Power System Planning

Power System
Planning Technologies
and Applications:
Concepts, Solutions,
and Management
Fawwaz Elkarmi
Amman University, Jordan
Nazih Abu-Shikhah
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Library of Congress Cataloging-in-Publication Data
Elkarmi, Fawwaz, 1950Power system planning technologies and applications: concepts, solutions and management / by Fawwaz Elkarmi and
Nazih AbuShikhah.
p. cm.
Includes bibliographical references and index.
Summary: This book focuses on the technical planning of power systems, taking into account technological evolutions in
equipment as well as the economic, financial, and societal factors that drive supply and demand and have implications for
technical planning at the micro level--Provided by publisher.
ISBN 978-1-4666-0173-4 (hardcover) -- ISBN 978-1-4666-0174-1 (ebook) -- ISBN 978-1-4666-0175-8 (print & perpetual
access) 1. Electric power systems--Management. I. AbuShikhah, Nazih, 1957- II. Title.
TK3001.E46 2012
333.79--dc23
2011048061
British Cataloguing in Publication Data

A Cataloguing in Publication record for this book is available from the British Library.
All work contributed to this book is new, previously-unpublished material. The views expressed in this book are those of the
authors, but not necessarily of the publisher.
Table of Contents
Foreword..............................................................................................................................................xiii
Preface.................................................................................................................................................. xiv
Chapter 1
Power System Planning Process Objectives............................................................................................ 1
Introduction...................................................................................................................................... 1
Power System Composition............................................................................................................. 2
The Planning Process....................................................................................................................... 5
Power System Planning................................................................................................................... 8
Summary........................................................................................................................................ 10
Chapter 2
Factors Affecting the Future of Power Supply Industry........................................................................ 13
Introduction .................................................................................................................................. 13
Electricity Supply Industry Reform............................................................................................... 15
Deregulation of Markets................................................................................................................ 16
Public Private Partnership Models................................................................................................. 17
Environmental Considerations....................................................................................................... 18
Other Considerations Affecting the Power Industry Reform......................................................... 20
Case Study..................................................................................................................................... 23
Summary........................................................................................................................................ 26
Chapter 3
Planning Criteria.................................................................................................................................... 27
Introduction.................................................................................................................................... 27
Planning Expansion ...................................................................................................................... 28
Power System Stability Concerns.................................................................................................. 31
Modeling and Performance Indicators ......................................................................................... 33
Power Quality (PQ) Considerations.............................................................................................. 37
Uncertainty Constraints and Risk Analysis Planning.................................................................... 40
Case Study: Generation Expansion Planning................................................................................ 41
Summary . ..................................................................................................................................... 43
Chapter 4
Load Research........................................................................................................................................ 47
Introduction.................................................................................................................................... 47
Load Research Methodology......................................................................................................... 49
Sampling Design............................................................................................................................ 49
Use of Load Research Results....................................................................................................... 51
Driving Factors............................................................................................................................. 52
Load Modeling............................................................................................................................... 53
Case Study..................................................................................................................................... 55
Summary........................................................................................................................................ 56
Chapter 5
Electricity Load Forecasting.................................................................................................................. 61
Introduction.................................................................................................................................... 61
Classification Electrical Load Forecasting.................................................................................... 63
Forecasting Perspectives................................................................................................................ 65
Forecasting Driving Factors.......................................................................................................... 66
Forecasting Time Frames............................................................................................................... 75
Case Study..................................................................................................................................... 77
Summary........................................................................................................................................ 77
Chapter 6
Energy Efficiency................................................................................................................................... 82
Introduction.................................................................................................................................... 82
Energy Efficiency Impact on Electricity Consumption................................................................. 84
Appliance Efficiency..................................................................................................................... 84
Building Efficiency........................................................................................................................ 85
Improving Energy Efficiency......................................................................................................... 88
Incentives Mechanisms to Effect EE............................................................................................. 91
Case Study..................................................................................................................................... 91
Summary........................................................................................................................................ 94
Chapter 7
Demand Side Management.................................................................................................................... 99
Introduction.................................................................................................................................... 99
Concepts and Characteristics of Demand Side Management (DSM) . ....................................... 100
Alternatives of DSM . ................................................................................................................. 102
Benefits of DSM ......................................................................................................................... 102
Implementation of DSM ............................................................................................................. 103
Evaluation of DSM Alternatives . ............................................................................................... 104
Case Study................................................................................................................................... 105
Summary...................................................................................................................................... 105
Chapter 8
Renewable Energy Technologies......................................................................................................... 121
Introduction.................................................................................................................................. 121
RE and Electric Power................................................................................................................. 124
