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_________________________________________________2Restructuring_____________________________________________________________2

The UK Experience____________________________________________________3Restructuring the British Electricity System___________________________________3

The Pool_____________________________________________________________4The Electricity Pool________________________________________________________4

New Entry____________________________________________________________5Generation Capacity and New Entrants_______________________________________5

Regulation____________________________________________________________7

Power Plants__________________________________________________________8Pictures of Power Plants and Transmission Lines_______________________________8

The Microworld______________________________________________________13

Business Setting______________________________________________________14The Environment_________________________________________________________14

Competition_____________________________________________________________14

The Regulator___________________________________________________________14

Electricity buyers_________________________________________________________14

Decision Rules_______________________________________________________15Bidding strategy__________________________________________________________15

Capacity decisions________________________________________________________16

Playing the game_____________________________________________________17Starting the Microworld___________________________________________________17

Running the Simulation___________________________________________________17Selecting a role________________________________________________________________17Objectives____________________________________________________________________17Making decisions_______________________________________________________________17Examining the impact of your decisions_____________________________________________17

Menus______________________________________________________________18

Main Screen_________________________________________________________20The Main Microworld Screen______________________________________________20

Decision Window_____________________________________________________21

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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________________________________________________________25Plant data_______________________________________________________________25

Demand data____________________________________________________________26

Time data_______________________________________________________________26

Loss-of-Load Probability Function__________________________________________27

Other Parameters________________________________________________________27

Microworlds_________________________________________________________29What is a microworld?____________________________________________________29

References___________________________________________________________29

Links_______________________________________________________________29

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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.

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The Electricity Industry

RestructuringAs 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.

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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.

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The Pool

The Electricity PoolAll 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)

GeneratorsNP, PGNuclear

IPPsImports

GeneratorsNP, PGNuclear

IPPsImports

Pool

LargeCustomers

LargeCustomers

12 RegionalElectricityCompanies

12 RegionalElectricityCompanies

OthersuppliersOther

suppliers

ConsumersConsumers

Supplies contractsSells electricity

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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.

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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

 1989 1995

Electricity Supplied(net) 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

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RegulationThe 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 forty-six 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 customer-led, 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.

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Power Plants

Pictures of Power Plants and Transmission Lines

Battersea Power Station, England

Bayswater Power Station, Lake Liddell, New South Wales

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Central California aqueduct with wind power

Palo Verde Nuclear Generation Plant, Wintersburg, Arizona

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Battersea Power Station and Grosvenor rail bridge, London

Glen Canyon Dam, Glen Canyon, Colorado River, Arizona

Natural gas pipeline

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Poppy field and Ferrybridge power station, West Yorkshire, U.K.

Small hydro-electric dam

Electricity, Edison's first electrical power plant

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Natural gas plant, Norman Wells, Northwest Territories, Canada

High-voltage power lines

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The MicroworldThe 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.

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Business Setting

The EnvironmentThe 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.

CompetitionThese 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 RegulatorA 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 buyersConsumers 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.

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Decision RulesDuring 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.

Incumbent'sCapacityNew Built Retirement

Incumbent'sProfits Investment

++

Profitability

IPP capacityIPP New Built

Total Capacity+

+Incumbent Market Share

+-

Support for IPPs

++

Pool Price-

+

Price Expectation+

+

+

Incumbent's Generation

Demand

+

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

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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 strategyGenerators 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.

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Playing the game

Starting the MicroworldTo 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 roleBefore 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.

ObjectivesFor 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 decisionsGenerators 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 decisionsDuring 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. 

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MenusThis 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 This option copies the currently selected graph into the clipboard so that

it may be copied into a word processor or other package.

Simulation Menu Run 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.

Run a year Runs the simulation for a year.Stop 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.

Step 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.

Go Back 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.

Restart 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.

Run Slower 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.

Run Faster 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.

Set Up Simulation 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

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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 MenuIncumbent Displays a report about the financial performance of the Incumbent.IPPs Displays a report about the financial performance of the Independent

Power Producers (IPPs)New Entrant 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 Displays/Hides the application's main toolbar.Simulation toolbar Displays/Hides the simulation toolbar.

Windows MenuCascade This option cascades all put windows across the screen from top left

downward.Tile 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.

Arrange Icons By selecting this option, any iconised windows are neatly arranged at the bottom left of the main screen.

Minimize All If this option is selected, then all open windows are minimised to the bottom of the main screen.

Help Menu  Introduction Displays the help topic with the introduction to the microworld.The Industry Displays the help topic with information about the industry.The Microworld Displays the help topic with information about the Microworld.Contents Displays the help file contents

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Main Screen

The Main Microworld ScreenThe 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.

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Decision WindowThe 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 playThe 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 generatorWhen 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 decisionThe 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 decisionType of actionYou 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 orderThis is the amount that you order when you press the "Order" button (in MWs)

"Order" buttonPressing this button orders the amount of capacity specified in the "Amount of capacity to order" box.

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Decisions as a regulatorWhen 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 PaymentsBy 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.

DivestmentAmount divestedThis 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 ButtonPress this button to order the incumbent to divest capacity equal to the value specified in the "amount divested" edit box.

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Graph WindowsGraph 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.

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Report WindowsReport 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.

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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 dataThe 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

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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.

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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 ParametersA number of other parameters can be defined in this page. Some of them are used in internal default decision rules:

CurrencyThe currency of monetary values provided to the model.

CCGT construction timeThe time lag from ordering a CCGT plant to commissioning.

Forecasting MethodUsed 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 constantThe smoothing constant used in the above forecasting model. The lower the value the longer the memory of the forecasting process.

IPP's discount rateIf 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:

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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 rateThe discount rate used by the incumbent to evaluate investments. It is also used as the interest rate paid on debt.

Incumbent Building AggressivenessA scaler that can modify the generation plant building aggressiveness of the Incumbent.

Incumbent Initial Fixed Assets, Cash and DebtUsed for constructing an approximate balance sheet for the incumbent.

New Entrant Initial CashThe initial financial position of the New Entrant.

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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.

ReferencesMorecroft 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.

LinksPeople's Express Microworld ((http://www.phrontis.com/people.htm))Beefeter Restaurants Microworld (http://www.smsim.co.uk/)

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