Powe System Restructuring

8/16/2019 Powe System Restructuring

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Module 7 : Power System Structures

Lecture 33 : Structure of a Deregulated Industry

Different entities in deregulated environment :

The introduction of deregulation has brought several new entities in the electricity market place, while on the other handredefining the scope of activities of many of the existing players. Variations exist across market structures over how eachentity is particularly defined and over what role it plays in the system. However, on a broad level, the following entities canbe identified as shown in the figure below.

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Genco

(Generating Company)

Genco is an owner-operator of one or more generators that runs them and bids thepower into the competitive marketplace. Genco sells energy at its sites in the samemanner that a coal mining company might sell coal in bulk at its mine.

Transco

(Transmission Company)

Transco moves power in bulk quantities from where it is produced to where it isdelivered. The Transco owns and maintains the transmission facilities, and mayperform many of the management and engineering functions required to ensure thesystem can continue to do its job. In most deregulated industry structures, the

Transco owns and maintains the transmission lines under monopoly franchise, butdoes not necessarily operate them. That is done by Independent System Operator (ISO). The Transco is paid for the use of its l ines. In some countries, Transo itself actsas a system operator.

Disco

(Distribution Company)

It is the monopoly franchise owner-operator of the local power delivery system, whichdelivers power to individual businesses and homeowners. In some places, the localdistribution function is combined with retail function, i.e. to buy wholesale electricityeither through the spot market or through direct contracts with gencos and supplyelectricity to the end use customers. In many other cases, however, the disco doesnot sell power. It only owns and operates the local distribution system, and obtains itsrevenues by ‘renting’ space on it, or by billing for delivery of electric power.

Resco

(Retail Energy Service Company)

It is the retailer of electric power. Many of these will be the retail departments of theformer vertically integrated utilities. Others will be companies new to the electricindustry that believe they are good at selling services. Either way, a resco buys power from gencos and sells it directly to the consumers.

ISO

(Independent System Operator)

The ISO is an entity entrusted with the responsibility of ensuring the reliability andsecurity of the entire system. It is an independent authority and does not participate inthe electricity market trades. It usually does not own generating resources, except for some reserve capacity in certain cases. In order to maintain the system security andreliability, the ISO procures various services such as supply of emergency reserves,or reactive power from other entities in the system.

Customers

A customer is an entity, consuming electricity. In deregulated markets, a customer has several options for buying electricity. It may choose to buy electricity from the spotmarket by bidding for purchase, or may buy directly from a genco or even from thelocal distribution company.

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The competition :

In a deregulated environment, two levels of competition exist or are encouraged. At what can be termed as wholesale level,gencos produce and sell bulk quantities of electric power. Power is typically sold in bulk quantities to other companies or very large industrial customers, through some deregulated power market mechanism. The gencos bid their power at themarketplace so as to maximize their profits.

Locally, retail delivery is accomplished by retailers, who compete for the business of the consumers in the area by offering

low price, good service and additional service features.

Thus, a restructured, completely competitive electric industry is a sandwich of competition above and below a power delivery system. This structure can be conveniently divided into wholesale and retail levels. The important thing to note isthat the power delivery i.e. transmission and distribution remains a monopoly. This is shown in the figure below.

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Ancillary Service Management

Ancillary services are defined as all those activities on the interconnected grid that are necessary to support thetransmission of power while maintaining reliable operation and ensuring the required degree of quality and safety. Thisrequires that a independent system operator should have adequate leverage to implement "normal" functions like

frequency and voltage regulation, but also carry out actions of preventive , emergency and restorative control actions asdiscussed in module 6.In deregulated power systems, transmission networks are available for third party access to allow power wheeling, andspot markets for electricity have been developed in many countries. In such an environment, ancillary services are nolonger treated as an integral part of the electric supply. They are unbundled and priced separately and system operatorshave to purchase ancillary services from ancillary service providers. The following are some examples of anciliary serviceswhich are procured and mamaged by an ISO.

RegulationThe use of generation or load to maintain minute-to-minute generation/ load balancewithin control area (like AGC).

Load FollowingThis service also refers to instant-to-instant balance between generation and load(governor action).

Operating Reserve-Spinning

The provision of unloaded generating capacity that is synchronized to the grid and canimmediately respond to correct for generation/ load imbalances, caused by generationand/ or transmission outages and that is fully available within several minutes.

