emission reduction policies, the national renewable energy target (RET) scheme, and the GreenPower Accreditation Program [78]. Policies like these in the last decade have helped ensure a shift in generation investment towards renewable energy technologies (as shown in figure 3.9) and promises more within the next decade [79].

18

These generators are classified as scheduled, semi-scheduled or non-scheduled as discussed in Article 2.2.1 of the National Electricity Rules (NER) designed by the Australian Energy Market Commission (AEMC) [83]. 19 The MLF represents the change in network losses across the NEM as a result of small increases in load at connection points compared to hypothetical changes if the loads were located at the regional reference node (RRN). This is represented mathematically as:
20

(3.1)

The MLFs are computed every financial year by AEMO and reflects the nodal losses with reference to the regional node and the change in nodal demand yearly [77]. The most recent MLFs computed for the 2011/12 financial year can be found in [84].

43

Figure 3-9: Shift towards renewable energy sources in the last decade [79]

AEMO plays a vital role in consolidating the supply adequacy, network planning and future investment opportunities through its suite of planning documents like the Electricity Statement of Opportunities (ESOO) [79], National Transmission Network Development Plan (NTNDP) [80], and a host other documents prepared for each regions like the South Australian Supply and Demand Outlook (SASDO) [81]. With carbon pricing on the verge of coming online in Australia from the next financial year [82], and its expected push on renewable energy investment, more rigorous centralized planning is expected to inform not only investors but the public alike on the likely effects of pricing carbon in the NEM.

44

MODELLING LONG-TERM INVESTMENT DYNAMICS USING PLEXOS

Electricity markets exhibit some structural patterns and dynamics that are easily captured by mathematical models which aid in testing the likely impacts of policy outcomes in a system. PLEXOS LT plan offers a very flexible and rigorous environment for the formulation and optimization of Mixed-Integer Linear Programs (MILP or MIP) that effectively mirror the dynamics in a whole range of market frameworks. Here an electricity model21 is developed using available data and some hypothesized data that closely mirror the South Australian wholesale market and would be used to provide answers to questions posed in the objectives section of this thesis; this is of course in response to the long-term dynamics of the liberalized framework practiced in the NEM. Policies constraining carbon emissions in the long term here in Australia are well accounted for in the model including effects of a likely carbon pricing commencing in 2012. This chapter discusses the PLEXOS LT Plan components which includes variables, parameters, and the problem formulation. The model is described in detail, endogenous and exogenous variable used in the model are highlighted including assumptions used in gathering exogenous data. Deterministic and stochastic simulations are carried out on the model assessing the base case and other scenarios while also treating the sensitivity of model outcomes to buttress conclusions reached.

4.1 PLEXOS LT Plan

The LT Plan is one of the unique simulation phases22 offered by the PLEXOS environment with a sole objective of finding optimal combination of generation and transmission builds and retirements over planning horizons (typically 10 - 30 years); hence dealing with capacity expansion problems. Though focused on discounting and end-year effects of expansion decisions, the LT Plan still handles generic constraints common to medium- and short-term decisions like emissions, fuel, reserve constraints, etc. Long term planning is not
21

The use of model henceforth in this thesis refers to the representation of a particular power supply/demand system while tool refers to the software architecture, in this case PLEXOS for Power Systems. 22 Other simulation phases PLEXOS solves are the Projected Assessment of System Adequacy (PASA) or MT schedule and the ST schedules.

45

only carried out in deterministic fashion as the PLEXOS LT Plan can stochastically find the single optimal solution in the face of uncertainties in any input like wind generation, load, fuel prices, etc. In modelling long-term capacity expansion for electricity markets PLEXOS captures a variety of possibilities through its many features including expansion and retirement of infrastructure (such as generators, AC/DC transmission lines, interfaces) in multi-stages, physical generation and load contracts from participants directly to customers, as well as modelling mutual exclusivity among projects. A whole range of generating options can be modelled from conventional thermal plants (with or without CCS) to hydro (run-of-river or with storages) down to little details like run up rates and ramp rates (depending on cooling states of generators). 4.1.1 PLEXOS LT Plan formulation

The LT Plan formulation uses Mixed-integer programming for solving capacity expansion problems using a set of user-defined elements and the necessary problem variables as shown in table 4-1 and 4-2 respectively. The objective function minimizes the net present value of build/retire costs, fixed operations and maintenance costs, and the expected production costs following the investment decisions. The LT Plan formulation can be represented in a simplified form thus: Minimize (4.0): ( ( ) )

)+

)+

46

Subject to:
Energy Balance (4.1):

Feasible Energy Dispatch Accounting for Maintenance and Forced Outage Rates (4.2):

( (

) )

Feasible Builds/Retirements (4.3):

Integrality (4.4):

Capacity Adequacy (4.5):

23

Table 4-1: LT Plan key formulation elements

Element

Description ( ) Discount rate. We then derive which is the discount factor applied to year , and which is the discount factor applied to dispatch period

Unit

23

The forced outages and maintenance outages are ignored in the capacity constraint (4.5) since the input reserve margin already accounts for forced outages [41].

47

Element

Description Duration of dispatch period Overnight build cost of generator Maximum number of units of generator be built by the end of year allowed to

Unit Hours $/KW

Maximum generating capacity of each unit of generator Number of installed generating units of generator Value of lost load (energy shortage price) Short-run marginal cost of generator which is composed of [Heat Rate] [Fuel Price] + [VO&M Charge] Fixed operations and maintenance charge of generator Average power demand in dispatch period System peak power demand in year Margin required over maximum power demand in year Penalty for shortage of capacity reserve Penalty for excess in capacity reserve The weighted average cost of capital is a projectspecific discount rate for generator

MW

$/MWh $/MWh

$/KW/year

MW MW MW

$/MW $/MW %

Table 4-2: Some common problem variables used in LT Plan

Variable

Description Integer number of generating units built in year Generator Integer number of generating units retired in year a collection of generator Dispatch level of generating unit in period for

from

48

Variable

Description Unserved energy in dispatch period Capacity shortfall in year Excess capacity in year

Constraints (4.1), (4.2), and (4.3) define minimum constraints that typically distinguish capacity expansion planning from mid- and short-term planning exercises. The integrality constraint in (4.4) makes the problem more realistic in representing the lumpiness of the investments, mothballing, or retirement decisions; however it also increases the complexity of the problem, although with MIP-compliant solvers such problems are tractable. The LT Plan formulation by default does not require reserve margin constraints in (4.5) (even though it will be involved in one of the scenarios developed in the model for this thesis) which means that a trade-off between shortage costs24 and the economics of expansion determines whether infrastructure is built or not; and the resulting reserve margin may/may not meet reliability standards. Given that this research also aims at studying the impact of intertemporal constraints and formulations in long-term planning using chronological modelling of the demand, I deem it necessary to highlight some additional formulations in the PLEXOS LT Plan that are otherwise ignored or linearized by the LDC approach.
Minimum Stable Level (4.6):
( )

Minimum Up Time (4.7):

GenTurnOn (t): ( ) ( )

GenOnk >= GenMUTt for k=t to t+MUT, and all t

Minimum Down Time (4.8):
24

This could be viewed as the customers value of reliability or loss of welfare due to interruption, and its computation varies across customer types, time of interruption as well as other factors discussed in [8].

