Economic Fundamentals of Power Plant Performance

Almas Heshmati

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136621680
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Stability of the electricity industry is crucial for economic growth of all nations. Sustainable economic growth cannot be accomplished without secured energy supply. The book underlines how management of the electricity industry should be conducted and the efficient form of electricity market structure. The book also studies the electricity industry in Korea which has been a strongly supportive and vital factor in the economic development of Korea for the last few decades.

The book focuses on the three market players of the electricity market and they are the suppliers, consumers and the government-related organizations. It includes detailed information on generation and finances at the generator level and analyzes the efficiency differences among generators, plants and business units by using different performance measurement methods. It identifies and analyzes different production factors' effectiveness and relationships in generation. The comprehensive analysis helps to provide explanations in the differences in the performance of the studied units. The book also discusses the implications of the findings for future resource allocation and how we can further enhance the efficiency of the industry.

The book will appeal to those interested in energy and energy policies, as well as researchers and practitioners in the economic development and electricity and utilities industry.

1 Introduction

1.1 Background to the Korean electricity industry

Stability of the electricity industry is crucial for the economic growth of all nations. Sustainable economic growth cannot be accomplished without a secure energy supply. Although there is no one-to-one relationship between the growth rate of gross domestic product (GDP) and that for electricity demand, there is a strong positive association between these two indicators of development. Therefore the management of the electricity industry should be conducted with careful planning and a continuous search for the most appropriate form of electricity market structure. This is needed in order to keep the level of economic activity stable and sustainably growing. The determinants that should be taken into account in such a context are, among others, the economic situation of a country, the price system, fuel prices, technological development, market structure, and several other factors important to renewable sources of energy, such as meteorological conditions.

The electricity industry has also been a strongly supportive and vital factor in the economic development of nations like Korea for the last few decades. The degree of dependence on energy and vulnerability is relatively high. For the stability of the electricity industry, the Korean government has tried to diversify sources of fuel for electricity generation and, as a result, multiple sources, such as coal, oil, liquefied natural gas (LNG), hydro, and nuclear, are used as the primary fuel for electricity generation. Owing to Korea's specific conditions, currently the country imports most of its primary energy. Therefore the Korean government, in an attempt to diversify its energy sources, has been trying to increase the number of suppliers of primary energy sources or energy trade partners and thereby to maintain a higher level of energy security and supply sources.

The electricity market is in general composed of three market players: suppliers, consumers, and government-related organizations. The supplier side can be divided into three main subsectors: generation, transmission, and distribution. Consumers can be categorized into various sectors, such as: public or municipality, agriculture, industry, education, and the general or household sector. They can also be differentiated into various regions. The government-related organizations differ from one country to another, and they include ministries, commissions, and committees related to the management and operation of the electricity industry and market.

The generation sector at the supplier side is often described or represented by its generating capacity and gross generation or supply of electricity to the market. These capacity and generation indicators are continuously increasing, and, as a result of increased demand, new power plants are being constructed annually in many developed and developing countries worldwide. At the same time, efforts are being made to increase energy efficiency and the total consumption of electricity. The Korean government has been trying to find the most appropriate structure for its electricity industry and thereby has focused mostly on making changes to the generation sector to meet the increasing demand and to enhance the nation's energy security. The main effort made in recent years has been to overcome the monopolistic structure problem in the industry. Till 2001 the Korea Electric Power Corporation (KEPCO) had a monopoly, managing all three sectors - generation, transmission, and distribution - in the electricity industry. The government aimed to break down this structure and to introduce competition into the industry. That is to say, the liberalization of the electricity industry market has been the main policy goal of the Korean government recently. Liberalization of public utilities is a common policy employed in many countries around the world as a measure to increase the efficiency of services and to reduce the public investment needs and negative environmental externalities through efficiency enhancement.