System Control The control area operator functions that schedule generation and transactions andcontrol generation in real time to maintain generation/ load balance.

Reactive Power andVoltage Control fromGenerator Sources

The injection or absorption of reactive power from generators or capacitors to maintainsystem voltages within required ranges.

Real power transmission losses

Any power flow in the network will cause losses which have to be supplied by purchasingsome additional power.

Network StabilityServices fromGeneration sources

Maintenance and use of special equipment (e.g. for emergency control) to maintain asecure transmission system.

System Black-StartCapability

The ability of a generating unit to proceed from a shutdown condition to an operatingcondition without assistance from the grid and then to energize the grid to help other units start after a blackout occurs

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NPTEL Electrical Engineering Restructured Power Systems (Web) Under Review

Reasons and objectives of deregulation of various power systems across the world

Introduction to restructuring of power industry

Introduction

Reasons for restructuring / deregulation of power industry

Understanding the restructuring process

Introduction to issues involved in deregulation


Fundamentals of Economics

The Philosophy of Market Models

Transmission Congestion Management

Locational Marginal Prices (LMP)


Pricing of transmission network usage and loss allocation

US and European market evolution

Reforms in Indian power sector

Modules / Lectures

Reasons and objectives of deregulation of various power systems acrossthe world

Restructuring or deregulation is a broad term and can have different meanings in different countries. This is becausethe changes essential for betterment of power sector depend on the prevailing conditions in the power sector of respective countries. Further, the word – betterment can be looked upon subjectively. For example, well developed,industrialized countries can expect price to go down and these countries can treat the change in the prices asbetterment. On the other hand, the developing countries need to make radical changes in the policy and regulationsuch that barrier to entry for private players is removed. The effective betterment can be looked upon from thisperspective for developing countries.

In this section we will see, in brief, the issues that led to restructuring of the power industry for following regions /countries: US , UK , Nordic Pool and developing countries.

The US

The US electric utilities, from the very beginning were privately owned and worked in a vertically integrated fashion. Thedeveloped countries like US had well functioning and efficient electricity systems. However for some systems, so longas consumers were concerned, they were not satisfied with the rising costs of electricity. For some other systems,utility management found that running the system was not viable due to low tariff. In some systems, pressure fromsmaller players to open up the business for competition played a major role. By and large, deregulation took place indeveloped countries by pressure to reduce costs while simultaneously increasing competitiveness in the market.


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HOME SYL LABUS LECTURES DOWNL OADS FAQ ASK A QUESTION

NPTEL Electrical Engineering Restructured Power Systems (Web) Under Review Introduction


Introduction













Modules / Lectures

Module1: Introduction

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


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Fig 1.1

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

order to protect end consumer interests. Some of the characteristics of monopoly utility are:

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

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


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Introduction













Modules / Lectures

Reasons for restructuring / deregulation of power industry The next obvious question is, “what is deregulation or restructuring of an industry?” From the name, one can sensediscontinuation of the framework provided by the regulation. In other words, deregulation is about removing control over the prices with introduction of market players in the sector. However, this is not correct in a strict sense. An overnightchange in the power business framework with provision of entry to competing suppliers and subjecting prices tomarket interaction, would not work successfully. There are certain conditions that create a conducive environment for the competition to work. These conditions need to be satisfied while deregulating or restructuring a system.Sometimes, the word ‘deregulation’ may sound a misnomer. ‘Deregulation’ does not mean that the rules won’t exist.The rules will still be there, however, a new framework would be created to operate the power industry. That is why theword ‘deregulation’ finds its substitutes like ‘re-regulation’, ‘reforms’, ‘restructuring’, etc. The commonly used word inEurope is ‘liberalization’ of power industry; ‘deregulation’ is a more popular phrase in US.

If the power industries worked successfully with the regulated monopoly framework for over 100 years, what was theneed for deregulating or changing the business framework of the system? There are many reasons that fuelled the

concept of deregulation of the power industry. One major thought that prevailed during the early nineties raisedquestions about the performance of monopoly utilities. The takers of this thought advocated that monopoly status of theelectric utilities did not provide any incentive for its efficient operation. In privately owned utilities, the costs incurred bythe utility were directly imposed upon the consumers. In government linked public utilities, factors other than theeconomics, for example, treatment of all public utilities at par, overstaffing, etc. resulted in a sluggish performance of these utilities. The economists started promoting introduction of a competitive market for electrical energy as a meansof benefit for the overall powerector. This argument was supported by the successful reform experiences of other sectors such as airlines, gas, telephone, etc.