49

GenTurnOff (t): ( ) ( ( ))

GenOffk >= GenMDTt for k=t to t+MDT, and all t

Start Cost and Shutdown Cost (4.9):
( ) ( )

( )

Objective (Minimize) (4.9.1):

Table 4-3: Description of variables used to define inter-temporal constraints

Variable

Description This is the maximum output capacity of the unit in period This decision variable represents the number of units operating in each dispatch period, Integer On/Off decision variable Linear start-up tracking variable Linear shutdown tracking variable

GenOn GenStart GenStop

These simple representations of the intertemporal constraints (4.6 4.9) included in the LT Plan MIP formulation for chronological runs hold true for hourly dispatch periods as is used in this analysis. In constraint (4.9), the units using additional variables
( )

variable tracks the on/off status of generating and

( )

before start or shutdown costs

are applied subject to minimizing the objective function defined in (4.9.1). Another point worth noting in the minimization problems handled by LT Plan is the lumpy capital cost, which represents the whole capital cost incurred up to the

commissioning date. In this simplified formulation, the capital cost can only be amortized if the economic life of the new builds spans within the planning horizon which makes it prone to error given that units could be built in the last year of the horizon. To cope with this loophole, the PLEXOS LT Plan annualizes the build cost by equivalently spreading the build cost over the economic life of the investment defined by the user, starting from the year of build. This is achieved by substituting expression (4.0.1) into the LT problem given in (4.0). 50

(4.0.1)
( [
( )

4.2 Model Overview

For this thesis, an optimization-based model incorporating all the existing thermal and wind generators in South Australia are modelled. The SA region is treated as a stand-alone market but with inter-regional transfers between SA and Victoria modelled as a wholesale market object. Owing to this arrangement electricity is traded between SA and Victoria (within seasonal interconnector transfer limits) in response to correlations between endogenously determined prices in SA and exogenous historical Victorian averages defined as part of the model input. This model serves the purpose of benefit maximization for all market participants from a market operator point of view assuming a perfectly competitive framework. The model excludes transmission limits and congestion modelling in its optimization of production costs within the SA region however locational losses incurred by all individual generators are represented by the marginal loss factors as defined in [84] for the 2011/2012 financial year. Model parameters and Input data and based on industry-wide databases25 and publications (particularly from AEMO) available as at July 2011; including data available through previous Energy Exemplar consultancies involving the NEM. While utmost attention was given towards replicating the existing system of electricity wholesale supply and demand in SA (which is somewhat reflected in the prices), limited access to the most up-to-date data and information regarding generating portfolio owned by different participants among others mean that results of modelling carried out are only sufficient for analytical purposes. 4.2.1 Bulls eye representation of model variables

The model developed for this research can be summarized using the bulls eye diagram given in figure 4-1. Variables placed in the centre of the bulls eye represent those internally computed or influenced by other such variables, hence referred to as the endogenous variables. The inputs that were needed to closely simulate the behaviour of wholesale electricity transactions in SA are mentioned under the exogenous variables while the ignored parts of the system are shown in the outermost part of the diagram. The

25

Some of data used were made available through Energy Exemplars rich database of information used for consultancy purposes.

51

approximated impact of omitting transmission parameters in this model is cushioned in build outcomes based on capacity addition limits of certain generation technologies in different locations; just as the use of MLFs ensures that congestion isnt entirely ignored in short-term dispatch decisions. The SA region is modelled as an aggregated case, whereby all generators and the regional load are connected to a node where the pool price is decided. The settlement method isnt affected however, as outputs at generator terminals are balanced against the auxiliary station demands and the marginal losses for the different generators. Correlating marginal costs of generating in the SA region with hourly prices defined in the Victoria region26 determines if power is purchased (imported) or sold (exported) depending on the seasonal interconnector flow limits defined in the model.

Figure 4-1: Bulls eye representation of the SA model

4.3 Model Input

PLEXOS models the market elements and systems individually or wholly using objects such as generators, nodes, regions, lines, constraints, and so on with input data defined for their
26

These prices were hypothetically scaled endogenously to fully reflect other scenarios like in the different carbon pricing scenarios.

52

properties. These properties can be made static if fixed for the whole simulation horizon or dynamic if more flexibility is to be introduced, particularly in temporal fashion. The complete list of parameters and input data for every generic object used in this model is very extensive hence provided in the Appendix. Table 4-4 highlights the generic objects used in building this specific model as well as brief definitions of their properties and source of information (where applicable). Intended for use with a long term planning horizon, the input data are made as dynamic as possible to reflect not only periodic variations but also season fluctuations and yearly trends for up to twenty years. Data which reflect such dynamism include generator ratings; build costs, emission prices, wind and solar profile, Victorian market prices, and fuel prices. Specific times are captured even further with time slices defined to model peculiar outcomes on Weekdays, Weekends, Peak, Off-peak, Summer, and Winter, as well as in combination like in Summer Off-peak for instance.
Table 4-4: PLEXOS input objects and properties

Property

Description Generator Objects

Source of data

Units Max Capacity Min Stable Level Heat Rate (Thermal efficiency) VO&M Charge Start Cost Rating

Number of installed units Maximum generating capacity of each unit Minimum stable generation level

AEMO AEMO AEMO

Average rate of fuel energy used per MWh electricity generated

Energy Exemplar

Variable operation and maintenance charge Cost of starting a unit Maximum dispatchable capacity of each unit across different periods

Energy Exemplar Energy Exemplar AEMO

53

Property Max Ramp Up

Description Maximum ramp up rate that applies between the Min stable level and the rating

Source of data AEMO

Run Up Rate

Ramp rate that applies while running the unit from zero to Min stable level.

Hypothetical

Aux Incr

Auxiliary energy consumed per unit of generation. Also important for modelling the high auxiliary demands of capturing and storing carbon.

ACIL Tasman [85]

Marginal Loss Factor FO$M Charge Firm Capacity Forced Outage Rate Maintenance Rate Mean Time to Repair Build Cost

MLFs defined for each generator in relation to locational supply/demand profiles Annual fixed operation and maintenance charge Contribution of each generator to capacity reserves A hypothetical probability of failure for each unit

AEMO

Energy Exemplar Energy Exemplar Energy Exemplar

Percentage of time unit is out on maintenance

AEMO

Average time required to bring a unit back to a dispatchable state Cost of building and commissioning a unit

AEMO

ACIL Tasman [85]

WACC Economic Life

Weighted average cost of capital for new projects Period over which fixed costs are recovered for units

Hypothetical Hypothetical

54

Property Max Units Built

Description Maximum number of units permitted to be constructed in aggregate over the planning horizon reflective of transmission congestion in different zones

Source of data AEMO

Max Units Retired

Maximum number of units permitted to be retired from an existing station over the horizon Fuel Objects

AEMO

Price

Price of Fuel

ACIL Tasman [85]

Transport charge

Additional charge on fuel due to transport requirements Emission Objects

AEMO

Shadow Price Production Rate

Marginal cost of emitting GHG Emissions produced per unit of energy measured per generator or fuel basis. This accounts for both combustion-related and fugitive emissions.