In 2001, as part of this changed policy direction, the Korean electricity generation sector was divided into six generation companies, which are called GENCOs for short. The six companies are named: Korea Hydro and Nuclear Power Company (KHNP), Korea South-East Power Company (KOSEP), Korea Midland Power Company (KOMIPO), Korea Western Power Company (WP), Korea Southern Power Company (KOSPO), and Korea East-West Power Company (EWP). The division was made depending on energy source and the main regional location of their facilities. Owing to the separation, 46 percent of KEPCO's labor force and 55 percent of its assets and liabilities were transferred to the independent GENCOs. Hydroelectric, steam, combined cycle (C/C), internal combustion, alternative energy, and nuclear are the generation types that the GENCOs are using. As a source, they can be classified into coal, hydro, gas, oil, nuclear, new, and renewable power generation sources.

The energy mix used in generation changes as a result of changes in the price of primary energy sources over time. As part of the restructuring process for the electricity market, the Korea Power Exchange Company (KPX) was established in 2001 for trading of pooled generated electricity by different producers. Almost all electricity generated is traded by KPX under the existing Power Purchase Agreement (PPA). The number of participants in the electricity market has rapidly increased in recent years, mainly due to the entry of many small-sized renewable-energy-based businesses into the market. Though participation in the market is mandatory for the generating companies, a cost-based pricing rule is applied in the market. This pricing system has induced substantial changes in the consumer electricity price since its introduction into the market.

After the generated electricity is traded on the market, it is then transmitted to the customers nationwide. KEPCO still acts as the monopoly for the transmission and distribution sector activities. Constant effort has been made to enhance the quantity and quality of transmission and distribution rather than changing the structure of the two sectors. For enhancement of quantity, transmission and distribution lines are being added; and for quality enhancement, efforts are being made to decrease the loss factor by means of introducing new systems, such as a distribution automation system (DAS) and an automatic meter reading system (AMR). The Korean government's future plan regarding the changes of the electricity market is presented in documents such as the Fourth Basic Plan of Long-Term Electricity Supply and Demand (4th BPE) published by the Ministry of Knowledge Economy in December 2008 and the First Basic Plan of National Energy. From those documents we can note that the Korean government mainly focuses on issues such as the restructuring of the industry, energy security, energy efficiency, and environmental protection.

As mentioned previously, for the demand side, the consumers are divided into various categories, such as public or municipality, agriculture, industrial, education, general and household sectors. The price system is not identical for each user category. A differentiated price system is employed in accordance with the public policy programs with a sector-specific priority pricing system. In addition to a user category price differentiation system, there is also a regional difference in electricity consumption intensity. Owing to a slowdown in the increasing rate of domestic peak power demand and the decreased quantity of power supply, the power demand is currently reaching a state of saturation.

Beyond the internal players in the electricity market, there are also some external players, which are government ministries, commissions, committees, research institutes, and various technology agencies. The Ministry of Knowledge Economy (MKE) is the ministry in charge of energy policy. MKE aims to manage different energy cooperation projects, in particular to expand the renewable resources and distribution networks, and craft environmentally friendly economic policies. Other commissions and committees related to the electricity industry are organizations including the Korea Electricity Regulatory Commission (KOREC), Electricity Market Surveillance Committee (EMSC), and the Fair Trade Commission (FTC). These are under the MKE and responsible for matters such are setting regulations and enhancing a fair market trading system. The Korea Energy Economics Institute (KEEI), Korea Institute of Energy Research (KIER), Korea Energy Management Corporation (KEMCO), and Electric Power Technology Evaluation and Planning Center (ETEP) are representatives of the research institutes and technology agencies related to the electricity industry and market in Korea.