Green Energy and Sustainable Energy Generation .................................................................... 127
Site Specificity ............................................................................................................................ 131
RE Pricing.................................................................................................................................... 134
Production Economics................................................................................................................. 135
Environmental Impacts................................................................................................................ 136
Promoting of RE.......................................................................................................................... 138
Summary . ................................................................................................................................... 139
Chapter 9
System Expansion Studies................................................................................................................... 143
Introduction.................................................................................................................................. 143
Generation Expansion.................................................................................................................. 144
Transmission and Distribution Expansion................................................................................... 145
Cost Considerations and Expansion Obligations......................................................................... 146
Regulatory Incentives.................................................................................................................. 146
Case Study................................................................................................................................... 147
Summary...................................................................................................................................... 154
Chapter 10
Integrated Resource Planning.............................................................................................................. 156
Introduction ................................................................................................................................ 156
Concept and Rationale................................................................................................................. 157
Supply and Demand Side Interaction ......................................................................................... 158
Uncertainty and Cost Implications............................................................................................. 161
Benefits of IRP............................................................................................................................. 162
Case Study................................................................................................................................... 164
Summary...................................................................................................................................... 167
Chapter 11
Interconnected Systems....................................................................................................................... 171
Introduction ................................................................................................................................ 171
AC and HVDC Interconnection................................................................................................... 172
Benefits of Interconnection.......................................................................................................... 178
Interconnection: Technical Factors ............................................................................................. 179
Economic and Financial Impacts................................................................................................. 182
Environmental Concerns............................................................................................................. 186
Social Impacts.............................................................................................................................. 186
Legal Aspects . ............................................................................................................................ 187
Political Aspect............................................................................................................................ 188
Summary...................................................................................................................................... 188
Chapter 12
Financing of Power Projects................................................................................................................ 191
Introduction.................................................................................................................................. 191
Economic Feasibility of Projects................................................................................................. 193
Factors Influencing Investment in Power Systems...................................................................... 194
Financial vs. Economic Analyses................................................................................................ 196
Financial Analysis Tools.............................................................................................................. 199
Major Factors Influencing Financing........................................................................................... 200
Financing Requirements.............................................................................................................. 204
Public Private Partnership (PPP)................................................................................................. 206
Summary...................................................................................................................................... 210
Chapter 13
Tariff Studies........................................................................................................................................ 213
Introduction ................................................................................................................................ 213
Tariff Calculation Models............................................................................................................ 215
Social Tariff Impacts . ................................................................................................................. 221
Cost-Reflective Tariff................................................................................................................... 222
Regulations and Tariffs................................................................................................................ 222
Case Study: Electricity Tariffs in Jordan (ERC, 2005)................................................................ 224
Net Paid Up Capital: JEPCO Prior to 2011................................................................................. 227
Summary...................................................................................................................................... 231
Chapter 14
Planning Tools...................................................................................................................................... 236
Introduction.................................................................................................................................. 236
Data Collection............................................................................................................................ 237
Group Thinking............................................................................................................................ 240
Decision Support Analysis........................................................................................................... 241
Decision Aiding Tools................................................................................................................. 245
Strategic Planning........................................................................................................................ 249
Summary...................................................................................................................................... 257
Compilation of References................................................................................................................ 261
About the Contributors..................................................................................................................... 272
Index.................................................................................................................................................... 275
Detailed Table of Contents
Foreword . ...........................................................................................................................................xiii
Preface . ............................................................................................................................................... xiv
Chapter 1
Power System Planning Process Objectives............................................................................................ 1
This chapter aims at providing the basic background and foundation to the whole power system planning
process covered in this book. It helps in setting the stage for a clearer and better understanding of the
ensuing chapters. This is needed in the case of all readers, but it is especially important for readers who
are not from the power industry such as regulators, policy makers, or legislators. Moreover, the planning
process itself is also introduced in this chapter. This is particularly helpful for practicing engineers and
other readers who might not be familiar with such issues. Finally, power system planning is introduced
in this chapter to emphasize specific functions used in this context, especially those that are different
than general planning functions.
