The Electricity Markets Microworld
by
Kiriakos Vlahos1
London Business School
1998
1
The help of Chris Day and Gary Shayne is gratefully acknowledged.
CONTENTS
The Electricity Markets Microworld _________________________________________ 1
Introduction ____________________________________________________________ 1
Microworlds ____________________________________________________________ 1
The Electricity Markets Microworld ________________________________________ 1
The Electricity Industry ________________________________________________ 2
Restructuring ___________________________________________________________ 2
The UK Experience ___________________________________________________ 3
Restructuring the British Electricity System __________________________________ 3
The Pool ____________________________________________________________ 4
The Electricity Pool ______________________________________________________ 4
New Entry ___________________________________________________________ 5
Generation Capacity and New Entrants _____________________________________ 5
Regulation __________________________________________________________ 7
Power Plants_________________________________________________________ 8
Pictures of Power Plants and Transmission Lines _____________________________ 8
The Microworld _____________________________________________________ 13
Business Setting _____________________________________________________ 14
The Environment _______________________________________________________ 14
Competition ___________________________________________________________ 14
The Regulator __________________________________________________________ 14
Electricity buyers _______________________________________________________ 14
Decision Rules ______________________________________________________ 15
Bidding strategy ________________________________________________________ 15
Capacity decisions ______________________________________________________ 15
Playing the game ____________________________________________________ 17
Starting the Microworld _________________________________________________ 17
Running the Simulation __________________________________________________ 17
Selecting a role _______________________________________________________________ 17
Objectives __________________________________________________________________ 17
Making decisions _____________________________________________________________ 17
Examining the impact of your decisions ___________________________________________ 17
Menus _____________________________________________________________ 18
Main Screen ________________________________________________________ 20
The Main Microworld Screen _____________________________________________ 20
Decision Window ____________________________________________________ 21
i
The buttons on the window caption ________________________________________ 21
Selecting a role to play ___________________________________________________ 21
Decisions as a generator _________________________________________________ 21
Decisions as a regulator __________________________________________________ 22
Graph Windows _____________________________________________________ 23
Report Windows _____________________________________________________ 24
Setup Window_______________________________________________________ 25
Plant data _____________________________________________________________ 25
Demand data___________________________________________________________ 26
Time data _____________________________________________________________ 26
Loss-of-Load Probability Function ________________________________________ 27
Other Parameters _______________________________________________________ 27
Microworlds ________________________________________________________ 29
What is a microworld? __________________________________________________ 29
References _________________________________________________________ 29
Links ______________________________________________________________ 29
ii
The Electricity Markets Microworld
Introduction
During the last decade fundamental change has gripped the heretofore monopolistic industry
of electricity generation and supply. Until the 1980’s, Electricity was seen as a natural
monopoly, and in most cases was publicly owned in Europe and privately owned in the US.
This changed when Chile, Norway and the UK became the first countries to create
competition in the electricity generation sector. The US, Australia, most of South America,
and many other countries in Europe are currently in various stages of design or operation of
similarly restructured electricity markets.
Microworlds
The companies that find themselves in these competitive electricity markets all face a new
and unfamiliar environment. For example, how much new capacity should a generating
company build in order to meet growing demand? At what price should generators price their
generating plants in the market, in order to balance market share and short term profitability?
How can a regulator ensure that competitive prices prevail in the market, whilst sufficient
incentives for new entry are maintained?
As a tool to help managers understand the possible consequences of the different decisions
they may make when faced with these sort of problems, a computer microworld can offer
valuable insights. By modelling the market and then simulating its evolution, managers can
experiment with the different strategies they may wish to employ in order to gain an
understanding of the consequences of their actions.
The Electricity Markets Microworld
The Electricity Markets Microworld is a computer simulation of a deregulated electricity
market. The situation that players are faced with at the start of the simulation is a market that
has recently been opened to competition. The incumbent generator, that had the monopoly
of generation before deregulation, now faces competition from a number of new independent
power producers (IPPs). These companies have entered with relatively cheap plants known
as combined cycle gas turbines (CCGTs) that are powered by natural gas. A regulator
oversees the operation of the market. The user of the microworld can select the role of the
Incumbent, a New Entrant or the Regulator, set targets, define strategies, and test them
running the simulation over a number of years.