In an effort to improve production efficiency, various measures - such as environmental regulations, enhancement of power distribution systems, attempts to find the most adequate generation mix, and the application of up-to-date technology - are also under way in Korea. As for environmental regulations, Korea is currently under no obligation to implement the Kyoto Protocol, but it is expected to assume the obligations concerning high energy consumption and high emissions from the year 2013. The Korean government is taking measures to get ready for the transition. Air pollutants such as oxides of sulfur (SO_x), oxides of nitrogen (NOx), and total suspended particulates (TSP) have been restricted, with limits on emission levels, and the quantity of the regulated amount is differentiated by fuel source, generation capacity size, and year of plant construction. A stronger air pollution regulation has been applied to high-capacity, newly constructed plants. For the enhancement of distribution power systems, a plan to invest more in research and development (R&D) activities is also under way.

1.2 Background to the world electricity industry

For electricity generation, there has been an increasing trend until the early 21st century. The proportion generated by the thermal sector has maintained its first position throughout the years. Nuclear appeared as the key source of electricity generation in the early 1970s, and the amount that it has generated has increased constantly over time. There has been a substantial change in the ranking of sources regarding the amounts of electricity generation worldwide, but coal has kept its dominant first place from the early 1970s. For the economic sector, industry consumes the largest amount of energy, and the Europe and Eurasia regions consume the largest amount of energy among all the existing economic regions. General and comparative information about the electricity market in various countries (United States, Canada, UK, Germany, France, Australia, Japan, and China) will be presented in Chapter 4.

Changes in the electricity industry in many countries are under way and the governments of those countries aim for more efficient and more reliable production of electricity to satisfy the continuously increasing electricity demand. The key phrase to describe the current trend of the electricity industry worldwide is the “introduction of competition.” As the reform and privatization programs of the electricity industry progress in many countries, the electricity market becomes gradually more competitive. Following the UK as a pioneer of the process, over 76 countries worldwide are currently implementing or planning to implement a reorganization of their electricity industry. Detailed information about the restructuring process of countries like the United States, Canada, some other OECD (Organisation for Economic Co-operation and Development) countries, and a few developing countries is presented in Chapter 4. The main purposes of the process are to enhance the security of the electricity supply, remove subsidy and its distortive effects on the market, improve efficiency, and enlarge the pool of customers' choices. However, as we can see from the Californian power crisis in 2001, the power outage of the United States in 2003, and the European power outage, it can be noted that competition might not always be the perfect answer to the problems of the electricity industry. The strong role of the government and regulatory agencies has to be maintained in order to achieve objectives and effective implementation of the market regulations introduced.

There has been much research conducted with the aim of finding the most suitable path for the transition of the electricity industry from a monopolized system to a full competition market structure. Research on trading models in an open electricity market was also carried out. Those studies with detailed information will be presented in Chapter 4. Research on evidence of successes and failures in reorganization activities, and evidence on reorganization effects on performance, are also presented in Chapter 4. There are other measures and changes introduced to enhance the management of the electricity market that are also under way, as well as major features other than the restructuring process. These measures, such as different forms of collaboration within the electricity market, have been introduced, and the power exchange market is changing its form so that it is able to handle all kinds of energy, like gas and oil, as well as the management of emission rights and its trade among firms.

1.3 Background to previous research on the electricity industry

Numerous applied research studies have been aimed at the measurement of efficiency and productivity in the electricity industry. For the Korean case, most recent research on the Korean electricity market attempted to find evidence of the effect of the restructuring of the industry that took place in 2001. The main focus of these studies was to provide a better direction to the continuous restructuring by examining the performance changes or by comparing the Korean producers with those of other developed countries. The sole analysis of efficiency evaluation of units within the industry was therefore given rather less attention. Methodologies used in studies of the Korean electricity market were mostly data envelopment analysis and, in some cases, various forms of stochastic frontier analysis and explanations of determinants of inefficiency or analysis based on the Malmquist productivity index. Detailed information about previous research on the Korean electricity industry is provided in Chapter 6.

Research on the electricity industry in other countries was also conducted using more or less similar performance measures as in the Korean case. For instance, there are numerous research studies on the analysis of efficiency of the electricity industry among the OECD countries. Both parametric and non-parametric methodologies are used in these studies.