Chapter 2
Factors Affecting the Future of Power Supply Industry........................................................................ 13
In the past two or three decades, several developments took place in the power supply industry. These
developments formed influencing factors that have a bearing on the power supply industry structure and
future evolution. It is very helpful before embarking on the planning of the power system to attempt to
identify such factors and understand how they might affect the future plans, design, composition, and
operational aspects of the power system.
In many countries the power supply industry has been transformed by means of reforms, deregulation
of markets, and public-private partnerships into new setups and hierarchies. The understanding of these
trends is essential to follow up the future structure and organization of the power systems.
Environmental considerations and consequences of power system operation have a great deal of influence on future plans. Other internal and external factors include market entry of new power system
technologies, efficiency improvements of system components, and introduction of new or renewable
energy sources.
The understanding of all factors that might influence the planning process directly and indirectly is a
prerequisite to guaranteeing a realistic outcome. This understanding provides the guiding principles and
outer boundaries of the concepts and thinking process involved in power system planning.
Chapter 3
Planning Criteria.................................................................................................................................... 27
Planning criteria, in general, constitute a set of decision parameters or design variables with which the
planner controls the planning scenarios. These criteria are similar to guiding principles and limitations
placed on the scenarios for the purpose of narrowing down the selection process. Usually these criteria
are defined and set by consensus after careful studies and analyses. Previous practices and experiences
shape and form such planning criteria. However, they need to be revised every now and then in order to
reflect changes in the power system, demand structures, and degree of acceptable risk.
Moreover, planning criteria represent boundary conditions that serve to eliminate unfeasible solutions
and keep only the feasible ones. Therefore, they are needed in expansion studies of power systems to
guarantee that the scenarios selected are all acceptable by the planners. Close coordination and continuous
dialogue among power companies (generation, transmission, and distribution) are strongly recommended
for proper planning in order to meet consumers demands and satisfaction.
Usually planning criteria are set by management, although some input from planners is needed. Knowledge of such criteriaand how they are calculatedprovides planners with good practices and enhances
the planning process.
Chapter 4
Load Research........................................................................................................................................ 47
Load research results provide a valuable input to decision makers in the electricity companies prior
to embarking on any plan, project, or program that touches on the supply of power or power quality
to consumers. The information not only covers technical matters, but also covers socioeconomic and
market information.
With the information collected through load research, electricity companies will be aware and hopefully
knowledgeable in the composition and trends of consumer demands. This essential knowledge will be
the basis for pricing electricity properly and fairly. Moreover, this information forms a good basis for
predicting future demand. Therefore, new expansions, enforcements, and extensions will be affected to
cater to future demand.
Load research data is also useful in the operation and performance of the power system. This information will help system operators to take appropriate actions, in cases of emergency, or in normal cases
without adversely affecting the system or customer satisfaction and comfort.
In a load research study the objective is to formulate the load curves of all consumer categories. The
daily load curve is an essential building block for achieving this objective. With information, the power
system planner can perform many important activities and functions within the planning process.
Chapter 5
Electricity Load Forecasting.................................................................................................................. 61
Forecasting is the backbone of any planning process in all fields of interest. It has a great impact on future
decisions and this is reflected as profits or losses to the institute. This chapter aims to provide the planning engineer with sufficient knowledge and background of the different scopes of forecasting methods,
in general, and when applied to power system field, in particular. Various load and energy forecasting
models and theoretical techniques are discussed from different perspectives, time frames, and levels.
The mission of any electrical utility/company that operates the power system is to match load with
electric energy supply, in addition to meeting the expected peak load of the power system. Electrical
load forecasting provides input to the rational planning of future resources.
A focus on a practical implemented case study presents an added value for the better appreciation of
this topic.
Chapter 6
Energy Efficiency................................................................................................................................... 82
Energy efficiency involves activities that affect and encourage a drastic change in electricity consumption
by end-users. It also involves the design and manufacture of energy efficient appliances and systems.
Energy efficiency aims at achieving the following goals: 1) buildings are constructed to have efficient
use of energy, 2) appliances are designed and designated as energy efficient, and 3) behavioral changes
to electricity end-users. If all stakeholders shoulder their responsibility then energy efficiency will
achieve its goals.