AEMO ACIL Tasman [85]

Removal Rate

Proportion of emissions captured (used alongside the removal cost to model the extra costs of carbon capture technology)

AEMO

Removal Cost

Incremental cost of emissions abatement Region Objects

AEMO

Load Load Scalar

Load demand for the region Scale factor for input load object

AEMO Hypothetical

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Property DSP Bid Quantity DSP Bid Price VoLL

Description Bid quantity for demand-side participation

Source of data AEMO

Bid price for demand-side participation Value of lost load used to model the spot price ceiling

AEMO AEMO

Price of Dump Energy Generator Settlement Model Load Settlement Model Load Metering Point Max Maintenance Min Capacity Reserves Node

Price of dump energy per MWh used to mirror the spot price floor Determines price paid to generators for electricity supplied

AEMO

Parameters to mirror NEM

Determines price paid by customers

Parameters that reflect the NEM

Metering point for input loads in the region

Parameters that reflect the NEM

Maximum generation capacity allowed to be scheduled on maintenance Minimum capacity reserve allowed in the region

AEMO

AEMO

Points of connection of generators and load in the Hypothetical region Line Objects

Max Flow Min Flow

Maximum flow allowed in the reference direction Maximum flow allowed in the opposite direction

AEMO AEMO

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Property

Description Market Object

Source of data

Price

Price of imported/exported energy per MWh based on historic prices in Victoria

AEMO

Price Scalar Price Incr Max Sales

Scalar on Market price Increment to dynamic market prices Maximum sales or exports out of the SA region subject to seasonal line limits

Hypothetical Hypothetical AEMO

Max Purchases

Maximum purchases or imports from outside the SA region Constraint Objects

AEMO

RHS

Used to represent a value that binds the constraint

Specific to constraint

Sense

Defines the equality sign for each constraint using =, , or sign

Penalty Price

Price which is paid for violating a constraint. Ignoring this property for a constraint means it is a hard constraint by default

Other input defined in this model include some constraints defined by the Constraint class using fictitious values to effectively model policy directions influencing investments in the NEM like the LRET targets as well as some system reliability states. Two key constraints developed for this model include one to ensure a minimum level of inertia is maintained in the system from intermediate and base-load plants given in (4.6) and the other to promote investment in renewable energy based on the revised LRET yearly targets [86] shown in (4.7).

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Minimum Inertial Constraint (4.6):

Annual minimum contribution of renewable generation based on LRET (4.7):

Where:
( )

is the left-hand side generation coefficient for each of the plants

represent the dispatch from base-load and intermediate thermal units (in this model it comprises coal plants, CCGT, and geothermal units). represents a penalty price for violating that constraint. Where it is not included it means the constraint cannot be violated as in (4.7). is the minimum level of synchronous rotating generation required to maintain system reliability (hypothetically set at 500MW for this study) is the generation from renewable sources (such as solar units, wind turbines, Biomass, and geothermal units) is the minimum annual total renewable generation contribution in (GWh) required to meet the LRET targets up to year 203027

The generating technologies represented in the model characterize existing scheduled and semi-scheduled technologies and possible new entrant technologies in South Australia at the time of writing. Thus technologies represented include, coal-fired plants, CCGT (with and without CCS), OCGT, biomass or Integrated gasification combined cycle (IGCC), wind, solar, and geothermal plants with information provided for the new entrant technologies in Appendix I. Wind fluctuation is modelled using endogenous stochastic representation of random historic data using locational wind profiles.

27

The values are enumerated in Table 8-7 under appendix II

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4.4 Scenario Analysis

PLEXOS tool provides a flexible user interface which ensures parametric study is easily carried out in its models to aid understanding of market dynamics, the effects of participant strategies and system-wide policies. Focusing on the South Australian region in the NEM, a limited number of scenarios were developed to demonstrate the sensitivity of this model and tool, including their potential use for more practical purposes. The scenarios were constructed to characterize certain changes on capacity expansion in SA including: long-term demand growth patterns using different probabilities of exceedence (POE); differing demand-side participation and related economics; carbon price levels; system reliability dynamics represented by constraints; regional imports and exports; the LRET targets, capacity obligations of generators and reserve margins; Technological advancement and learning curves; not omitting annual and aggregate build limits on certain technologies due to project exclusivity or locational congestions. The effects of some of these scenarios are shown in the sensitivity analysis discussed in a later section.

4.5 General Model Hypotheses

This model seeks to replicate the economics inherent in an energy-only market as is practiced in the NEM, hence behaviour of generators with regards to forward contracts electricity sales and ancillary obligations are ignored. Perfect competition is assumed in the spot price formulation based on the true marginal costs of each generator, making it a suitable approach for observing the long-term economics of the system as well as an ideal way of carrying out benchmarking exercises for electricity frameworks. In summary, investment decisions are made purely on the basis of expected returns to be accrued from building or retiring each technology in tandem with the exogenous cost curves defined on a technology and locational basis. This also translates to overlooking permitting delays and construction delays for each technology as a unit is committed the year it is built; nevertheless this can be taken into account by specifying dates before which a certain infrastructure is not permitted to come online. While the impact of costing emissions is included in this model under some scenarios, no sort of compensation to the generators is included for this study. Hence plants are retired when their net revenues turn negative for an extended period of time within the horizon

59

and at no extra costs28. Priority isnt given to any projects due to congestion matrices or proximity to transmission and mutual exclusivity of certain projects are equally not considered. The absence of intra-regional transmission network means that losses are only factored in generator settlements using MLFs defined for every financial year by AEMO and this study assumes the same MLFs are maintained for the entire planning horizon. Interregional transfers between SA and Victoria are modelled in response to an input price data file dynamically scaled to reflect price increase under the carbon pricing scenarios. The ratings for existing thermal plants are assumed to be constant for the first ten years following data drawn from AEMOs forecast seasonal ratings for the plants in SA. However, the thermal plants are assumed to gradually deteriorate in the following decade. For new units however, the efficiencies are fixed for the planning span. Technological learning curves are believed to be adequately incorporated into the model using more efficient heat rates for new entrants (used in one of the scenarios) and in the annual build cost curves defined for every technology. Therefore taxes and depreciation were assumed to be factored into the build costs and annual de-rating of plants for this model.

28

Retirement costs can be included in the model although this was ignored for paucity of practical financial data.

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SIMULATION AND RESULTS

In this chapter simulations are carried out on the model presented in the previous chapter baring a few assumptions as discussed. Having been developed to show a simplified model of the South Australian electricity framework, simulation results are analysed in terms of the fundamental causes of the simulated results and relative behaviour rather than exact figures reported. Most of the model outcomes have been observed in markets such as the Australian NEM as described at the end of chapter three. Simulation results are used to illustrate the developments thus far in HPC and my arguments biased towards proportionate improvements in decision-making pertaining to investments in electricity markets. This is demonstrated by the use of the relatively less tractable chronological modelling of load demand in capacity planning compared to orthodox methods. The long-run response of power markets to policy changes is further exhibited showing sensitivity analysis of key variables using some developed scenarios involving reserve margins, carbon pricing, renewable targets, and so on.

5.1 Simulation Parameters and Conditions

Deterministic simulations are carried out over a 20-year planning horizon using LDC and Chronological load representation of the model. The systems initial condition is at an idle state at the beginning of the simulation. Input load demand used for both methods are treated in interval steps of one hour each; the LDC representation is formed using one block per month with each duration curve sliced into 200 blocks. In similar fashion the chronological representation fits 200 blocks into monthly step functions to capture a minimum of daily peak and off-peaks for the entire horizon29 with added intertemporal constraints defined in (4.6 4.9) of section 4.1.1. The transmission network is modelled to a regional level hence all resources are connected to a single notional node while interregional flow algorithms are considered. The system is set for benefit maximization of all participants (i.e. bounded by perfect competition) and generators are dispatched in merit orders except where other constraints are binding. A system-wide discount rate of 10% is used while project-specific WACC is
29

Random experiments carried out using this model showed that similar results were achieved with as few as 50 blocks per month.

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defined as input data for different projects. This discount rate also applies perpetually after the end of the horizon as the optimization considers on-going existence of the market after the planning horizon ends. Unit commitment optimization is based on linear relaxation rather than the optimal integer production decisions to reduce the MIP problem formulation. Stochastic samples of endogenous variables like wind profile, generator forced outages, and maintenance outages are modelled in every simulation using Monte Carlo sampling method with the stochastic results fixed to aid accurate comparison of the Chronological and LDC methods. The simulation was carried out in PLEXOS 6.202 R11 environment using Xpress-MP solvers.