1.4 Objective of this study

Having discussed the research question of the issue of performance in the electricity industry, and how this issue has been dealt with and assessed in different environments, we refer here to the objectives of this study. The previous experience of the identification of problems and their optimal solutions influenced the selection and combination of different performance approaches as measurement and analysis tools.

During our work in gathering information about the electricity industry in Korea and several other developed countries worldwide, and previous research on the electricity market, we found similarity in the motivation for these studies of the electricity markets. The motivations are as follows.

• Most of the previous research used only a single performance methodology. By using only one methodology in the analysis, there is no way to check whether the result based on that particular methodology is reliable or not. Various methodologies have to be used and compared in a systematic sensitivity analysis with respect to method, data, and models in order to be able to select the most reliable result generated from the various methodologies employed.
• Previous research was short of a detailed efficiency measurement platform for the different generation levels. The need for disaggregation of facilities into more micro-levels is captured in this study. Taking it into account, generating facilities are divided into the most disaggregate level, such as the generators in our analysis. Plant, which is the aggregation of a certain number of generators, and business units, which is the aggregation of a certain number of plants, are also analyzed here.
• A comparison with other units in the same generation group was also needed in order to identify the position or the rank of the production units. By doing so, we are able to measure and recognize the current state of performance of the electricity industry and thereby make inferences about the possible effects of restructuring and deregulation policies and measures.
• Most studies focus only on an estimation of efficiency and not on its causal factors. In order to identify and estimate the effects of different indicators that affect the level of efficiency, data at the generator level are also needed. The information could be used by each company in setting and developing detailed generation strategies to reduce costs and to enhance their competitiveness and profitability.
• In addition to an estimation of models and a comparison of their results by using various methodologies, comparison had to be used as a means of finding the effect of restructuring that took place in 2001. This is crucial as an assessment of past policy and guidance on the design of future policy measures.

Given the description of the motivations provided above, the purpose of our performance study of the Korean electricity market is as follows.

• To create a unique database ranging from the lowest level to the highest level of aggregation, namely from generator to company level, by utilizing generation information as well as financial information.
• To analyze efficiency differences among generators, plants, and business units by using different performance measurement methodologies and a comprehensive sensitivity analysis.
• To identify and analyze the effectiveness and relationship of different production factors in generation and to provide explanations of the differences in performance of the studied generation units.
• Based on the results obtained, to discuss the implications of the findings for the further efficiency enhancement of the industry.

A brief description of the research conducted to achieve the above-mentioned purpose of this study is provided below.

1.5 Generator-level database

In order to take various important generation characteristics into account for the analysis, a significant amount of data was needed. The data were from public sources, accounting and annual reports supplied by the six GENCOs. A total of 66 factors were collected, contained in the newly created database. There were ten different measures for generation output and eight for characteristics of outputs. For input factors, seven measures were collected for capital, ten for labor, and five for fuel input. For generation cost, a total of 14 measures were collected. In addition, 12 data measures were collected on the producers' characteristics.

Though not all the data collected were used in the empirical analysis of the performance of the generation units, it was a meaningful task in order to guide definitions of variables and the creation of more useful datasets for a future and better analysis of the industry. Several aggregation and distribution tasks were conducted on the raw data. Data collected at the generation level were aggregated to plant level and consequently to business...

Table of contents

• Front Cover
• Economic Fundamental of Power Plant Performance
• Routledge Studies in the Modern World Economy
• Title Page
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• Preface
• List of abberivations
• 1 Introduction
• 2 The Korean electricity industry
• 3 Market structure of the electricity industry
• 4 Global trends in the electricity industry and energy consumption
• 5 Overview of performance methodologies
• 6 Previous efficiency analysis of electricity generation
• 7 Generator-level data
• 8 Analysis of performance at generator level and policy implications
• 9 Summary and conclusions
• Notes
• Bibliography
• Index