1
The Electricity Industry
Restructuring
As mentioned in the introduction, electricity restructuring has been taking place in many
countries around the world. It has taken different forms in different countries and been
referred to as deregulation, privatisation and liberalisation. The driving force behind these
changes has been the desire or the need to:
stimulate competitive pressures in order to reduce costs and promote innovation
reduce electricity prices
raise private capital for building power stations
widen share ownership
Although, the changes are often described as deregulation, there are typically as many rules
after restructuring as before. The resulting markets retain elements of the former monopolies,
such as transmission and a powerful Regulator with wide ranging powers over the industry.
At a time when many countries are looking to deregulate their utility industries and introduce
greater competition, it is not surprising that the UK experience has attracted wide
international attention and served a model for a number of countries.
2
The UK Experience
Restructuring the British Electricity System
Since 1989, the electricity industry in the United Kingdom has undergone two radical
changes: the privatisation of almost all the electricity companies and the introduction of
competition. The change of ownership from the state to private investors (by means of
flotation on the stock market) has had a major impact on an industry which spent 40 years in
the public sector. In addition, the entire industry has been fundamentally restructured to
facilitate competition. From an organisational viewpoint, there are three separate electricity
systems in the United Kingdom: England and Wales, Scotland and Northern Ireland, and the
following discussion focuses only on the England and Wales system for simplicity.
Competition has been introduced into electricity generation and supply (supply being the
purchase of electricity from a generator and its sale to a final consumer). In the process, it
was fundamental to separate the monopoly elements of the business (transmission and
distribution), from those elements, which would be subject to competition (generation and
supply). In transmission and distribution a system of independent regulation was introduced,
since the high cost of duplicating networks would prevent competition in these areas.
Under the restructuring of the industry in England and Wales, the single integrated generation
and transmission electricity company, Central Electricity Generation Board (CEGB), was split
into four parts as of April 1990. Two privately owned generation companies, National Power
and Powergen, divided the fossil-fired power stations; and one publicly owned generation
company, Nuclear Electric, kept all the nuclear generation plants. Nuclear Electric remained
in public ownership until it was sold to public investors in July 1996. The ownership and
operation of the transmission system were transferred to the newly created National Grid
Company (NGC), which was given a specific remit to facilitate competition. NGC was given
the responsibility for ensuring secure dispatch of generation and the operation of a daily
power pool. The power-pool became the market place for buying and selling electricity
between generators and suppliers
The 12 Regional Electricity Companies (RECs), responsible for supplying electricity to
regional franchise markets, were privatised into local distribution and supply companies.
RECs were allowed to compete independently in buying power from the generators and
selling to large customers (demand of 100 kW or more). Large customers account for nearly
half the total electricity sales in England and Wales, and by 1998 all customers have the
freedom to choose their supplier.
3
The Pool
The Electricity Pool
All the major generating companies are required to sell the electricity they produce into an
open commodity market known as the Pool. The Pool is a simple name for what is, in effect, a
very complex trading mechanism. The Pool was set up in about a year, but there has been
continuous evolution and development. Each generating unit has to declare by 10 am each
day its availability to the market, together with the price at which it is prepared to generate, for
each and every half hour of the following day. The units are then called to generate by the
NGC in ascending order of price. The most expensive unit used establishes the system
marginal price (SMP) which all others receive for that half hour. There is an additional pricing
component designed to provide an incentive for future investment of generation capacity, set
by valuing the small possibility that electricity supply is disrupted (loss of load- LOLP) given
the amount of generation capacity available. The regulator assesses and sets the value for
loss of load (VOLL). The following equation shows how Pool Purchase Price is calculated.