5.2 Base Case Simulations

The base case includes all existing scheduled and semi-scheduled generating plants using ratings reported by AEMO as of July 2011 and includes new entrants expected to be commissioned by the end of 2011. Committed and proposed investments beyond 2011 are ignored and subject to economic optimization by the algorithms. Carbon pricing is defined to come into stream at the beginning of the 2012-13 financial year and retirement of fossil plants is subject to fixed costs, dispatch economics, reliability levels and other environmental targets defined in the model. Hourly demand forecast is defined for a 10% POE based on AEMOs high demand growth scenario. Demand-side participation is included to account for more distributed generation including other uncertainties likely to bear in a carbon-constrained future. For this case the same model is executed in deterministic mode to minimize overall investment and production costs required to meet the same demand profile over a 20 years horizon within similarly defined reliability level. 20 random samples are generated for endogenous variables including wind profile, generator forced outages, and maintenance outages and the mean of the production costs relative to the different samples is used as a basis for comparisons. Results in figure 5-1 show similar behaviours using the LDC method as in (a), and the chronological method in (b). However with the peak load defined as a fixed input to the model, the variations in the capacity reserve margin indicate some differences in the order with which capacity is added to ensure reliability.

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Figure 5-1: Base model simulations showing the input peak load, total capacity and reserve margin

Close observation reveals less capacity in figure (5-1b) ending at about 8000 MW compared to 9000 MW in (5-1a) despite both reserve margins tailing out at 5% at the end of the planning horizon related to the defined minimum level in the model. The reserve margin for any given year is calculated thus: ( )
( )

(5.1)

The capacity reserves takes into account the seasonal ratings of existing and newly installed capacity usually comprising of what is referred to as the firm generation capacity; the curtailable load representing DSP from wholesale customers like energy-intensive industries in the region; the planning peak load which is basically the peak load but includes other obligational demand that are not considered part of the regional demand; and a notional net export capability of the region based on interconnector limits. In summary the capacity reserve can be defined as:
( )

(5.2) The generation capacity represents the net existing capacity in the region across the 20 years taking into accounts generator builds and retirements as figure 5-2 shows.

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Figure 5-2: Comparison of capacity builds and retirements between LDC and Chrono executions

The LDC solution retires 240 MW of coal plant (base-load) while adding a huge proportion of wind capacity. The Chrono on the other hand retires more coal plants (totalling 770 MW) but builds relatively higher share of thermal plants (including intermediate and peak) across the horizon. See that the Chrono method spreads its thermal builds in correlation with the wind builds across the years while the LDC on two different occasions commit huge lumps of intermittent plants in 2022 and 2026 during which the average capacity factor for thermal base-load plants were 40% and 30% respectively. Another difference observed on a number of results comparing these two simulations have shown that the proportion of wind committed in the latter years of the horizon declines after information on start-ups and other inter-temporal costs is fed back to the problem in the Chronological simulation. The LDC however, does not get such feedback hence opts for a greater share of free wind expected to fulfil perpetual demand. The pie charts in (a) and (b) show the percentage of new technology commissioned over the horizon. Wind penetration levels are increasingly being monitored by transmission system operators (TSOs) as the risk of faults and planning for remedial actions are perceived to increase with share of intermittent generation. The use of chronological modelling in LT planning carried out here is proving to be very useful in checking excessive wind penetration for a safer and more economic generation portfolio. The last 10 years of the horizon where most of the 64

new capacity is added shows more penetration of wind energy in the LDC simulation compared to the Chrono (see figure 5-3). Similarly, annual wind capacity penetration (wind/peak demand) from the chronological solution reaches a peak of 51% at the end of the horizon whereas that of the LDC solution yields a higher penetration of about 68% in the final year. Also, more interestingly using the minimum demand for that year, the maximum possible instant penetration of wind was calculated as 206% for LDC against 155% for the Chrono results. The fact that the same demand profile is used for both methods means that the profitability of the excessive investments in wind generation misleads the LDC simulation hence making the builds prone to inter-regional spot prices as most of the wind energy has to be exported or dumped if safe levels are to be dispatched. Hence the Wind utilization ratio30 indicates that the wind built by the Chrono simulation contributes more towards satisfying local demand than in the LDC.

Figure 5-3: Wind penetration levels for Chrono and LDC simulations

Europe boasts of some of the highest wind penetration in the world that has been managed successfully with minimal drawbacks to the significant penetrations on

30

The Wind utilization ratio is a notional factor developed for the purpose of this thesis used to show the contribution of wind generation to local demand. It is computed by dividing the wind energy penetration by the capacity penetration for each of the Chrono and LDC solutions. i.e.

65

operational problems. Most notable of these regions of high wind penetration include Denmark, Spain, Portugal, Ireland and Germany [88]. Table 5-1 compares the wind penetration levels from some of these European countries as at year 2010 [88] with penetrations peak levels from simulations carried out.
Table 5-1: Successful wind penetration levels attained by 2010 compared with simulation results

Capacity penetration (%) Spain Portugal Ireland Germany Chrono (2030) 44 42 32 33 51

Energy Penetration (%) 16 17 10.5 6.7 (2009) 31

Maximum possible instant penetration (%) 110 111 86 76 155

LDC (2030)

68

50

206

These high penetration levels havent been all rosy for the countries involved, for example, the Irish SEM was forced to curtail about 1.2% of total wind energy (approximately 27 GWh) for security reasons in the latter parts of 2010 [88]. The ripple effects of these differing investment portfolios for the models are illustrated by production variables in the following chart in figure 5-4. More investments in renewables and the resulting greater share of wind generation (wind energy/total generation) in the LDC simulation lead to higher production costs when the build decisions are optimized against short term unit commitment or economic dispatch decisions.

66

Figure 5-4: Production outcomes incurred from investment decisions

The emissions cost (Chrono-Emi and LDC-Emi curve) is seen to account for a significant part of the total production costs forcing noticeable declines in 2017 for both methods, although achieved in differing circumstances. The Chrono run cuts down its emissions by retiring coal plants and utilizing less of the higher emitting open-cycle peaking plants whereas the LDC forces the capacity factors of the same dirty coal plants below profitable margins hence incurring fixed costs from those plants. Also, there is a higher reliance on peaking plants in order to deal with the relatively high variability of wind generation hence causing more pollution. Because the short term decisions can be modeled with greater resolution with chronology retained of course, we see the overall system costs for the LDC outpacing that of the Chrono as the wind generation share diverges in both methods. Simulations showed that investing in the optimum amount of intermittent generation as guided by chronological optimization led to savings in production costs of about 10 percent in the last ten years of the planning horizon.

5.3 Sensitivity Analysis

Having reported similar behaviour using aggregated LDC and intertemporal representation of electricity demand in long-term studies, it is essential to show the sensitivity of this

67

decision support tool and the South Australian electricity model built for this research work in particular, towards supporting my arguments. Simulations using 5 blocks per month of LDC are used to show the sensitivity of this model as regards testing the effect of policy decisions and industry regulations by using different parameters here developed in the scenario analysis. 5.3.1 Impact of market access

The importance of accessing neighbouring markets by a region cannot be overemphasized in many regards. The relative non-storability of electricity makes the benefits of interregional trade even more appealing, not just for competitive prices but also for reliability issues in times of tight supply [65]. To demonstrate the workability of this South Australian Model is not only showing the importance of interchange between regions (as is the case in the NEM and also as designed by the EU Third Energy Package31), but also to show how it could be used for determining interconnector capacities for the most economic gain. Without market access average prices (No Market curve) are observed to be clearly higher with the reserve margin making a huge climb up to 32% in year 2015 as figure 5-5 shows. The huge addition in capacity serves to prevent a possibility of unserved energy in the region which in turn could force the average prices to skyrocket even higher. With access opened up to the neighbouring Victorian market, see that the price average (Market curve) drops and the reserve margin is relatively less spiky as the balance of supply and demand dictates investment in capacity while retaining the minimum reserve level.