Energy efficiency reduces consumer bills, cost to utilities, and cost to the national economy. It also
reduces environmental pollution, prolongs the time needed to consume energy resources, and increases
the security of supply.
Energy efficiency is affected through electrical appliances and buildings. In the first category manufacturers compete to produce energy efficient appliances. In the latter architects and engineers compete to
build energy efficient homes, schools, shops, malls, etc. A third element is needed to affect energy efficiency. This is that the consumer must be aware of the issue and at the same time willing and motivated
to participate in energy efficiency activities.
Chapter 7
Demand Side Management.................................................................................................................... 99
Demand Side Management (DSM) is a term used to describe the activities and ensuing programs that
attempt to affect changes in consumer behavior leading to a reduction in electricity consumption. DSM
comprises any activity or program that is designed within the wider energy efficiency function. The
participants in any DSM program are carefully selected such that their collective response to the program results in energy saving or shift in timing of load demand. Therefore, the objective of any DSM
program could be peak load saving or simply shifting in its timing from the peak load period to other
off-peak periods.
The implementation of DSM programs is likely to introduce improvement in the efficiency of power
systems, reduce financial burdens on utilities to build new energy facilities, improve the environmental
situation, and lower the cost of delivered energy to consumers; thus lowering O&M costs as well as
consumer bills, enhance system reliability by reducing power shortages and power cuts, improve the
national economy by improving the value added of the electricity sector, and increase job creation and
new business ventures.
Chapter 8
Renewable Energy Technologies......................................................................................................... 121
This chapter presents different types of renewable and/or sustainable energy resources. It discusses their
impact on the globe in terms of economy, pricing, and environment.
Renewable Energy (RE) resources have some special features and attributes that differ from conventional
energy resources. Conventional energy resources, however, put some constraints on the application or
usage of RE. Such limitations include: site specificity, small size of power output, and current marginal
feasibility. The environmental benefits of RE resources favor them over conventional resources.
The role of RE resources in the electricity industry is explained from present and future perspectives.
The promotion strategies and methods of utilizing these resources are outlined. Such promotion is a
very important issue that must be adopted by all countries. This will lead to encouraging investments in
this promising area, and will result in huge long-term benefits for countries, institutes, and individuals.
Chapter 9
System Expansion Studies................................................................................................................... 143
Expansion studies in generation and transmission are discussed. These are needed to match future demand with future available capacity. Several issues are to be considered including costs, site location,
technology used, plant size, etc.
The cost factors governing these expansions are presented, while taking into consideration the environmental and legal impacts. In some situations governmental intervention is needed to encourage expansions. This is usually associated with the provision of regulatory incentives that support investment in
the recommended fields of expansion. Some systems may require expansion in the generation side,
while transmission expansion is inevitable for other systems. In some cases expansion is to be made in
both generation and transmission.
The current situation becomes more complicated as the de-regulated models are adopted. So, the power
system utility responsibility is split among several companies, and each of them is responsible to plan
the expansion of its component or subcomponent. Furthermore, strong coordination and continuous
dialogue among all parties is needed.
A case study serves in making the picture clearer to the reader. This case study covers an expansion in
the generation area of a real life electric power system.
Chapter 10
Integrated Resource Planning.............................................................................................................. 156
Integrated Resource Planning (IRP) is an economic planning process which, if implemented correctly,
selects a plan with the lowest practical cost at which a utility can deliver reliable energy services to its
customers. The ultimate objective of this planning process is to formulate a plan having a mix of energy
resources, but at the same time minimizing the total financial outlays spent in order to maximize the
energy service benefits gained. IRP can be described as an approach through which the future demand for
electricity services, during any given planning period, is met with a combination of least-cost of supply
and demand side efficiency options, while incorporating issues such as security of supply, environmental
protection, national economy, and other country-specific goals.
IRP can provide a vehicle to test and put into force regulatory policies and actions. Environmental externalities, risk reduction, improving continuity of service, market distortions, and lack of inexpensive
financing are all included in the IRP process. Policies are usually translated to fiscal or monetary measures
through licensing procedures, tariff design, environmental penalties, renewable energy encouragement
acts, and additional taxes or levies. This would certainly provide demand side options with some advantage over the conventional ones.