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Another impetus for deregulation of power industry was provided by the change in power generation technology. In theearlier days, cost-effective power generation was possible only with the help of mammoth thermal (coal/nuclear)plants. However, during the mid eighties, the gas turbines started generating cost effective power with smaller plantsize. It was then possible to build the power plants near the load centers and also, an opportunity was created for private players to generate power and sell the same to the existing utility. This technology change, supposed to haveprovided acceleration to the concept of independent power producers, supported the concept of deregulation further.This technology change is supposed to have provided acceleration to the concept of independent power producers.This further supported concept of deregulation. This was specifically true where the financial losses were apparentlyhigh which was prevalent in some of the developing countries.

It should be noted that these are the indicative or major reasons for introducing the concept of deregulation in power industry. There are many other reasons as well. One of the important reasons is the condition under which power

systems were regulated, did not exist any more. There was no wind of skepticism about the electrical technology andall the initial investments in infrastructure were already paid back. Further, the deregulation aims at introducingcompetition at various levels of power industry. The competition is likely to bring down the cost of electricity. Then, theactivities of the power industry would become customer centric.

The competitive environment offers a good range of benefits for the customers as well as the private entities. It isclaimed that some of the significant benefits of power industry deregulation would include:

1. Electricity price will go down: It is a common understanding that the competitive prices are lesser than themonopolist prices. The producer will try to sell the power at its marginal cost, in a perfectly competitiveenvironment.

2. Choice for customers: The customer will have choice for its retailer. The retailers will compete not only on theprice offered but also on the other facilities provided to the customers. These could include better plans, better reliability, better quality, etc.

3. Customer-centric service: The retailers would provide better service than what the monopolist would do.

4. Innovation: The regulatory process and lack of competition gave electric utilities no incentive to improve or totake risks on new ideas that might increase the customer value. Under deregulated environment, the electricutility will always try to innovate something for the betterment of service and in turn save costs and maximize theprofit.

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




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Introduction













Modules / Lectures

Understanding the restructuring process The process of deregulation has taken different formats in different parts of the world. Also, the reasons for power sector to adopt the reforms vary from country to country. For the developed countries, introduction of competition toachieve social welfare was probably the most important reason. On the other hand, the developing countries mainlybanked on the capacity addition through entry of private players. It is observed that neither, there is lone reson for driving deregulation of power industry nor is there a single objective of the same.

The restructuring process starts with the unbundling of the originally vertically integrated utility. This essentially leadsto separate the activities involved in an integrated power system leading to creation of functional partition amongstthem. For example, the unbundling of power industry involves separating transmission activity from the generationactivity. Further, distribution can be separated from transmission. Thus, these three mutually exclusive functions arecreated and there are separate entities or companies that control these functions. Then, the competition can beintroduced in the generation activity by allowing other private participants in this segment. In contrast to the verticallyintegrated case where all the generation is owned by the same utili ty, there is a scope for private players to sell their

generation at competitive prices. The generators owned by the earlier vertically integrated utility will then competewith these private generators. The transmission sector being a natural monopoly is most unlikely to have competingplayers in the sector. This is because for natural monopolies like transmission companies, the business becomesprofitable only when output is large enough. Figure 1.2 shows the representative structure of deregulated power system. In contrast to the vertically integrated utility structure, it can be seen that there are many alternative pathsalong which the money flows. It is evident that there are many more other entities present, apart from the verticallyintegrated utility and the customers. It should be noted that there can be many more versions of deregulatedstructure.




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Various Entities Involved in Deregulation:

The introduction of deregulation has introduced several new entities in the electricity market place and has

simultaneously redefined the scope of activities of many of the existing players. Variations exist across marketstructures over how each entity is particularly defined and over what role it plays in the system. However, on a broadlevel, the following entities can be identified:

1. Genco (Generating Company): Genco is an owner-operator of one or more generators that runs them andbids the power into the competitive marketplace. Genco sells energy at its sites in the same manner that acoal mining company might sell coal in bulk at its mine.

2. Transco (Transmission Company): Transco moves power in bulk quantities from where it is produced towhere it is consumed. The Transco owns and maintains the transmission facilities, and may perform manyof the management and engineering functions required to ensure the smooth running of the system. Insome deregulated industries, the Transco owns and maintains the transmission lines under the monopoly,but does not operate them. That is done by Independent System Operator (ISO). The Transco is paid for theuse of its lines.