31

Details are as described in the EU Electricity Regulation (EC) No 714/219 of the European Parliament which repeals the Regulation (EC) No 1228/2003 opening up access to cross-border electricity exchanges.

68

Figure 5-5: Simulations showing sensitivity of price with reserve margins

Finally, the interconnector capacity is increased to a limit of 2000 MW32 for imports and exports from year 2015 and the results shown by the IC Augmentation curves in figure 5-7 as well. Prices were reduced even further for the next 10 years, later levelling with that of the base price as its reserve margins drop slightly below that of the base level. 5.3.2 Emissions pricing and competitiveness of renewable investments

In making arguments for or against emission reduction mechanisms in an arguably carbonconstrained era we find ourselves, we are in most cases guided by simulated behaviour of decision support tools and models. Proponents and oppositions of emissions pricing in Australia have not been left out of those debates in recent times with the recent passage of carbon price legislation into law. It is in this light that scenarios were developed to test the impact of the status quo where renewable investment is promoted by policies like the LRET against two other extreme scenarios: a fully-functional carbon pricing mechanism starting with a price of $33.28/tCO2-e in 2013/1433; and finally a system totally unconstrained by emission mechanisms where mainly economics is allowed to dictate investments in capacity.
32

This is increased from the base level of 680 MW of imports and 488 MW of export pending seasonal variations. 33 See full emissions price trajectory in Appendix II

69

Using national LRET targets, this research work assumed that a third of the annual targets34 are to be met by the scheduled and semi-scheduled renewable generation plants from South Australia alone. The carbon scenario was developed based on shadow prices ($/Kg) using AEMOs NTNDP 2010 [80] figures for a medium pricing trajectory along with emission factors of all the fuels simulated in the model (coal, natural gas, liquid fuel, and biomass35) from the National Greenhouse Accounts (NGA) for 2010 [92] as is laid out in Appendix II; also inter-regional market prices were hypothetically escalated for peak and off-peak periods to reflect the effect of carbon price on the spot prices across the neighbouring region. However the business-as-usual scenario assumes a do-nothing policy, leaving economic growth and system reliability as major determinants for investment in capacity. Figure 5-8 shows the proportions in the capacity added over the horizon for the different scenarios.

Figure 5-6: Capacity builds in the different scenarios

The results definitely show some shift towards more environmentally friendly options in the investment portfolios of the different scenarios with investment in wind turbines leading the proportion in all three scenarios. Obviously with a carbon price in place, investment in geothermal plants increasingly becomes more viable as fig 5-8(c) shows. The sensitivity of this model is further demonstrated by the level of GHG production in the scenarios shown by the shaded areas on figure 5-9. As expected, shifting towards a less emission-intensive portfolio comes at a cost, which explains the steeper cumulative investment curves in the LRET and Carbon pricing scenarios. A significant impact of the LRET policy could be seen to encourage early entrance of cleaner technologies without
34 35

See Appendix II Emission factors were omitted for biomass fuels, given the inconsistency of the fuel composition and its insignificant share of generation in the South Australian mix.

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necessarily hindering the major polluters, particularly where the demand growth rate is substantial; hence a rather indifferent effect on emissions production. Another impact of the LRET is in keeping the dispatch spot prices lower compared to prices encountered in the BAU or carbon scenarios. Since renewable generation plants such as wind have very negligible marginal costs, deliberately increasing the share of dispatchable renewable plants means less thermal plants are included in the merit orders determining the price. Although the carbon scenario also brings in more renewable generation, the inclusion of emission shadow price in the SRMC of the fossil plants still keeps the prices higher than the LRET scenario, at least until the level of penetration becomes extremely higher. The SRMC is calculated as:

Where the generation;

represents the maintenance and direct operational costs of represents an additional charge that may be

incurred by generators for rights to deliver power to the grid; and the ensures that generators are charged marginally for emissions based on pre-defined shadow prices [41].

Figure 5-7: Scenario analysis of GHG productions under different investment regimes

The carbon pricing scenario is shown to curb emissions intensity most effectively in the region as major polluters are forced to account for their emission externalities forcing 71

abatement to optimal levels by retrofitting or by even retiring inefficient plants. In the BAU scenario however, emissions continue to increase at a steady rate reaching almost 8 times that in the carbon scenario by 2030. This is due to the relative miserly investment in renewable generation and excessive dependence on thermal plants during the entire horizon. Generally, results from the 3 scenarios discussed (even though aggregated) basically depict possible investment paths for South Australia and mirror closely the actual expected investment portfolio published by AEMO in 2011 [79]. Comparing publicly announced projects either under development or at planning stages, gives the investment mix shown in figure 5-10.

Figure 5-8: Publicly announced expected capacity additions in South Australia

Given the volatility of carbon reduction policies in Australia over the last couple of years, it is difficult to rationalise these projects purely on environmental or techno-economic basis as only a few of the announced projects are committed or even have a set completion date. However, just like in the LRET scenario developed in this model, Wind turbines, fastresponse peak OCGTs, and geothermal plants are expected to dominate investments in generation in the coming years as far as South Australia is concerned.

5.4 Solution Summary: Resource versus Results

Chronological representation of load in modelling exercises is not a new phenomenon, and it is in fact still a preferred way of reproducing short term (daily, hourly, etc.) unit commitment behaviour of electricity systems by system operators with the aid of 72

modelling or supervisory tools. For planning horizons approaching 5 years and beyond using realistic models however the LDC representation has proven to be very effective, and in some cases the only tractable option (depending on the complexity of the model). Provided computing performance growth continues, and more importantly, as long as software vendors are able to capture the performance growth through evolution of architectures, there is every chance that better modelling techniques like the chronological sort can be applied to realistic models as shown through this research. Experimental simulation runs for this research were carried out using a very high performance hyperthreading enabled Intel machine (for commercially available standards at the time of writing) having the following specifications: Two Intel Xeon processors: 12 cores, 24 threads (2 threads/core), clock speed of 2.53 GHz 32 GB RAM of memory, and 12MB Cache per processor.

Having carried out so many simulations, the results in table 5-2 gives a good overview of the relative differences between the results of using the LDC method versus the more complex Chrono modelling. The results summarize the performance statistics reported after solving the same model with and without chronology. The significantly higher values reported by the Chrono problem size is a reflection of how a simple model increases by complexity as a result of the way extra constraints are handled. These constraints include: start (and shutdown) costs, length of starts/stops, minimum on/off periods, ramp limits, and minimum stable limits of thermal plants; that are forced to cycle more when the level of intermittent generation increases in the system. Comparing the simulation durations (runtime) of both methods shows why the LDC method is still very much effective given the relatively insignificant time it took to solve. Also, the amount of memory usage is another indicator that the chronological modelling isnt perhaps ideal yet. For this level of detailed optimization to be carried out on a realistic model like that of South Australia used for this research, dedicated resources in highperformance computers and significant waiting time have to be accommodated unlike the LDC method which can be done on a personal laptop within reasonable time.