Pool Purchase Price = SMP + [LOLP * (VOLL - SMP)]
This form of pricing inevitably produces volatility in prices, which is an unwelcome risk for
buyers and sellers (generators and suppliers). As a result, a number of different short and
long term contracts between generators and buyers have emerged to hedge against pool
price fluctuations, making capacity and energy prices more predictable for both customers
and generators. These so-called Contracts for Differences (CfDs), with either RECs or
individual large customers, initially covered about 90% of the electricity sold by the major
generating companies. But as buyers of electricity gained experience of the operation of the
pool and pool prices, they became more risk seeking and were willing to take a greater
amount of pool price risks. Figure 1 provides an overview of the electricity system in the UK
showing both the flow of electricity and contract arrangements.
Overview of England & Wales Electricity System (1995)
Generators
Generators
NP,
NP,PG
PG
Nuclear
Nuclear
IPPs
IPPs
Imports
Imports
Large
Large
Customers
Customers
Pool
12
12Regional
Regional
Electricity
Electricity
Companies
Companies
Other
Other
suppliers
suppliers
Supplies contracts
Sells electricity
4
Consumers
Consumers
New Entry
Generation Capacity and New Entrants
At the time of privatisation, National Power became responsible for 30,000 MW of capacity,
and PowerGen the remaining 18,000 MW of fossil fuel-fired plant. In addition, 8,400 MW of
nuclear capacity 2,100 MW of hydro-electric pumped storage capacity was in operation. After
privatisation the generators no longer have any obligation to supply, and they have to
compete for their share of an increasingly competitive market, and new entrants (also referred
to as independent power producers; IPPs) were encouraged to enter the generation business.
By the end of 1997 there were more than 22 generation companies bidding capacity into the
England & Wales Pool.
In the 7 years since the deregulation, there has also been a significant change in plant
technology and gas has become the preferred fuel for new power generation plant for both
existing and new generators. There are a number of reasons for this shift in plant technology
including improved gas turbine technology, environmental pressures for increased industry
competition, and the recent relatively inexpensive price of gas. In comparison with coal-fired
stations, new combined cycle gas turbines (CCGTs) involve low capital cost, and their short
construction times allow for greater flexibility in deciding when to build new stations (see
figure below). Their modular design makes them ideal for turnkey contracts, which transfer
construction risk to plant and equipment suppliers, and they also offer major environmental
advantages. In comparison with coal-fired plant, CCGTs consume 27% less fuel, emit 58%
less carbon dioxide and 80% less nitrogen oxides for each unit of electricity generated.
Moreover, they emit no sulphur dioxide, and thus represent one of the best ways of tackling
environmental problems such as acid rain and global warming.
This new CCGT technology has allowed new entrants to build and operate relatively small
generation plants which would previously not have been economically viable. Furthermore,
the perceived need for increasing the number of competitors in the market allowed new
entrants in the early 1990’s to negotiate attractive contracts with the REC’s at a time when
oversupply of gas made it possible to obtain what were then considered inexpensive long
term gas supply contracts. This new entrant subsidy was an effort to wrestle away market
power from the large incumbents (i.e. National Power and PowerGen). By March 1996, 9,505
MW of new CCGT plant had been commissioned in England and Wales and a further 15,000
MW was either under construction or planned. Of this capacity, new entrants have
commissioned 6,000 MW of plant and a further 2,900 MW is under construction. In total, there
are some 20 independent power schemes in prospect, some of which are still in the planning
stage.
5
Given that UK electricity demand is forecast to rise only slowly (by around 1% per year over
the next decade) this represents a serious challenge to the existing generators. By the year
2000 new entrants, who already account for nearly 14% of the generation market in England
and Wales, could capture up to 20%. To get a sense of how the generation sector has
evolved since privatisation, it is interesting to note some key statistics shown in the tables
below. This table shows the percentage amount of capacity by plant type (fuel) in the UK for
1989, the last year before restructuring, with those for 1995.