3. Discom (Distribution Company): It is the owner-operator of the local power delivery system, which deliverspower to individual businesses and homeowners. In some places, the local distribution function iscombined with retail function, i.e. to buy wholesale electricity either through the spot market or through direct

contracts with Gencos and supply electricity to the end use customers. In many other cases, however, theDiscom does not sell the power. It only owns and operates the local distribution system, and obtains itsrevenue by wheeling electric power through its network.

4. Resco (Retail Energy Service Company): It is the retailer of electric power. Many of these will be the retaildepartments of the former vertically integrated utilities. A Resco buys power from Gencos and sells i t directlyto the consumers. Resco does not own any electricity network physical assets.

5. Market Operator:Market operator provides a platform for the buyers and sellers to sell and buy the electricity.It runs a computer program that matches bids and offers of sellers and buyers. The market settlementprocess is the responsibility of the market operator. The market operator typically runs a day-ahead market.The near-real-time market, if any, is administered by the system operator.

6. System Operator (SO): The SO is an entity entrusted with the responsibility of ensuring the reliability andsecurity of the entire system. It is an independent authority and does not participate in the electricity markettrades. It usually does not own generating resources, except for some reserve capacity in certain cases. Inorder to maintain the system security and reliability, the SO procures various services such as supply of emergency reserves, or reactive power from other entities in the system. In some countries, SO also ownsthe transmission network. The SO in these systems is generally called as Transmission System Operator

(TSO). In the case of a SO being completely neutral of every other activity except coordinate, control andmonitor the system, it is generally called as Independent System Operator (ISO).7. Customers: A customer is an entity, consuming electricity. In a completely deregulated market where retail

sector is also open for competition, the end customer has several options for buying electricity. It may chooseto buy electricity from the spot market by bidding for purchase, or may buy directly from a Genco or even fromthe local retailing service company. On the other hand, in the markets where competition exists only at thewholesale level, only the large customers have privilege of choosing their supplier.




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Introduction













Modules / Lectures

Understanding the restructuring process Electricity, as a commodity, can not be compared with any other commodity traded in the market. This is because it hassome distinguishing characteristics of its own, which demand satisfaction of technical constraints beforeaccomplishing the commercial trades. Two important features of electricity as a commodity are: need for real timebalance and inability to wheel the commodity through desired path (in bulk). Hence, a set of principles laid down bystandard micro-economic theory can not be mapped directly to the electricity commodity markets.

Tackling network congestion is one of the challenging issues of the de-regulated era. Transmission network providesthe path through which transactions are made in a power market. But each transmission network has its own physicaland operating limits like line flow limits, bus voltage magnitude limits and more. The power injection and withdrawalconfiguration should be such that no limit gets violated. If the network is operated beyond these limits, it may, even,result in the entire system blackout. Therefore, any arbitrary set of transactions can’t be organized on the power network. This has given rise to a new problem under the restructured power system environment, referred to ascongestion management. There are many ways in which congestion is formally defined but to explain in simple words,

when some components in a power network appear to be overloaded due to a trading arrangement, that particular arrangement is said to create congestion on the network. The purpose of congestion management is to makenecessary corrections in order to relieve congestion. It can be easily appreciated that under the vertically integratedstructure, network congestion, in fact, is not a challenging task. This is because all the resources in the system areunder the direct control of the monopolist. Thus, this is the sole responsibility of the monopolist to maintain itstransmission network.

Provision of ancillary services is another tough task carried out by the system operator under the deregulated




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r m w r . n ry rv r n v n n r nn r r n ry u r the transmission of power while maintaining reliable operation and ensuring the required degree of quality and safety.Under the deregulated power system environment, the system operator acquires a central coordination role andcarries out the important responsibility of providing for system reliability and security. It manages system operationslike scheduling and operating the transmission related services. The SO also has to ensure a required degree of quality and safety and provide corrective measures under contingent conditions. In this respect, certain services, suchas scheduling and dispatch, frequency regulation, voltage control, generation reserves, etc. are required by the power system, apart from basic energy and power delivery services. Such services are commonly referred to as ancillaryservices. In deregulated power systems, transmission networks are available for third party access to allow power wheeling. In such an environment, the ancillary services are no longer treated as an integral part of the electric supply.They are unbundled and priced separately and system operators may have to purchase ancillary services fromancillary service providers.

