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Springer Texts in Business and Economics Christoph Weber  Dominik Möst  Wolf Fichtner Economics of Power Systems Fundamentals for Sustainable Energy Springer Texts in Business and Economics Springer Texts in Business and Economics (STBE) delivers high-quality instruc- tionalcontentforundergraduatesandgraduatesinallareasofBusiness/Management Science and Economics. The series is comprised of self-contained books with a broadandcomprehensivecoveragethataresuitableforclassaswellasforindividual self-study. All texts are authored by established experts in their fields and offer a solid methodological background,often accompanied by problems and exercises. (cid:1) (cid:1) Christoph Weber Dominik Möst Wolf Fichtner Economics of Power Systems Fundamentals for Sustainable Energy 123 Christoph Weber Dominik Möst University of Duisburg-Essen TU Dresden Essen, Germany Dresden,Germany Wolf Fichtner Karlsruhe Institute of Technology (KIT) Karlsruhe, Germany ISSN 2192-4333 ISSN 2192-4341 (electronic) SpringerTexts inBusiness andEconomics ISBN978-3-030-97769-6 ISBN978-3-030-97770-2 (eBook) https://doi.org/10.1007/978-3-030-97770-2 ©TheEditor(s)(ifapplicable)andTheAuthor(s),underexclusivelicensetoSpringerNature SwitzerlandAG2022 Thisworkissubjecttocopyright.AllrightsaresolelyandexclusivelylicensedbythePublisher,whether thewholeorpartofthematerialisconcerned,specificallytherightsoftranslation,reprinting,reuseof illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmissionorinformationstorageandretrieval,electronicadaptation,computersoftware,orbysimilar ordissimilarmethodologynowknownorhereafterdeveloped. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publicationdoesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfrom therelevantprotectivelawsandregulationsandthereforefreeforgeneraluse. The publisher, the authors, and the editorsare safeto assume that the adviceand informationin this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained hereinorforanyerrorsoromissionsthatmayhavebeenmade.Thepublisherremainsneutralwithregard tojurisdictionalclaimsinpublishedmapsandinstitutionalaffiliations. ThisSpringerimprintispublishedbytheregisteredcompanySpringerNatureSwitzerlandAG Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland Preface Electricity and, more generally, energy systems are complex, multifaceted systems that may only be grasped and adequately analysed by combining multiple inter- disciplinaryskills.Thishasbeenourexperienceovermanyyearsofresearchinand teaching these topics at universities in Germany, be it in Karlsruhe, Dresden or Essen.Buttheseinterdisciplinaryandinterculturalchallengesalsopoppedupwhen giving lectures elsewhere, when discussing with practitioners and colleagues at nationaland international conferences and inmultiple projects. So we have started at some point to think about writing a textbook to compile and consolidate our knowledgeofthischallengingfield.Ourobjectivehasbeentoprovideastructured guide to the subject, but this has also required that we commonly agree upon a structureandaselectionofmaterialstobeincludedinsuchabook.Thishasbeena longerprocessthanweinitiallyenvisaged.Buttheprocessofwritingthisbookhas also helped us deepen our shared understanding of the core concepts of this interdisciplinary research area that is labelled energy systems analysis or energy economics. The research area is highly topical and likely to remain so over the coming decades,giventheglobalchallengeofclimatechange.Asclimatechangeislargely drivenbyCO emissionsrelatedtothecombustionoffossilfuels,weareconvinced 2 that the energy carrier electricity will gain more and more importance. The use of CO -free electricity will help to decarbonise sectors like transport and heating that 2 so far primarily rely on fossil fuels. Environmental effects caused by energy con- version,e.g.climatechange,havebeenastrongmotivationforustoenterthefield years ago, andit isa major driverfor our current researchand teaching. Yet atthe same time, the rapid pace and shifting centres of interest in the political and aca- demic debate pose a challenge to those trying to consolidate the knowledge in the formofatextbook.Asweprogressed,weconcludedthatitisessentialtolaysolid foundations, even if this means that not all subjects treated may sound topical for thereaderfromtheoutset.Whilefinalisingthebook,wehaveexperiencedthatthe RussianwarinUkrainehasleadtomajorimpactsontheEuropeanenergymarkets. These tend to provide additional evidence for the principles outlined in the book. evenifwewerenotableatthisstagetoconsideralltheeffectsindetail.Butwitha solid basis laid, we hope that our students and the readers of this book will