pt. I INTRODUCTION TO ECONOMIC CONCEPTS -- 1.Introduction to Micro-economics -- 1.1.Economic Objectives -- 1.2.Introduction to Constrained Optimisation -- 1.3.Demand and Consumers' Surplus -- 1.3.1.The Short-Run Decision of the Customer -- 1.3.2.The Value or Utility Function -- 1.3.3.The Demand Curve for a Price-Taking Customer Facing a Simple Price -- 1.4.Supply and Producers' Surplus -- 1.4.1.The Cost Function -- 1.4.2.The Supply Curve for a Price-Taking Firm Facing a Simple Price -- 1.5.Achieving Optimal Short-Run Outcomes Using Competitive Markets -- 1.5.1.The Short-Run Welfare Maximum -- 1.5.2.An Autonomous Market Process -- 1.6.Smart Markets -- 1.6.1.Smart Markets and Generic Constraints -- 1.6.2.A Smart Market Process -- 1.7.Longer-Run Decisions by Producers and Consumers -- 1.7.1.Investment in Productive Capacity -- 1.8.Monopoly -- 1.8.1.The Dominant Firm -- Competitive Fringe Structure -- 1.8.2.Monopoly and Price Regulation --

1.9.Oligopoly -- 1.9.1.Cournot Oligopoly -- 1.9.2.Repeated Games -- 1.10.Summary -- Questions -- Further Reading -- pt. II INTRODUCTION TO ELECTRICITY NETWORKS AND ELECTRICITY MARKETS -- 2.Introduction to Electric Power Systems -- 2.1.DC Circuit Concepts -- 2.1.1.Energy, Watts and Power -- 2.1.2.Losses -- 2.2.AC Circuit Concepts -- 2.3.Reactive Power -- 2.3.1.Mathematics of Reactive Power -- 2.3.2.Control of Reactive Power -- 2.3.3.Ohm's Law on AC Circuits -- 2.3.4.Three-Phase Power -- 2.4.The Elements of an Electric Power System -- 2.5.Electricity Generation -- 2.5.1.The Key Characteristics of Electricity Generators -- 2.6.Electricity Transmission and Distribution Networks -- 2.6.1.Transmission Networks -- 2.6.2.Distribution Networks -- 2.6.3.Competition and Regulation -- 2.7.Physical Limits on Networks -- 2.7.1.Thermal Limits -- 2.7.2.Voltage Stability Limits -- 2.7.3.Dynamic and Transient Stability Limits -- 2.8.Electricity Consumption --

2.9.Does it Make Sense Distinguish Electricity Producer's and Consumers? -- 2.9.1.The Service Provided by the Electric Power Industry -- 2.10.Summary -- Questions -- Further Reading -- 3.Electricity Industry Market Structure and Competition -- 3.1.Tasks Performed in an Efficient Electricity Industry -- 3.1.1.Short-Term Tasks -- 3.1.2.Risk-Management Tasks -- 3.1.3.Long-Term Tasks -- 3.2.Electricity Industry Reforms -- 3.2.1.Market-Orientated Reforms of the Late Twentieth Century -- 3.3.Approaches to Reform of the Electricity Industry -- 3.4.Other Key Roles in a Market-Orientated Electric Power System -- 3.5.An Overview of Liberalised Electricity Markets -- 3.6.An Overview of the Australian National Electricity Market -- 3.6.1.Assessment of the NEM -- 3.7.The Pros and Cons of Electricity Market Reform -- 3.8.Summary -- Questions -- Further Reading -- pt. III OPTIMAL DISPATCH: THE EFFICIENT USE OF GENERATION, CONSUMPTION AND NETWORK RESOURCES --

4.Efficient Short-Term Operation of an Electricity Industry with no Network Constraints -- 4.1.The Cost of Generation -- 4.2.Simple Stylised Representation of a Generator -- 4.3.Optimal Dispatch of Generation with Inelastic Demand -- 4.3.1.Optimal Least Cost Dispatch of Generation Resources -- 4.3.2.Least Cost Dispatch for Generators with Constant Variable Cost -- 4.3.3.Example -- 4.4.Optimal Dispatch of Both Generation and Load Assets -- 4.5.Symmetry in the Treatment of Generation and Load -- 4.5.1.Symmetry Between Buyer-Owned Generators and Stand-Alone -- Generators -- 4.5.2.Symmetry Between Total Surplus Maximisation and Generation Cost Minimisation -- 4.6.The Benefit Function -- 4.7.Nonconvexities in Production: Minimum Operating Levels -- 4.8.Efficient Dispatch of Energy-Limited Resources -- 4.8.1.Example -- 4.9.Efficient Dispatch in the Presence of Ramp-Rate Constraints -- 4.9.1.Example -- 4.10.Startup Costs and the Unit-Commitment Decision --