Table: Key Statistics for the UK Electricity System
Electricity
Supplied(net)
1989
1995
271.714TWh
292.211TWh
Total fuel use for generation
Coal
64.5%
48%
Nuclear
23.6%
28.4%
Gas
0.7%
16.7%
Oil
9.4%
4.8%
Hydro
0.5%
0.6%
Other
1.2%
1.5%
Net Capacity (major
power producers)
70,327MW
65,900MW
Maximum Demand
53,414MW
55,611MW
6
Regulation
The Electricity Act of 1989 in the UK created a regulatory system headed by a Director
General of Electricity Supply, who is answerable to the President of the Board of Trade in
England and Wales. The Director General is responsible for ensuring an efficient and
competitive electricity market, and for protecting the interests of customers. The regulator
closely monitors Pool price and has made several announcements indicating his expectations
for the maximum Pool price deemed acceptable- effectively setting a price cap. The regulator
is also responsible for reviewing generation licence applications for new entrants, and fortysix generation licences have been issued in England and Wales since privatisation. There are
already 22 independent generators selling electricity into the Pool. In addition, to further
stimulate competition the regulator forced the incumbent generators to sell a number of
generation plants. In June and July 1996 6,000 MW of plant previously owned by PowerGen
and National Power was leased to Eastern Electricity. The table below summarises the share
of generation capacity by company for 1996.
Table: Generation Capacity Share
Net Capacity on
31 March 96
Share of Total
Capacity (%)
National Power*
19,269
30
Powergen**
15,282
24
Nuclear Electric
7,128
11
Magnox Electric
2,989
4
First Hydro
2,088
3
Independents
5,924
9
* Includes 4,000 MW of Plant now leased to Eastern
** Includes 2,00 MW of plant now leased to Eastern
All this has led to an increasingly competitive generation market which has changed the
emphasis in the way the generation business is managed. Although in the past the whole of
the industry made a profit (for its owner, the Government) and had an excellent record in
fulfilling its statutory duty to ‘keep the lights on', it was engineering-led rather than customerled, and prices were established on a cost-plus basis. Before deregulation there was no
competition, nearly perfect information, predictable income, and no requirement to understand
the customer. After deregulation prices are set by the market, customers gain some degree of
decision-making power, new competitors enter the market, and information becomes
imperfect. Companies in the electricity industry around the world will need to change
dramatically to adjust to their new environment- as did the electricity companies in the UK.
7
Power Plants
Pictures of Power Plants and Transmission Lines
Battersea Power Station, England
Bayswater Power Station, Lake Liddell, New South Wales
8
Central California aqueduct with wind power
Palo Verde Nuclear Generation Plant, Wintersburg, Arizona
9
Battersea Power Station and Grosvenor rail bridge, London
Glen Canyon Dam, Glen Canyon, Colorado River, Arizona
Natural gas pipeline
10
Poppy field and Ferrybridge power station, West Yorkshire, U.K.
Small hydro-electric dam
Electricity, Edison's first electrical power plant
11
Natural gas plant, Norman Wells, Northwest Territories, Canada
High-voltage power lines
12
The Microworld
The Electricity Markets Microworld is a computer simulation of a deregulated electricity
market. The situation that players are faced with at the start of the simulation is a market that
has recently been opened to competition. The user of the microworld can select the role of
the Incumbent , a New Entrant or the Regulator, set targets, define strategies, and test them
running the simulation over a number of years. Alternatively he or she can run the simulation
using default decision rules to create scenarios about the development of the industry.
13
Business Setting
The Environment
The Electricity Markets Microworld is a computer simulation of a deregulated electricity
market. The situation that players are faced with at the start of the simulation is a market that
has recently been opened to competition. The previously state-owned Electricity Company
that had the monopoly of generation, is now privatised and faces competition from a number
of new independent power producers IPPs. The structure of the industry is now similar to that
of the UK electricity market, with a power pool operating at the heart of the system.
Competition
These companies have entered with relatively cheap plants known as combined cycle gas
turbines (CCGTs) that are powered by natural gas. The incumbent generators on the other
hand own a range of plants from cheap coal plants through oil plants to expensive open cycle
gas turbines (OCGTs). For the sake of simplicity the Independent Power Producers are
aggregated into one entity referred to as "IPPs". A number of CCGT plants have already
been built as soon as deregulation was announced.