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Table 5-2: Comparisons of computing demands for LDC and Chrono simulations

Base Case Simulation Results Columns (variables) LT Plan Formulation Size Rows (constraints)

LDC 1,297,728 855,386

Chrono 7,508,928 10,541,78 6

Chrono Factors/differences 5 times more variables 12 times more constraints

Integers Non-zero coefficients

48 2,801,925

48 37,028,38 3

Same integer decision size 13 times larger

Peak Memory usage (MB)

8,473.49

31,767.26 (100% utilization)

3 times more memory

Runtime (hours) Objective Function (NPV)

3.5 2.4008E+1 1

80.536 2.3881E+1 1

23 times longer time to solve 1.2687E+0937

The objective function as explained in section 4.1.1 is a good way to compare the optimization of both methods. Very similar values help to validate both methods as being effective however slightly less value reported in the Chrono method is an indication of a better cost-effective expansion plan. For this model, the average difference across the simulations accounts for 1% of the LDC value. This is explained by the fact that most of the

36

The duration of this particular execution is not an ideal reflection of the relative runtimes for similar LDC and Chronological simulations as the RAM is used to full capacity while solving this Chrono problem. Other more tractable versions of the model have shown that similar Chrono problems take 3 10 times longer to solve where the memory is within the boundaries of the problem requirement. 37 This difference reflects the total less costs mostly from the production costs over the horizon as the Chrono execution spends more on investment compared to the LDC.

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savings calculated by the Chrono simulation is being done in the last couple of years when significant amount of wind start to come online. Furthermore, comparing NPVs for both methods taking only the last five years of the horizon (2025-2030) into account reported savings of up to 10% as fig. 5-4 clearly shows. It is important to note at this juncture that other factors like computer system background processes may have competed for resources with the execution demands especially in the Chrono runs where peak memory usage reached 100%. Other factors, including imperfections in solvers arguably better optimised for conventional methods, may have contributed in providing the results shown in the table.

5.5 Improving LT Chronological Execution Times

The realistic and flexible way that the South Australian electricity system was modelled is one way of perhaps showing that retaining chronology in capacity planning may be worth considering especially as intermittency continues to penetrate electricity systems around the world. Scaling computing performances to deal with tractability issues or merely tolerating extra hours might be worth the possibilities of huge savings in capital expenditure and operation costs for future power systems dependent on rigorous and farreaching decisions made today. The major challenge experienced during this research, the extended simulation execution time, is still a big factor in determining what methods are used today. However, projecting ahead through the multi-processing pathway being opened up by chip vendors means that multi-threaded processes harnessed during this research will only get better with time regardless of increasing problem complexity. This means that complex problems will be decomposed and solved concurrently among different cores without losing much in terms of accuracy of solutions. Reproducing investment lumpiness inherent in power systems planning in this model added to integer decisions which ultimately meant the MILP grew in complexity with the number of new entrant options considered. However, one of the ways of simplifying an MILP formulation offered by the tool used was by partially integerizing the planning horizon. This means that expansion decisions could be enforced as integers for a limited time over the simulation period and has the effect of reducing the integers by a fraction of the integerized duration. For instance if a 20-year simulation reports 240 integers, then integerizing only the first 15 years of the horizon reduces the integers in the new formulation to . Arguments for this simplified way of solving CEP 75

problems could be made on the basis that lumpiness (or capacities) of new entrant technologies in later years become more uncertain as the expansion horizon increases, thus linearizing expansion decisions in those years when technological advancement cannot be accounted for should not be viewed as less realistic paths to the optimal solutions. The option of increasing the optimal solution gap for the solver to make choices between feasible solutions also helps in improving execution times. In this case, the optimal solutions reported were very similar despite widening the allowance from 0.01% to 0.1%. With the test carried out both Chrono runs reported exactly the same integer solutions solved by the MIP algorithm but slightly different linear solutions both solved using Interior point algorithm with a gap within 0.1%. Despite the very similar outcomes, this method reduced solution times from 8.5 hours to 5 hours. Also by taking the simulations in smaller multiple steps, e.g. in 5 steps of 4 years each rather than solving a single step of 20 years simplifies the problem formulation. By solving in smaller steps the solver is better able to manage the less number of variables, constraints, and most importantly integers in the formulation, leading to arguably gains proportional to the number of steps. Here, decisions from previous steps are carried over into subsequent steps and the overall solution is reached in the final step. A drawback of this method however is that solving a capacity expansion problem in smaller steps may lead to less optimal overall solutions (usually reporting larger objective functions) as the solutions are optimized sequentially without forward looping other steps. Executing the steps concurrently while allowing feedback from the different steps could possibly be the best way of improving execution times significantly while retaining solution optimality. Whether this can be done efficiently remains to be seen nevertheless.

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CONCLUSIONS

6.1 Findings and Recommendations

Unit commitment and economic dispatch of electricity systems can be modelled in a chronological manner more accurately. Though used mainly for operational objectives, these outcomes play a huge role in long-term planning (where cost minimization is at stake) as I have shown in this research. Chronological modelling for LT purposes does not only hold advantages in putting a check to high penetration of unpredictable generation options. This work disputes a seemingly popular notion that high penetration of wind plants cuts down GHG pollution proportionately as I have shown using high resolution modelling that it could lead to an over dependence on the less efficient fast-response open cycle turbines. Through this research I also demonstrated that Chronological simulations are better able to capture reliability issues and economic objectives owing mainly to recurring production costs that arise due to the lumpiness of investments, capacity imbalance, and wrong capacity mix. Chronological modelling captures reliability benefits that LDC does not necessarily observe. In the Chrono runs carried out, the level of intermittent capacity added is relatively lesser. Comparing ratios of thermal to intermittent capacity added annually in the planning, Chrono modelling consistently reported significant higher ratios compared to the LDC. This can be attributed to a better representation of the short run marginal costs38 of all other technologies in the electricity system modelled. Overall the Chrono simulation maintained the generation share from intermittent renewable sources below that of the LDC optimization. One of the reasons for this behaviour is to keep the marginal cost of production at a level where the thermal plants are able to compete. More importantly the Chrono method was able to minimize emissions cost from fossil plants despite building less clean renewable plants. Retiring base-load plants when emission costs forces their capacity factor below certain profitability thresholds is considered savvier than incurring fixed cost from those plants while operating at very low capacities as was observed in the LDC optimization.

38

The Short run marginal costs determine which existing units are placed top of the merit order or which are shut or ramped down [93].

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Despite less investment in capacity the Chrono method is able to reproduce very similar reserve margins through optimized investment signals fed into the system from more informed unit commitment and dispatch patterns in tandem with the demand trends. In this era when investment in renewable technologies are encouraged via a variety of policy paths, adequate planning for inter-regional trading and opening up of markets can be carried out using the Chrono method at least as a basis, and this model could serve as a pointer to system operators and policy makers seeking impacts of investments in transmission infrastructure. An example of its application is in the South Australian Green Grid proposals still being debated [87]. Whether or not retaining chronology is considered worthy of the waiting times with the current computing options available, it still serves as a crucial pointer for capacity expansion exercises as information from a chronological base execution may prove indispensable. Outcomes from one lengthy execution could be used in determining annual build limits, project start times, and perhaps project exclusivity when designing models to be executed using the preferred LDC approach. In addition, retaining chronology in CEP could be vital in risk management and uncertainty analysis if results achieved during this research are anything to go by. Though inconclusive due to limited computing resources and time constraints, a comparison of scenario-wise decomposition simulations using 3, 5 and 7 random wind samples (or scenarios) between LDC and Chrono methods showed significant difference in the objective values with the Chrono result consistently greater. Meaning that in events where decisions have to reflect worst-case scenarios for instance in CEP, the LDC approach might not provide a sufficient basis for such information. Generally the possible accounting of start and shutdown costs in the Chrono method which is reflected in the cost of meeting load through generation gives slightly higher wholesale prices as expected. However, these prices provide better signals for investment purposes as the Chrono simulations consistently save more in production costs following the choice of technology added to the existing system while equally meeting reliability standards. The magnitude of the savings made from subsequent production costs were better reflected by short-term (ST) simulations. In either execution, build decisions from the LT simulation phases were decomposed into ST phases for better accounting of production costs. In summary, the major learning points of this research so far can only make far-reaching impacts if adopted by all vendors involved in designing the appropriate decision-support tools for future energy systems. Even if Moores law remains valid in the coming years 78