4.11.Summary -- Questions -- Further Reading -- 5.Achieving Efficient Use of Generation and Load Resources using a Market Mechanism in an Industry with no Network Constraints -- 5.1.Decentralisation, Competition and Market Mechanisms -- 5.2.Achieving Optimal Dispatch Through Competitive Bidding -- 5.3.Variation in Wholesale Market Design -- 5.3.1.Compulsory Gross Pool or Net Pool? -- 5.3.2.Single Price or Pay-as-Bid? -- 5.4.Day-Ahead Versus Real-Time Markets -- 5.4.1.Improving the Quality of Short-Term Price Forecasts -- 5.4.2.Reducing the Exercise of Market Power -- 5.5.Price Controls and Rationing -- 5.5.1.Inadequate Metering and Involuntary Load Shedding -- 5.6.Time-Varying Demand, the Load-Duration Curve and the Price-Duration Curve -- 5.7.Summary -- Questions -- Further Reading -- 6.Representing Network Constraints -- 6.1.Representing Networks Mathematically -- 6.2.Net Injections, Power Flows and the DC Load Flow Model --

6.2.1.The DC Load Flow Model -- 6.3.The Matrix of Power Transfer Distribution Factors -- 6.3.1.Converting between Reference Nodes -- 6.4.Distribution Factors for Radial Networks -- 6.5.Constraint Equations and the Set of Feasible Injections -- 6.6.Summary -- Questions -- 7.Efficient Dispatch of Generation and Consumption Resources in the Presence of Network Congestion -- 7.1.Optimal Dispatch with Network Constraints -- 7.1.1.Achieving Optimal Dispatch Using a Smart Market -- 7.2.Optimal Dispatch in a Radial Network -- 7.3.Optimal Dispatch in a Two-Node Network -- 7.4.Optimal Dispatch in a Three-Node Meshed Network -- 7.5.Optimal Dispatch in a Four-Node Network -- 7.6.Properties of Nodal Prices with a Single Binding Constraint -- 7.7.How Many Independent Nodal Prices Exist? -- 7.8.The Merchandising Surplus, Settlement Residues and the Congestion Rents -- 7.8.1.Merchandising Surplus and Congestion Rents -- 7.8.2.Settlement Residues --

7.8.3.Merchandising Surplus in a Three-Node Network -- 7.9.Network Losses -- 7.9.1.Losses, Settlement Residues and Merchandising Surplus -- 7.9.2.Losses and Optimal Dispatch -- 7.10.Summary -- Questions -- Further Reading -- 8.Efficient Network Operation -- 8.1.Efficient Operation of DC Interconnectors -- 8.1.1.Entrepreneurial DC Network Operation -- 8.2.Optimal Network Switching -- 8.2.1.Network Switching and Network Contingencies -- 8.2.2.A Worked Example -- 8.2.3.Entrepreneurial Network Switching? -- 8.3.Summary -- Questions -- Further Reading -- pt. IV EFFICIENT INVESTMENT IN GENERATION AND CONSUMPTION ASSETS -- 9.Efficient Investment in Generation and Consumption Assets -- 9.1.The Optimal Generation Investment Problem -- 9.2.The Optimal Level of Generation Capacity with Downward Sloping Demand -- 9.2.1.The Case of Inelastic Demand -- 9.3.The Optimal Mix of Generation Capacity with Downward Sloping Demand --

9.4.The Optimal Mix of Generation with Inelastic Demand -- 9.5.Screening Curve Analysis -- 9.5.1.Using Screening Curves to Assess the Impact of Increased Renewable Penetration -- 9.5.2.Generation Investment in the Presence of Network Constraints -- 9.6.Buyer-Side Investment -- 9.7.Summary -- Questions -- Further Reading -- 10.Market-Based Investment in Electricity Generation -- 10.1.Decentralised Generation Investment Decisions -- 10.2.Can We Trust Competitive Markets to Deliver an Efficient Level of Investment in Generation? -- 10.2.1.Episodes of High Prices as an Essential Part of an Energy-Only Market -- 10.2.2.The M̀issing Money' Problem -- 10.2.3.Energy-Only Markets and the Investment Boom--Bust Cycle -- 10.3.Price Caps, Reserve Margins and Capacity Payments -- 10.3.1.Reserve Requirements -- 10.3.2.Capacity Markets -- 10.4.Time-Averaging of Network Charges and Generation Investment -- 10.5.Summary -- Questions --