These schemes were financially
supported by the distribution companies, which are the main bulk buyers of electricity. The
reason for the support was the strategic intend to break the monopoly power of the
Incumbent.
The Regulator
A Regulator oversees the market and aims to facilitate the creation of competitive market and
ensure fair prices for the consumers. Given that the Incumbent has a large market share
initially, the Regulator is particularly aware of the potential abuse of this power. He monitors
bidding behaviour and market prices. If he detects uncompetitive behaviour in terms of
excess profits he is likely to intervene with measures that range from warnings to orders to
the Incumbent to divest capacity.
Electricity buyers
Consumers and distribution companies are not explicitly modelled in the microworld since in
most countries, demand for electricity is known with a relatively high degree of accuracy. But,
their desire for increased competition is taken into account, through the assumed support for
Independents. Demand is assumed to grow during the simulation a default rate of 2% per
year.
14
Decision Rules
During the simulation the user will choose to play the one of the roles of the Incumbent, a
New Entrant or the Regulator. For the roles that are not played by the microworld user
default decision rules are assumed. .The decisions that generators have to make fall into two
categories, capacity decisions and bidding strategy.
Capacity decisions
The initial plants that the incumbent owns are gradually decommissioned throughout the
length of the simulation, thus with plant decommissioning and demand growing during the
simulation, new plants will need to be build. This effect combined with the expected demand
growth creates the need and opportunities for new capacity. It is assumed that all new
capacity will come in the form of Combined Cycle Gas Turbines (CCGT).
The generators form an expectation of profits from new capacity, by examining the historic
performance of their CCGT plant. They also have accurate knowledge of the expected gap in
capacity created by the decommisioning of old plant and the demand growth. Both the
Incumbent and the Independent Power Producers (IPPs - an aggregate entity) decide to build
when they expect a profit from a new CCGT plant. The greater the profitability the more the
greater is the fraction of the capacity gap they build. In many cases, when new capacity is
deemed to be very profitable they would build even when there is enough capacity in the
system.
Support for IPPs
+
+
IPP capacity
+
IPP New Built
Price Expectation
+
Incumbent Market Share
+
-
+
Total Capacity
Pool Price
+
Demand
New Built
Incumbent's
Capacity
+ Retirement
+
Incumbent's Generation
+ Profitability
Incumbent's
Profits
+ Investment
+
Figure: Stock and flow diagram of the Investment Decisions
A diagram that shows the structure of the default decision making process of the two
generators is given in figure above. When the market price rises, the forecast profitability of
new CCGT plants increases, which is used as a signal to build new capacity. The capacity
15
decision rules of the Incumbent and Independents differ. The capacity investment decision of
the Independents is influenced by the market share of the Incumbent, with their ability to build
new capacity increasing as the market share of the Incumbent increases. This rule was
chosen to model the effect that was observed in the England and Wales market, where
distribution companies subsidised new entrants in an attempt to break the dominant position
of the incumbent generator. The Incumbent's new investment decision is influenced by its
profits as it will not be able borrow money to build new capacity if their existing plant is loosing
money.
Bidding strategy
Generators also have to decide how to price the generating capacity that they own. The short
term implications of the bidding decision for any generator are described in the following
influence diagram.
Raising bid prices would increase the pool prices prevailing in the system, but reduce the
amount of electricity generated. For Independent Power Producers, raising bid prices is not
a sensible strategy in general. But, for portfolio generators, such as the Incumbent, it could
well be a profitable strategy in the short term. What is missing in the above diagram is the
longer-term impact of higher bid-prices. They encourage entry in two different ways: by
increasing the profitability of competitors and by influencing the expectations about the level
of pool prices in the future. This is captured in the feedback structure below.
16
Playing the game
Starting the Microworld
To begin the microworld, select the EMM option in the Start Menu. The program will then
begin to load and you will see an opening screen with a picture of a power station on it. Either
click on the picture or wait a few seconds and the program will continue to load. When the
program has finished loading you will see the main screen which contains the functionality for
you to run and interact with the simulation.