theres bound to be trade-offs between rebuilding application architecture for maximizing the throughput offered by the next generation computing systems; or enjoying the free lunch offered by compatibility of old designs on future computer system with negligible gains . Review of other literatures in Chapter 2 reiterates the fact that decision support tools are designed around known theories like linear optimization and decomposition methods among others; all sharing a common challenge in computing tractability. Nevertheless, this research gives a wake-up call to decision-support tool vendors in the energy industry to re-design their architecture for maximum benefit of the recent evolution of computing technologies; not just for the sake for it but for the benefit of making better capital-intensive decisions known to characterise energy systems.

6.2 Prospects for Further Research Work

The developed South Australian Model is ideal for testing the impacts of various timedependent variables in chronological fashion against the aggregated Load Duration Curve (LDC) method. In this research work emphasis was placed on the effect of start costs, as well as ramp rates, and Minimum up and down time constraints of thermal plants. Further research could include the impacts of Run up and run down rates of thermal plants to evaluate individual or total influence over the LDC method. This would be very useful for testing the impact of very flexible turbine generators becoming more competitive for high penetration of wind. The chronological simulations could be essential in determining the type or amount of the different tools capable of delivering flexibility to electricity systems characterized by high wind penetration. Energy storage, demand- and supply-side response, and inter-regional transfer capability are some of the notable tools [93] that can boost the reliability and economic advantages for future systems through improved flexibility for high penetration scenarios of unpredictable generation sources. Depending on the structure of a framework regarding capacity sharing between markets or in contingency cases, and the economic gains expected, optimum sizes of inter-connectors can be simulated with increase in peak load in the long term. The South Australian Green Grid arguments for instance could be made clearer with better modelling as the chronological modelling has shown. In very large inter-connected systems like in the US where tractability may hinder the use of the chronological LT method, it could still have a huge impact in the roll-out of energy storage and demand-side technologies like electric vehicles, hydrogen storages and the much

79

needed smart meters to improve customer-producer interaction or otherwise demand elasticity. This study ignores the effect of intra-regional transmission constraints and could swing different ways if included in future studies. The inclusion of transmission constraints means not every generator is able to contribute to immediate demand and hence unit commitment optimization could be very interesting where excessive wind integration in certain zones may force regional prices very high or low during the simulation. Also, including transmission constraints could involve expansion of transmission lines alongside generation options and results could open up new challenges especially where wind profile follows daily patterns (high wind at night and low during the day) or where it is very erratic and unpredictable. In summary, this study could be furthered to account for transmission constraints after which generation expansion is evaluated. A step further may seek the impact of transmission constraints on not only generation expansion but also in total power system expansion including transmission lines and switchgear. In the area of uncertainty analysis and risk management, accounting for inter-temporal constraints in CEP could provide better source of guidance for quantifying risks and also for defining financing limits. Consistent higher objective functions is an indication that with more constraints considered, the risks associated with different scenarios of generation profile is higher than what traditional energy models would generally specify. This does not only have importance for centralized planning but also for market players in a competitive market structure. Overall this research work does not necessarily devalue the importance of the LDC approach in modelling of electricity markets but rather sparks up the momentum for further research into ways of accounting for intertemporal constraints in medium to longterm planning which ultimately means significantly reducing the risks involved with investing in intermittent energy sources. In doing so, this work opens up ideas into finding ways of improving tractability of chronological modelling; particularly in ways that will benefit the most from the distributed and parallelized paths computing advancements seems to be headed.

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APPENDIX

8.1 APPENDIX I Model Overview and New Entrants Input

Figure 8-1: Model visualization showing existing generators and new entrants

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Table 8-1: New entrants build Costs ($/kW) 2010-2030 [12]

Financial Year 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 Biomass 6064 6064 6064 6064 6064 6064 6064 6064 6064 6064 6064 6064 6064 6064 6064 6064 6064 6064 6064 6064 CCGT 1658 1658 1658 1658 1658 1642 1626 1610 1594 1579 1563 1547 1531 1515 1499 1483 1468 1452 1436 1420 CCGT with CCS 2847 2847 2847 2847 2847 2775 2703 2630 2558 2486 2414 2341 2269 2197 2125 2052 1980 1908 1836 1763 Geo (EGS) 8207 8207 8207 8207 8207 8142 8077 8012 7948 7883 7818 7753 7688 7624 7559 7494 7429 7364 7299 7235 Geo (HAS) 8694 8694 8694 8694 8694 8590 8486 8382 8278 8175 8071 7967 7863 7759 7656 7552 7448 7344 7240 7136 OCGT 1195 1195 1195 1195 1195 1186 1177 1168 1159 1150 1141 1132 1123 1114 1105 1096 1087 1078 1069 1060 Solar (PV) 6997 6997 6997 6997 6997 6834 6671 6508 6344 6181 6018 5855 5691 5528 5365 5201 5038 4875 4712 4548 Wind (Large Scale) 3094 3094 3094 3094 3094 3053 3011 2970 2929 2888 2846 2805 2764 2722 2681 2640 2599 2557 2516 2475 Wind (Medium Scale) 3254 3254 3254 3254 3254 3211 3167 3124 3080 3037 2993 2950 2906 2863 2820 2776 2733 2689 2646 2602 Wind (Small Scale) 3583 3583 3583 3583 3583 3535 3488 3440 3392 3345 3297 3249 3201 3154 3106 3058 3010 2963 2915 2867

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Table 8-2: Input parameters for new entrant technologies [12]

New Entrants Max Capacity (MW) 50.00 700.00 700.00 50.00 50.00 160.00 1.00 1.00 1.00 1.00 Min Stable Level (MW) 0.00 280.00 280.00 35.00 35.00 40.00 0.00 0.00 0.00 0.00 Heat Rate (GJ/MWh) VO&M Charge ($/MWh) 2.25 1.94 3.59 1.00 1.00 2.48 0.01 0.01 0.01 0.01 2.88 15.41 15.00 15.00 0.98 10.00 0.00 0.00 0.00 Aux Incr (%) Marginal Loss Factor 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 FO&M Charge ($/kW/year) 40.00 14.00 25.00 187.50 125.00 9.00 73.00 37.00 39.00 42.00 Firm Capacity (MW) 50.00 679.87 592.13 42.50 42.50 158.43 0.72 0.03 0.03 0.03 Maintenance Rate (%) Forced Outage Rate (%) 24.56 3.52 3.52 3.00 3.00 5.00 N/A N/A N/A N/A Mean Time to Repair (Hrs) 16.00 16.89 16.89 16.00 16.00 30.20 N/A N/A N/A N/A WACC (%) Economic Life (Years) 30 30 30 30 30 30 30 30 30 30 Max Units Built

Biomass CCGT CCGT with CCS Geo (EGS) Geo (HAS) OCGT Solar Wind (Large Scale) Wind (Med Scale) Wind (Small Scale)