be capabletoreachoutfurther andcontributetheirparttotheshapingoffuture,more v vi Preface sustainable electricity systems. Based on our teaching experiences at Bachelor, Master and PhD levels, we aim to provide a balanced mix of conceptual discus- sions, mathematical formulations and practical applications. Hence the core target group of our textbook are students at both Bachelor and Master levels. Especially themorequantitativepartsaboutmodellingandriskmanagementmightyetalsobe of interest for students at PhD level and other researchers. At the same time, the authors hope that some of today’s experts, including practitioners, may find this helpful book to enlarge their view on overarching questions regarding electricity systems—given that we all are experts only in limited areas. This work would not have been possible without the continuous collaboration andexchangewithinourresearchgroupsandbeyond.Theworkofmanyhasleftits imprintinthisbook,eveniftheremainingambiguitiesareuniquelytobeattributed to the authors. We are particularly thankful to our colleagues Russell McKenna, Michael Bucksteeg, Peter Lund and Ramteen Sioshansi for reviewing the draft ofthemanuscriptandprovidingmanyvaluablesuggestions.WealsothankMarvin Lepperforhisdetailedworkonthereferences,WolfdieterFichtnerforproofreading as well as Martin Lieberwirth and Dominic Rosswag for their scrupulous work on the graphs and figures. But all of this would not have been possible without the lovingandenduringsupportofourfamilies.Withouttheirpatienceandacceptance ofmany hours and daysspent onthis andother work,this bookwould never have seen the light of day. Essen, Germany Christoph Weber Dresden, Germany Dominik Möst Karlsruhe, Germany Wolf Fichtner Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 Fundamentals of Energy and Power Systems . . . . . . . . . . . . . . . . . 7 2.1 Physical and Engineering Basics . . . . . . . . . . . . . . . . . . . . . . 8 2.1.1 Energy and Power and Thermodynamic Systems . . . . 8 2.1.2 Laws of Thermodynamics. . . . . . . . . . . . . . . . . . . . . 12 2.1.3 Thermodynamic State Variables, Energy Transformation and Carnot Efficiency . . . . . . . . . . . . 13 2.2 Energy, Economy and Society. . . . . . . . . . . . . . . . . . . . . . . . 18 2.3 Challenges of Resource Availability and Environmental Damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.3.1 Resource Availability . . . . . . . . . . . . . . . . . . . . . . . . 22 2.3.2 Environmental Damage. . . . . . . . . . . . . . . . . . . . . . . 27 2.4 Energy Transformation Chain and Energy Balances . . . . . . . . 31 2.4.1 Energy Terms and Energy Transformation Chain . . . . 31 2.4.2 Energy Balances. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.4.3 Energy Flowchart. . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.5 Particularities of Electricity and the Electricity Sector . . . . . . . 37 2.6 Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 2.7 Self-check ofKnowledge and Understanding and Exercises... 39 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3 Energy Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 3.1 Electricity Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 3.1.1 Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 3.1.2 Applications on the Demand Side . . . . . . . . . . . . . . . 45 3.1.3 Load Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 3.1.4 Demand-Side Management . . . . . . . . . . . . . . . . . . . . 48 3.1.5 Projecting Electricity Demand. . . . . . . . . . . . . . . . . . 50 3.1.6 Electricity Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 3.2 Heat Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 3.3 Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 vii viii Contents 3.4 Self-check of Knowledge and Exercises. . . . . . . . . . . . . . . . . 55 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 4 Electricity Generation and Operational Planning . . . . . . . . . . . . . . 59 4.1 Conventional Generation Technologies. . . . . . . . . . . . . . . . . . 60 4.1.1 Fossil-Fired Technologies . . . . . . . . . . . . . . . . . . . . . 60 4.1.2 Nuclear Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 4.1.3 Combined Heat and Power Generation (CHP) . . . . . . 77 4.2 Renewable Generation Technologies . . . . . . . . . . . . . . . . . . . 82 4.2.1 Hydropower. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 4.2.2 Wind Power. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 4.2.3 Solar Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 4.2.4 Bioenergy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 4.2.5 Other Renewable Energy Technologies . . . . . . . . . . . 104 4.3 Key Characteristics of Electricity Generation Technologies . . . 109 4.3.1 Technical and Environmental Characteristics . . . . . . . 109 4.3.2 Economic Characteristics . . . . . . . . . . . . . . . . . . . . . 113 4.3.3 Levelized Cost of Electricity. . . . . . . . . . . . . . . . . . . 115 4.4 Scheduling Electricity Generation—The Unit Commitment and Dispatch Problem. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 4.4.1 Day-Ahead Operational Planning. . . . . . . . . . . . . . . . 117 4.4.2 From Day-to-Day Planning to Portfolio Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 4.5 Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 4.6 Self-check of Knowledge and Exercises. . . . . . . . . . . . . . . . . 128 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 5 Electricity Transport and Storage. . . . . . . . . . . . . . . . . . . . . . . . . . 133 5.1 Electricity Transmission and Distribution . . . . . . . . . . . . . . . . 134 5.1.1 Basics of Electricity Networks . . . . . . . . . . . . . . . . . 134 5.1.2 Physical Principles of Power Flow . . . . . . . . . . . . . . 138 5.1.3 Electricity Network Components. . . . . . . . . . . . . . . . 149 5.1.4 System Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . 154 5.2 Storage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 5.2.1 Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 5.2.2 Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 5.3 Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 5.4 Self-check of Knowledge and Exercises. . . . . . . . . . . . . . . . . 169 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 6 Regulation: Grids and Environment. . . . . . . . . . . . . . . . . . . . . . . . 175 6.1 Grid Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 6.1.1 Fundamentals of Electricity Market Regulation . . . . . 176 6.1.2 Non-discriminatory Grid Access, Unbundling and Price Regulation . . . . . . . . . . . . . . . . . . . . . . . . 178 Contents ix 6.1.3 Practical Challenges of Performance-Based Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 6.1.4 Principles of Network Pricing . . . . . . . . . . . . . . . . . . 187 6.2 Environmental Effects and Environmental Policy . . . . . . . . . . 198 6.2.1 Externalities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 6.2.2 Emissions, Environmental Impacts and Emission Reduction Technologies . . . . . . . . . . . . . . . . . . . . . . 200 6.2.3 Policy Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . 212 6.2.4 Limiting Climate Change . . . . . . . . . . . . . . . . . . . . . 218 6.3 Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 6.4 Self-check of Knowledge and Exercises. . . . . . . . . . . . . . . . . 228 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 7 Simple Electricity Market Equilibrium Models. . . . . . . . . . . . . . . . 235 7.1 Short-Term Market Equilibrium Without Transmission Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 7.1.1 Simple, Graphical Approach: Merit-Order Model . . . . 236 7.1.2 Assumptions Underlying the Concept of Perfect Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 7.1.3 Formal Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 7.1.4 Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 7.2 Short-Term Market Equilibrium with Two Grid Nodes . . . . . . 247 7.2.1 Graphical Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 248 7.2.2 Formal Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 7.3 Optimal Power Flow Model and Nodal Pricing. . . . . . . . . . . . 250 7.4 Long-Term Market Equilibrium. . . . . . . . . . . . . . . . . . . . . . . 255 7.4.1 Formal Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 7.4.2 Graphical Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 7.4.3 Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 7.5 Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 7.6 Self-check of Knowledge and Exercises. . . . . . . . . . . . . . . . . 264 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 8 Markets: Organisation, Trading and Efficiency . . . . . . . . . . . . . . . 271 8.1 Organisation of the Electricity Sector. . . . . . . . . . . . . . . . . . . 272 8.2 Basics of Electricity Trading . . . . . . . . . . . . . . . . . . . . . . . . . 272 8.3 Key Market Design Choices . . . . . . . . . . . . . . . . . . . . . . . . . 276 8.4 Balancing Groups: Coordination Between Electricity Trading and Grid Operation. . . . . . . . . . . . . . . . . . . . . . . . . . 278 8.5 Information Efficiency: Links Between Spot and Future Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 8.5.1 Law of One Price. . . . . . . . . . . . . . . . . . . . . . . . . . . 281 8.5.2 Link Between Spot and Futures Markets . . . . . . . . . . 282

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