Running the Simulation
Selecting a role
Before running the simulation you need to select which role you which to take. It has to be
one or the roles of the Incumbent, a New Entrant or the Regulator. The New Entrant begins
with no generating capacity and has the choice of building CCGT plants during the simulation.
The Incumbent also has the choice of building CCGT plants but of course begins the
simulation with several existing plants. The initial plants that the incumbent owns are
decommissioned throughout the length of the simulation, thus with plant decommissioning
and demand growing during the simulation, new plants will need to be build.
Objectives
For the generating roles (Incumbent and New Entrant) the overall objective is to maximise the
shareholder value. (The model uses a simplified balance sheet to calculate this value). To
achieve this you need to balance short term profitability with longer term growth of market
share. The incumbent tries to protect his market share, whilst the New Entrant tries to find
ways of coping with the market power of the incumbent.
The regulator aims to ensure that low prices prevail in the market, coupled with market
stability and sufficient new investment.
Making decisions
Generators make capacity and bidding decisions (price the generating capacity that they
own). The regulator can make two types of decisions. The first relates to the capacity
payments and is implemented by changing the Value of Loss of Load. The second relates to
plant divestment. He has the power to order the incumbent to divest some of his capacity.
Decisions are made using the controls of the Decision Window. The simulation is run for 20
years with decisions being made every month. It is suggested that you review your
decisions once every year by using the "Run for a year" simulation menu option. For
the roles other than the ones you choose to play, default decision rules are used. Default
decision rules will always be used for the Independents who may build new capacity during
the simulation.
Examining the impact of your decisions
During the simulation you can examine the impact of your decisions using one of the many
graphs of variables provided and reports. At any point you can stop the simulation, move one
step at a time or restart using the simulation menu options or the toolbar of the main screen.
17
Menus
This page explains the Main menu options
File Menu Options
Open Game
Previous games that have been saved may be recalled. This may be
done for two reasons. You may wish to restart a game that has not been
completed before, or you may wish to load a game that contains settings
representing a specific electricity market scenario.
You will receive a warning message when you select this option
indicating that the current game will be lost when you load a new game.
Clicking No returns you to the main screen, clicking Yes initiates a
window that allows you to select, from the directory structure, a
previously saved game.
Save Game As…- A game may be saved at any point and reopened as described above.
Selecting this option open window that allows you to navigate through the
directory structure and then save the file will a name you specify.
Close Window
This option closes that currently selected window. For example, if a graph
is currently being displayed and is selected, then this option will close it.
Print
To print a graph, table or report, select the window to be printed by
clicking on it and then select this menu option to print it. Pressing Ctrl + P
activates this menu option using only the keyboard.
Exit
To close the program either select this menu option or press Ctrl + X. If
you wish to recall the present game at a later date then it should be
saved first with the Save Game As… option described above.
Edit Menu
Copy to Clipboard
Simulation Menu
Run
Run a year
Stop
Step
Go Back
Restart
Run Slower
Run Faster
Set Up Simulation
This option copies the currently selected graph into the clipboard so that
it may be copied into a word processor or other package.
If the simulation is presently not running, then selecting this option starts
the simulation. This option may be selected at the very beginning to
commence the simulation or to continue it if it has been running and then
stopped. Ctrl + R acts as keyboard short-cut to this menu option.
Runs the simulation for a year.
Stops the simulation once it has been started with the above Start option.
The simulation will halt at the end of the current time period. Ctrl + S is
the keyboard short-cut to stop the simulation.
Rather than running the simulation in a continuous fashion as happens
when the Start option is selected, the simulation may be stepped through
month at a time with this option. Ctrl + E will activate this option from the
keyboard.
Once the simulation has begun, if it is stooped using the Stop option
described above, then selecting this option will move the simulation one
month backward in time. This may be useful if you wish to change a
previous decision.
To restart the simulation at the initial year, this option can be selected. By
restarting in this manner, all previous decisions relating to building new
capacity and pricing of plants is reversed.
When the simulation is run in a continuous manner, as happens when the
Start option is selected, the speed of time moving from month to month
may be slowed down with this option.
This is the opposite of the previous option. The current speed is indicated
by a slider on the tool-bar at the top of the main window. This slider may
be moved up and down using the mouse to increase and decrease the
simulation speed, rather than using this option or the Run Slower option.
This is an advanced option and may be used to change the internal
setting of the simulation. When this option is selected a window appears
18
that has tabs at the top which can be used to make several changes to
the internal data of the simulation. By selecting the first tab, Plant Data
may be modified. The second tab Demand, contains the data on the
demand function and demand growth which you may modify. After
making any modifications to the data contained in these tabs, clicking the
Save and Exit button will bring up a message asking you if you wish to
continue with the modifications, if you selecting Yes then the
modifications you have made will be saved in the simulation model.
Clicking No will return you to the Set Up Simulation where you may make
further modifications or return to the main screen by clicking Exit.
Reports Menu
Incumbent
IPPs
New Entrant
Displays a report about the financial performance of the Incumbent.
Displays a report about the financial performance of the Independent
Power Producers (IPPs)
Displays a report about the financial performance of the New Entrant.
Graphs Menu
The graph menu contain options for displaying data on key variables within the simulation.
There are several graphs available that help explore various aspects of system behaviour.
View Menu
Main Toolbar
Simulation toolbar
Windows Menu
Cascade
Tile
Arrange Icons
Minimize All
Help Menu
Introduction
The Industry
The Microworld
Contents
Displays/Hides the application's main toolbar.
Displays/Hides the simulation toolbar.
This option cascades all put windows across the screen from top left
downward.
To tile all open windows such as graphs and decision windows in the
screen, this option can be selected. This may be useful in situation when
may windows are open at the same time and you wish to view them all.
By selecting this option, any iconised windows are neatly arranged at the
bottom left of the main screen.
If this option is selected, then all open windows are minimised to the
bottom of the main screen.
Displays the help topic with the introduction to the microworld.
Displays the help topic with information about the industry.
Displays the help topic with information about the Microworld.
Displays the help file contents
19
Main Screen
The Main Microworld Screen
The top of the main screen there are eight pull-down menus. Just below these menus are
several large buttons on a tool-bar which contain short-cuts to the functionality contained in
the above menus. The bottom right-hand panel of the main screen contains a progress
monitor that indicates the passage of time during the simulation.
20
Decision Window
The decision window allows you to specify and dynamically change your decisions about
bidding or investments in generation.
The buttons on the window caption
This button displays a help comment
Pressing this button rolls-up or down the Decision Window allowing you to see a
bigger part of the main window.
Selecting a role to play
The combo-box at the top of the window provides a choice of roles to play. Select a role
before running the simulation.
Decisions as a generator
When you play the role of a generator, the window looks as the picture below. Click on any
part of the window to get information about this part.
Bidding decision
The slide bar allows you to specify your bidding strategy for the next simulation period(s).
The plant bids are formed by increasing their variable costs by the percentage specified in
this slide bar.
Investment decision
Type of action
You have a choice of following the default investment decision, ordering a fixed capacity
every period (until you change the option) or ordering specific amounts of capacity using the
"Order" button.
Amount of capacity to order
This is the amount that you order when you press the "Order" button (in MWs)
"Order" button
Pressing this button orders the amount of capacity specified in the "Amount of capacity to
order" box.
21
Decisions as a regulator
When you play the role of a generator, the window looks as the picture below. Click on any
part of the window to get information about this part.
Capacity Payments
By changing the value in this edit box you can control the Value of Loss of Load used in
calculating the price of electricity paid to generators.
Divestment
Amount divested
This is the amount in MWs that the Incumbent has to divest when you press the Divestment
button. Typically you would consider increasing this value when there is shortage of capacity
and decrease it when there is excess capacity.
Divestment Button
Press this button to order the incumbent to divest capacity equal to the value specified in the
"amount divested" edit box.
22
Graph Windows
Graph windows show the evolution of model variables over the simulated time. There are
several available graphs. Clicking the yellow balloon button at the window caption provides a
brief explanation of the graph.
23
Report Windows
Report windows provide tabular information about the plant data and financial performance of
the market players. The Balance Sheet shows how the Shareholder value is calculated. New
investment is funded by cash if it available or else debt. Interest is payed on debt.
24
Setup Window
The setup window is for advanced users of EMM that want to customise the system modelled
and some of the internal paremeters. There are five tabs in the window giving you access to:
Plant data
The information provided in this table is the full definition of the plant data. It is a set of
records, one for each plant, ending with a record containing the word "END". Some
restrictions apply when specifying the plant data:


The names of the three types of generators are hard-coded in the program.
There has to be a plant called CCGT for each generator, even if the capacity is very
small. This is the only plant the generator can invest in to expand capacity. There is no
restriction on other plants
25
Demand data
The information on this page specifies the demand as a Load Duration Curve.
Time data
In this page the start, end year and the simulation periods per year can be defined.
26
Loss-of-Load Probability Function
This page defines the average LOLP as a function of the Excess Capacity. Excess Capacity
in turn is calculated as the ratio of Total Available Capacity over Peak Demand. This function
can be designed to reflect a pricing system such as that of the UK. Alternative it can be used
to model a scarcity or shortage cost. You can change the function by dragging the points
using the mouse.
Other Parameters
A number of other parameters can be defined in this page. Some of them are used in internal
default decision rules:
Currency
The currency of monetary values provided to the model.
CCGT construction time
The time lag from ordering a CCGT plant to commissioning.
Forecasting Method
Used in the default investment calculation to forecast the profitability of CCGT plants. It can
be either simple or double (includes trend) exponential smoothing.
CCGT profit smoothing constant
The smoothing constant used in the above forecasting model. The lower the value the longer
the memory of the forecasting process.
IPP's discount rate
If the incumbent control less than 50% of the market, the IPPs' discount rate (used in
determining the NPV of CCGT investment is given by the equation:
27
Discount Rate = Intercept + Slope * (Incumbent market share - 0.5)
Otherwise
Discount Rate = Intercept
A negative slope can be used to model the institutional or regulatory help to new entrants,
when the market share of the incumbent is seen as a strategic threat to competition.
Incumbent's discount rate
The discount rate used by the incumbent to evaluate investments. It is also used as the
interest rate paid on debt.
Incumbent Building Aggressiveness
A scaler that can modify the generation plant building aggressiveness of the Incumbent.
Incumbent Initial Fixed Assets, Cash and Debt
Used for constructing an approximate balance sheet for the incumbent.
New Entrant Initial Cash
The initial financial position of the New Entrant.
28
Microworlds
What is a microworld?
Business simulators are becoming increasingly popular in management education. Many
MBA programs including the Harvard MBA and the London Business School MBA kick off
with a module designed around such a simulator, in the LBS's case the "People's Express"
(Sterman, 1988). These simulators, also known as microworlds (Senge and Lannon, 1990,
Morecroft 1988), are case studies supported by computer simulations.
A main criticism of traditional case studies is that students cannot see the consequences of
their recommendations or test alternative proposals. So, users of such cases do not realise in
full the benefits of case-based learning, which is intrinsically linked to the experience of failure
and the exploration of different courses of actions .
With microworlds, users have the opportunity to "implement" their recommendations and
simulate their impact on the business and its environment over time-scales of many years.
Competition among teams of users can also create a gaming dimension to the exercise. The
learning potential of such simulation is enhanced by debriefing sessions relating the
performance of teams to their recommendations and the underlying structure of the business
problem. A number of such microworlds are being developed at the London Business School,
MIT and other business school. Emphasis is placed in making the simulations realistic by
adding multimedia or turning them into edutainment products.
References
Morecroft John. "System Dynamics and Microworlds for Policymakers", European Journal of
Operational Research 35, pp 301-320, 1988
Sterman D. John. "People Express - Management Flight Simulator", Sloan School of
Management, MIT, 1988.
Senge M. Peter and Lannon Colleen. "Managerial Microworlds", Technology Review, July
1990.
Links
People's Express Microworld ((http://www.phrontis.com/people.htm))
Beefeter Restaurants Microworld (http://www.smsim.co.uk/)
29