Then, there are certain issues like market design and market power which need regulatory intervention. Issuespertaining to market design revolve around choice made in the selection of dispatch philosophies, choice of variouspricing schemes, choice between number of markets with multiple gate closures, etc., from various alternatives. Themarket architecture, which maps various markets on timeline, is also an important sub-topic of market design process.

Existence of market power shows the signs of deviation from the prefect competition. In general, market power isreferred to as ability of market participants to profitably maintain the market price above or below the competitive levelfor a significant period of time. To tackle the situation, an indirect regulatory intervention in the form of market designrules is needed. Thus, as mentioned earlier, deregulation does not mean ceasing to have rules. It is the ‘restructuring’of the power business framework. More rigorous treatment to these issues is given in further chapters.




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Overview of A Deregulated Industry

Unbundling of traditionally vertically integrated utility.

One of the principal characteristics of a competitive structure is the identification and separation of the various tasks whichare normally carried out within the traditional organization so that these tasks can be open to competition whenever practical and profitable.

This process is called unbundling .

An unbundled structure contrasts with the so-called vertically integrated utility of today where all tasks are coordinated jointly under one umbrella with one common goal, that is, to minimize the total costs of operating the utility.

One of the first steps in the restructuring process of the power industry has been the separation of the transmissionactivities from the electricity generation activities.

The subsequent step was to introduce competition in generation activities, either through the creation of power pools,provision for direct bilateral transactions or bidding in the spot markets.

On the other hand, the transmission system has significant economics of scale (i.e., it is economical to have a commonbulk transmission system of a large capacity rather than individual small capacity transmission l inks). Consequently it wassuited to be a natural monopoly and a separate entity. It was felt necessary to introduce regulation in transmission so as toprevent it from overcharging for its services. The transmission system thus became a neutral, natural monopoly subject toregulation by public authorities. And to overcome the monopolistic characteristic, the trend has been to establish new legaland regulatory frameworks offering third parties "open access" to the transmission network subject to technicalconstraints.

An important point to note is that the restructuring process was however not uniform in all countries. While in manyinstances, it started with the breaking up of a large vertically integrated utility, in certain other instances restructuring wascharacterized by the opening up of small municipal monopolies to competition.

In brief, Electric utilities are expected to split apart into unbundled companies, with each utility re-aligning itself into severalother companies that respectively focus on each part of the new industry, i.e., power delivery and retailing. This is knownas Disaggregation.

Under deregulation, the vertically integrated utility, one giant company that generates, transmits, distributes and sellselectricity in coordinated manner will become thing of the past. To function in an open access system, such utilities willhave to rearrange their operational organization to match the unbundled functions they must perform. Each part of thecompany will need to work in its new form. Generation will have to compete in the competitive power generation marketplace. T & D will have to operate as an open provider of delivery services. Competition will be present in retailing.

Generally, the governments advocating deregulation want competition in energy production, and they want to seesignificant levels of customer choice in the retail market for electricity. At the same time, i t recognizes that it is best to haveonly one transmission and one distribution system in any one area. Therefore, the purpose of deregulation is torestructure the electric industry so that power production and retail sales are competitive, while delivery is still a regulated,monopoly franchise business.

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Structure of deregulated industry

The figure below shows the typical structure of a deregulated electricity system with links of information and money flowbetween various players.

The configuration shown in the figure is not a universal one. There exist variations across countries and systems.

A system operator is appointed for the whole system and it is entrusted with the responsibility of keeping the system inbalance, i.e. to ensure that the production and imports continuously match consumption and exports. Naturally, it wasrequired to be an independent authority without involvement in the market competition nor could it own generationfacilities for business. This system operator is known as Independent System Operator (ISO).

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Different power sellers will deliver their product to their customers (via retailers), over a common set of T & D wires. Theseoperations are supervised by an independent system operator (ISO). The generators, T & D utility and retailers communicatewith the ISO. Mostly, customers communicate with a retailer, demanding energy. The retailer contacts the generating companyand purchases the power from it and makes it transferred to its customer’s place via regulated T & D lines. The ISO is the oneresponsible for keeping track of various transactions taking place between various entities. A customer can also enter into a bi-lateral contract with a generator directly for supply of the required energy.

In the vertically integrated environment, the electricity bill consisted of a single amount to be paid towards the generation,transmission and all other costs. But, in the restructured environment, the electricity price gets segregated into the following:

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