pt. V HANDLING CONTINGENCIES: EFFICIENT DISPATCH IN THE VERY SHORT RUN -- 11.Efficient Operation of the Power System in the Very Short-Run -- 11.1.Introduction to Contingencies -- 11.2.Efficient Handling of Contingencies -- 11.3.Preventive and Corrective Actions -- 11.4.Satisfactory and Secure Operating States -- 11.5.Optimal Dispatch in the Very Short Run -- 11.6.Operating the Power System Ex Ante as though Certain Contingencies have Already Happened -- 11.7.Examples of Optimal Short-Run Dispatch -- 11.7.1.A Second Example, Ignoring Network Constraints -- 11.7.2.A Further Example with Network Constraints -- 11.8.Optimal Short-Run Dispatch Using a Competitive Market -- 11.8.1.A Simple Example -- 11.8.2.Optimal Short-Run Dispatch through Prices -- 11.8.3.Investment Incentives -- 11.9.Summary -- Questions -- Further Reading -- 12.Frequency-Based Dispatch of Balancing Services -- 12.1.The Intradispatch Interval Dispatch Mechanism --

12.2.Frequency-Based Dispatch of Balancing Services -- 12.3.Implications of Ignoring Network Constraints when Handling Contingencies -- 12.3.1.The Feasible Set of Injections with a Frequency-Based IDIDM -- 12.4.Procurement of Frequency-Based Balancing Services -- 12.4.1.The Volume of Frequency Control Balancing Services Required -- 12.4.2.Procurement of Balancing Services -- 12.4.3.Allocating the Costs of Balancing Services -- 12.5.Summary -- Questions -- Further Reading -- pt. VI MANAGING RISK -- 13.Managing Intertemporal Price Risks -- 13.1.Introduction to Forward Markets and Standard Hedge Contracts -- 13.1.1.Instruments for Managing Risk: Swaps, Caps, Collars and Floors -- 13.1.2.Swaps -- 13.1.3.Caps -- 13.1.4.Floors -- 13.1.5.Collars (and Related Instruments) -- 13.2.The Construction of a Perfect Hedge: The Theory -- 13.2.1.The Design of a Perfect Hedge -- 13.3.The Construction of a Perfect Hedge: Specific Cases --

13.3.1.Hedging by a Generator with no Cost Uncertainty -- 13.3.2.Hedging Cost-Shifting Risks -- 13.4.Hedging by Customers -- 13.4.1.Hedging by a Customer with a Constant Utility Function -- 13.4.2.Hedging Utility-Shifting Risks -- 13.5.The Role of the Trader -- 13.5.1.Risks Facing Individual Traders -- 13.6.Intertemporal Hedging and Generation Investment -- 13.7.Summary -- Questions -- 14.Managing Interlocational Price Risk -- 14.1.The Role of the Merchandising Surplus in Facilitating Interlocational Hedging -- 14.1.1.Packaging the Merchandising Surplus in a Way that Facilitates Hedging -- 14.2.Interlocational Transmission Rights: CapFTRs -- 14.3.Interlocational Transmission Rights: Fixed-Volume FTRs -- 14.3.1.Revenue Adequacy -- 14.3.2.Are Fixed-Volume FTRs a Useful Hedging Instrument? -- 14.4.Interlocational Hedging and Transmission Investment -- 14.4.1.Infinitesimal Investment in Network Capacity -- 14.4.2.Lumpy Investment in Network Capacity --

14.5.Summary -- Questions -- Further Reading -- pt. VII MARKET POWER -- 15.Market Power in Electricity Markets -- 15.1.An Introduction to Market Power in Electricity Markets -- 15.1.1.Definition of Market Power -- 15.1.2.Market Power in Electricity Markets -- 15.2.How Do Generators Exercise Market Power? Theory -- 15.2.1.The Price--Volume Trade-Off -- 15.2.2.The Profit-Maximising Choice of Rate of Production for a Generator with Market Power -- 15.2.3.The Profit-Maximising Offer Curve -- 15.3.How do Generators Exercise Market Power? Practice -- 15.3.1.Economic and Physical Withholding -- 15.3.2.Pricing Up and the Marginal Generator -- 15.4.The Incentive to Exercise Market Power: The Importance of the Residual Demand Curve -- 15.4.1.The Shape of the Residual Demand Curve -- 15.4.2.The Importance of Peak Versus Off-Peak for the Exercise of Market Power -- 15.4.3.Other Influences on the Shape of the Residual Demand Curve --