Chapter 11
Interconnected Systems....................................................................................................................... 171
In power system industry the aim is to provide the customers with secure, reliable, and low cost electric
power. For isolated systems these objectives may be difficult to achieve. If two power systems are kept
isolated (not interconnected), then the reserve margin of each system will be high in order to cater for
probable outages. This implies that electricity cost will be higher for each individual system. In contrast,
the interconnection of power systems will serve in reducing reserve margin and reduce electricity costs
in both systems. Practically, obstacles do exist and hinder the implementation of interconnection.
Power systems operate on either AC (50 Hz), or AC (60 Hz). Interconnection can be implemented based
on an AC/AC or AC/DC basis. Technical, economical, and environmental considerations must be investigated to establish the best interconnection configuration. Moreover, the social, legal, and political
impacts are of potential importance and must be considered.
Chapter 12
Financing of Power Projects................................................................................................................ 191
Economy and finance represent major factors in the planning process. For power system planning, the
investments are very huge in amount (billions of dollars). In this free market era, almost all governments
are trying to reduce budgetary expenses. This results in governments divorcing themselves from being
involved in such huge investments. The economy of scale forces governments to rely on the private
sector. However, as the profit is the driving force for the private sector, incentives must be set clear, and
regulations must be flexible enough to encourage the Public-Private Partnership (PPP), which comprises
many financing schemes. These may be attractive to the private sector and, hence, enable the financing
of such projects. This chapter discusses issues related to economic feasibility and financing factors that
govern investment in the power industry. Different PPP schemes are discussed in further details and their
potential contribution and roles in the future of the power industry are pinpointed.
Chapter 13
Tariff Studies........................................................................................................................................ 213
Electricity pricing is based on achieving a set of objectives defined as follows: 1) to guarantee efficient
allocation of national economic resources; 2) encouraging the adoption of certain EE measures; 3) fair
return on the utilitys investments; 4) fair allocation of costs among the various consumers; and 5) simplicity and convenience in implementation.
Electricity tariff, in general, needs to reflect the true cost of supply in order to ensure maintaining an
adequate level of security of supply and the financial viability of the electricity sector including private
and public entities. The true cost of supply needs to be determined accurately by an independent body.
This is the role of the regulatory agency responsible for setting the tariff, taking into consideration the
welfare of all stakeholders.
Chapter 14
Planning Tools...................................................................................................................................... 236
Planning is very important for the success of any project or business. Various tools need to be implemented
in conducting the functions comprising the planning process. These tools aid the decision making process
and minimize the risks involved in the selection of the way to control the project under consideration
or running the business.
In this chapter, various categories of planning tools are discussed and explained. These tools are proposed
to be applied at the different stages of the project. They are applicable to the strategic planning stage
and for the monitoring and evaluation stages. As the planning process is dynamic in nature, it is highly
recommended to apply different tools at different phases of the project.
Compilation of References ............................................................................................................... 261
About the Contributors .................................................................................................................... 272
Index.................................................................................................................................................... 275
xiii
Foreword
This is a comprehensive and well written book that practically covers all aspects relating to electrical
power systems analysis and planning. It is also a badly needed book. With the proliferation of information systems and computers, the interests of students and researchers were, over the last few years, diverted from the study of electrical power systems into those new, novel, and rapidly developing technologies. It also led to almost neglecting to develop and add to the literature of electrical power systems
either at the university or research institutions level.
The world is rapidly electrifying. Electricity is gradually replacing many other forms of energy and
labor. Worldwide growth of electricity demand almost matches global economic growth and is one and
a half times the growth of primary energy use. This is a trend that is continuing, and by the middle of
this century, the majority of human energy needs will be served by electricity as the major energy carrier. Correspondingly, understanding the planning and investment process of electrical power systems
is mandatory for the efficient and sustainable development of almost every economy. This book helps
in achieving this purpose.
I must congratulate the authors for writing such a timely and thorough book, which is going to serve
the needs of energy planners as well as graduate students. I am sure that it will be a well received and
welcome addition to the literature on electrical power systems and hope that it will eventually be periodically updated by the authors.
Hisham Khatib
Global Energy Award Laureate
Hisham Khatib is past-Chairman of the Jordan Electricity Regulatory Commission, Honorary Vice Chairman of the World
Energy Council. He is an engineer and economist on energy technology, energy security, and local and global environmental
issues related to energy and development. