Homepage for EE/Econ 458

Restructuring of
Wholesale Power Markets

Last Updated: 28 March 2015

Latest Course Offering: Spring 2009
Meeting Time: Tuesday/Thursday 5:30pm-7:00pm
Meeting Place: Coover 1011

Leigh Tesfatsion
Professor of Econ, Math, and ECpE
Department of Economics
Iowa State University
Ames, Iowa 50011-1070
tesfatsi AT iastate.edu

Instructor Office/Office Hours:
Room 375, Heady Hall
Hours: Thursdays 12:30-3:40pm,
   and by appointment

Teaching Assistant:
Ms. Qun Zhou (ECpE)
Tel: 515-294-2525
zhouqun8508 AT gmail.com

Teaching Assistant Office/Office Hours:
Room 24, Active Learning Complex (ALC), Coover
Hours: Tuesdays 10-12, and by appointment
Transmission Lines Graphic

Syllabus (Reading & Exercise Assignments)
Accumulated Point Scores (5/12/09)
General Resources on Electricity Restructuring
Course Objectives
Topic Outline
Structure (grading, exam schedule, etc.)
Quiz Answer Keys (4/14/09)
Disability Statement

The Web http://www2.econ.iastate.edu/classes/econ458/tesfatsion/

Course Objectives

Wholesale power markets around the world are currently undergoing substantial changes in their structure and rules of operation. This process has come to be referred to as restructuring.

For example, twenty years ago most electricity in the U.S. was supplied by vertically integrated utilities operating under a regulatory compact whereby they agreed to provide an adequate supply of electricity for all users in return for receiving a fair rate of return on their capacity. In contrast, over 50% of generating capacity in the U.S. is now operating under a centrally administered wholesale power market in which electricity is priced in accordance with the location and timing of its injection into and withdrawal from the transmission grid.

Debates and controversy continue with regard to the exact form that restructured wholesale power markets should take. At the national level, regulatory agencies (such as the U.S. Federal Energy Regulatory Commission) are in the process of revising the entire regulatory framework within which these markets operate, with fiduciary responsibility for protecting against risks to national security. At the regional level, market administrators are devising and implementing new rules of operation in an attempt to ensure reliability as well as efficiency and fairness. At the level of participant traders, companies are developing new bid/offer strategies for the purchase and sale of energy and ancillary services in an attempt to enhance their net earnings while protecting against financial risks.

Some commentators continue to argue that this restructuring process has not produced the intended improvements in market efficiency while at the same time it has complicated the efforts of market administrators to ensure the reliability of market operations and the efforts of traders to protect themselves against financial risks. Given the extraordinary global financial crisis now taking place, it seems inevitable that calls will strengthen for a return to heavier regulation of wholesale power markets, possibly even for a return to administered cost-based pricing.

This power economics course will cover topics essential for understanding the current controversies surrounding the restructuring of wholesale power markets both here in the U.S. and abroad. Planned topics include: an historical overview of wholesale power market restructuring; microeconomic basics for power markets; strategic market behavior (game theory); optimization basics; wholesale power market operation over transmission grids; locational marginal pricing and optimal power flow; organization of restructured wholesale power markets (real-world examples); financial and operational risk management; system security and ancillary services; investment in new generation; financial transmission rights and transmission investment; and the potential for "green power."

Topic Outline

NOTE: See the on-line EE/Econ 458 Syllabus for a detailed listing of required readings and exercises.

  1. Power Market Restructuring: Overview
  2. Microeconomic Basics for Power Markets
    1. Market Principles and the Theory of the Firm
    2. Strategic Market Behavior (Game Theory)
    3. Markets, Risks, and Contracts
  3. Optimization Basics for Power Markets
    1. Introduction to Constrained Optimization
    2. Optimization Tools for Economic Dispatch
  4. Operation of Restructured Wholesale Power Markets
    1. Organization of Power Markets
    2. Power Market Trading Subject to Transmission Constraints
      1. Power Systems and LMP Fundamentals
      2. Bid/Offer-Based Optimal Power Flow
    3. Market Power Mitigation
    4. Real-World Examples: Policy Concerns
  5. Financial and Operational Risk Management
    1. System Reliability
    2. Financial Transmission Rights
  6. Investment for the Future
    1. Investment in New Generation
    2. Investment in New Transmission
  7. Environmental Issues
    1. Emission Control
    2. Potential for "Green Power"
  8. Future Prospects for Restructuring

Course Structure

Credits and Prerequisites

Required Textbooks (Bookstore):

Class Attendance:

You are strongly encouraged to attend and participate in class. As noted below, class attendance and participation in class discussions will count for extra credit in case of a borderline grade. If you must miss class, you will be responsible for all information presented and/or discussed in class; neither the instructor nor the TA will be under any obligation to provide you with this information (apart from hand-outs).

Class Lecture Schedule:

For the most part we will follow the order of topics in the required Kirschen/Strbac textbook. Required readings will be marked with two asterisks (**) at the online EE/Econ 458 syllabus. The instructor will also send out frequent class updates using the class mailing list reminding everyone about planned readings and assignments for the next segment of the course. Any changes to scheduled topics/readings will be highlighted at the online EE/Econ 458 syllabus using "new" or "updated" icons.

Take-Home Exercise Assignments:




Your overall course grade will be computed on a pro-rated point basis as follows

Letter grades will be determined according to the following guidelines

As the course proceeds, you can check your accumulated point scores to date at the following site:

Accumulated Point Scores              


Feel free to contact the instructor during office hours, class meetings, or through email if you have any questions or concerns. At the start of classes a mailing list will be established for use by all class participants (including the instructor and TA).

Quiz Answer Keys (Practice Questions):

Quiz 1 (1/27/09): Answer Outline (pdf,15K)

Quiz 2 (2/17/09): Answer Outline (pdf,15K)

Quiz 3 (3/31/09): Answer Outline (pdf,17K)

Quiz 4 (4/14/09): Answer Outline (pdf,36K)

Disability Statement:

If you have a disability and require accommodations, please contact the instructor early in the semester so that your learning needs may be appropriately met. You will need to provide documentation of your disability to the Disability Resources (DR) office, located on the main floor of the Student Services Building, Room 1076, 515-294-7220.