15.5.The Incentive to Exercise Market Power: The Impact of the Hedge Position of a Generator -- 15.5.1.Short-Term Versus Long-Term Hedge Products and the Exercise of Market Power -- 15.5.2.Hedge Contracts and Market Power -- 15.6.The Exercise of Market Power by Loads and Vertical Integration -- 15.6.1.Vertical Integration -- 15.7.Is the Exercise of Market Power Necessary to Stimulate Generation Investment? -- 15.8.The Consequences of the Exercise of Market Power -- 15.8.1.Short-Run Efficiency Impacts of Market Power -- 15.8.2.Longer-Run Efficiency Impacts of Market Power -- 15.8.3.A Worked Example -- 15.9.Summary -- Questions -- Further Reading -- 16.Market Power and Network Congestion -- 16.1.The Exercise of Market Power by a Single Generator in a Radial Network -- 16.1.1.The Exercise of Market Power by a Single Generator in a Radial Network: The Theory -- 16.2.The Exercise of Market Power by a Single Generator in a Meshed Network --

16.3.The Exercise of Market Power by a Portfolio of Generators -- 16.4.The Effect of Transmission Rights on Market Power -- 16.5.Summary -- Questions -- Further Reading -- 17.Detecting, Modelling and Mitigating Market Power -- 17.1.Approaches to Assessing Market Power -- 17.2.Detecting the Exercise of Market Power Through the Examination of Market Outcomes in the Past -- 17.2.1.Quantity-Withdrawal Studies -- 17.2.2.Price--Cost Margin Studies -- 17.3.Simple Indicators of Market Power -- 17.3.1.Market-Share-Based Measures and the HHI -- 17.3.2.The PSI and RSI Indicators -- 17.3.3.Variants of the PSI and RSI Indicators -- 17.3.4.Measuring the Elasticity of Residual Demand -- 17.4.Modelling of Market Power -- 17.4.1.Modelling of Market Power in Practice -- 17.4.2.Linearisation -- 17.5.Policies to Reduce Market Power -- 17.6.Summary -- Questions -- Further Reading -- pt. VIII NETWORK REGULATION AND INVESTMENT -- 18.Efficient Investment in Network Assets --

18.1.Efficient AC Network Investment -- 18.2.Financial Implications of Network Investment -- 18.2.1.The Two-Node Graphical Representation -- 18.2.2.Financial Indicators of the Benefit of Network Expansion -- 18.3.Efficient Investment in a Radial Network -- 18.4.Efficient Investment in a Two-Node Network -- 18.4.1.Example -- 18.5.Coordination of Generation and Network Investment in Practice -- 18.6.Summary -- Questions -- Further Reading -- pt. IX CONTEMPORARY ISSUES -- 19.Regional Pricing and Its Problems -- 19.1.An Introduction to Regional Pricing -- 19.2.Regional Pricing Without Constrained-on and Constrained-off Payments -- 19.2.1.Short-Run Effects of Regional Pricing in a Simple Network -- 19.2.2.Effects of Regional Pricing on the Balance Sheet of the System Operator -- 19.2.3.Long-Run Effects of Regional Pricing on Investment -- 19.3.Regional Pricing with Constrained-on and Constrained-off Payments --

19.4.Nodal Pricing for Generators/Regional Pricing for Consumers -- 19.4.1.Side Deals and Net Metering -- 19.5.Summary -- Questions -- Further Reading -- 20.The Smart Grid and Efficient Pricing of Distribution Networks -- 20.1.Efficient Pricing of Distribution Networks -- 20.1.1.The Smart Grid and Distribution Pricing -- 20.2.Decentralisation of the Dispatch Task -- 20.2.1.Decentralisation in Theory -- 20.3.Retail Tariff Structures and the Incentive to Misrepresent Local Production and Consumption -- 20.3.1.Incentives for Net Metering and the Effective Price -- 20.4.Incentives for Investment in Controllable Embedded Generation -- 20.4.1.Incentives for Investment in Intermittent Solar PV Embedded Generation -- 20.4.2.Retail Tariff Structures and the Death Spiral -- 20.4.3.An Illustration of the Death Spiral -- 20.5.Retail Tariff Structures -- 20.5.1.Retail Tariff Debates -- 20.6.Declining Demand for Network Services and Increasing Returns to Scale -- 20.7.Summary -- Questions.