11.96 7.06 7.03 N/A N/A 10.17 N/A N/A N/A N/A

7.22 4.64 4.64 7.22 7.22 3.00 N/A N/A N/A N/A

8.78 8.78 8.78 8.78 8.78 8.78 8.78 8.78 8.78 8.78

6 71 71 50 15 313 4000 3000 3000 3000

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Table 8-4: Hypothetical improvements in heat rates (GJ/MWh) for new entrant thermal plants [12] Table 8-3: New entrant gas prices 2010-2030 [85]
Financial Year 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 Fuel Cost ($/GJ) 4.8399 4.8601 4.8914 4.9112 5.2696 5.5174 6.3914 6.9091 6.9205 7.6364 7.8876 8.1495 8.157 8.6567 8.9576 9.1363 9.1439 9.151 10.6021 10.7453 Transport Charge ($/GJ) 0.587395 0.583383 0.579399 0.575442 0.571513 0.56761 0.429159 -0.02576 -0.02765 -0.27578 -0.2739 -0.27203 -0.27017 -0.26832 -0.26649 -0.26467 -0.26286 -0.26107 -0.25929 -0.25751 Financial Year 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 Biomass 11.538 11.538 11.538 11.538 11.538 11.356 11.180 11.009 10.843 10.682 10.526 10.375 10.227 10.084 9.945 9.809 9.677 9.549 9.424 CCGT 7.324 7.324 7.324 7.324 7.324 7.200 7.200 7.059 7.059 6.990 6.923 6.857 6.792 6.729 6.667 6.606 6.545 6.486 6.429 CCGT with CCS 8.748 8.748 8.748 8.748 8.748 8.748 8.540 8.540 8.342 8.342 8.342 8.153 8.153 7.973 7.973 7.800 7.800 7.635 7.635 OCGT 10.948 10.948 10.948 10.948 10.948 10.784 10.625 10.470 10.320 10.174 10.033 9.895 9.761 9.630 9.503 9.379 9.259 9.141 9.026

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The New Entrant gas prices in table 8-3 are forecasted prices for Gas turbines expected to come online during the course of the simulation. The prices reflect among others, expected discovery of new reservoirs and competitiveness of unconventional gas supply in the future. The cost of Biomass fuels is estimated at 0.5 ($/GJ) and assumed constant for the planning horizon.

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8.2 APPENDIX II Carbon Pricing and LRET Scenario Input

Table 8-5: Fossil fuels and their GHG production rates from combustion [85]
Fuels Brown Coal Liquid Fuel Natural Gas Biomass GHG Production Rate (KgC02-e/GJ) 93.11 69.02 51.33 N/A

Table 8-6: CO price trajectory ($/tCO -e) for financial years ending in 2030 [80]
Year 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 High - CPT 25 0 0 0 49.92 51.92 53.99 56.15 58.4 60.74 63.16 65.69 68.32 71.05 73.89 76.85 79.92 83.12 86.45 89.9 93.5 Medium - CPT 15 0 0 0 33.28 34.61 36 37.44 38.93 40.49 42.11 43.79 45.55 47.37 49.26 51.23 53.28 55.41 57.63 59.94 62.33 Low - CPT 5 0 0 0 23.92 24.88 25.87 26.91 27.98 29.1 30.27 31.48 32.74 34.05 35.41 36.82 38.3 39.83 41.42 43.08 44.8

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Shadow Prices ($/Kg) which proportionately reflected the CO price trajectory sourced from the NTNDP were used as input in the model. In all scenarios, the shadow prices was kept equal at 2 0.01 in 2013/14 and for subsequent years divided by a notional factor (approximately 933) to get the respective shadow prices used to achieve equivalent amounts of C0 abatement.

39

Table 8-7: Notional LRET targets for South Australia

Financial Year 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-30 NEM LRET Target 10,400 16,338 18,238 16,100 18,000 20,581 25,181 29,781 34,381 41,000 30% Notional SA targets 3466.667 5446 6079.333 5366.667 6000 6860.333 8393.667 9927 11460.33 13666.67

39

See Definition of Terms section for brief explanation of shadow price.

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8.3 APPENDIX III Demand Projection Input Data

Publicly available demand patterns from AEMO [79] was meticulously applied in forecasting future demand patterns using PLEXOS. AEMOs ESOO provides Energy projections up to 2021 and the average growth percentage which was used to forecast up to 2040 for this model. Maximum demand for each year is applied, taking into account the POE as well as summer and winter weather effects; and using a base year demand, alongside the energy forecast, PLEXOS builds the demand profile up to the defined year retaining the pattern of the base year. Tables 8-8 through 8-11 show input data used to build demand profile for a 10% POE under high, medium and low growth scenarios.

Table 8-8:South Australian Winter maximum demand projections [79]

10% POE Winter MD Growth 2010 Medium High Low 2,660 2,660 2,670 2011 2,710 2,730 2,700 2012 2,790 2,820 2,730 2013 2,820 2,970 2,750 2014 2,850 3,060 2,770 2015 2,850 3,200 2,810 2016 2,890 3,300 2,830 2017 2,940 3,400 2,850 2018 2,980 3,470 2,880 2019 3,010 3,570 2,900 2020 3,060 3,630 2,920 Average annual growth 1.40% 3.20% 0.90%

Table 8-9: Summer maximum demand projections [79]

2010-11 Medium High Low 3,530 3,520 3,520 2011-12 3,630 3,630 3,560 2012-13 3,670 3,810 3,600 2013-14 3,720 3,910 3,630 2014-15 3,730 4,080 3,670 2015-16 3,780 4,200 3,690 2016-17 3,860 4,320 3,700 2017-18 3,880 4,400 3,740 2018-19 3,940 4,520 3,780 2019-20 4,010 4,610 3,830 Average annual growth 1.40% 3.00% 0.90%

Table 8-10: Energy projections between 2010 and 2020 [79]

MEDIUM GROWTH HIGH GROWTH 14,307 14,358 14,824 15,022 14,982 16,077 15,020 16,669 14,788 17,465 14,989 18,104 15,119 18,677 15,239 18,962 15,356 19,573 15,512 19,816 0.90% 3.60%

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LOW GROWTH

14,317

14,390

14,471

14,458

14,560

14,611

14,620

14,617

14,662

14,768

0.30%

Table 8-11: 2009-10 base year profile [79]

Winter MD Summer MD Energy 2460 3,341 13,977 1.70% 4.30% 1.90%

Table 8-12: Demand-side participation (DSP) set at different RRN prices for South Australia [80]
High DSP $1000/MWh 77.18 79.56 81.94 84.66 87.38 90.1 93.16 96.22 99.28 102.68 $3000/MWh 70.37 72.54 74.71 77.19 79.67 82.15 84.94 87.73 90.52 93.62 $5000/MWh 79.45 81.9 84.35 87.15 89.95 92.75 95.9 99.05 102.2 105.7 $1000/MWh 77.18 78.2 79.56 80.58 81.94 82.96 84.32 85.68 86.7 88.06 Medium DSP $3000/MWh 70.37 71.3 72.54 73.47 74.71 75.64 76.88 78.12 79.05 80.29 $5000/MWh 79.45 80.5 81.9 82.95 84.35 85.4 86.8 88.2 89.25 90.65 $1000/MWh 77.18 77.18 77.18 77.18 77.18 77.18 77.18 77.18 77.18 77.18 Low DSP $3000/MWh 70.37 70.37 70.37 70.37 70.37 70.37 70.37 70.37 70.37 70.37 $5000/MWh 79.45 79.45 79.45 79.45 79.45 79.45 79.45 79.45 79.45 79.45

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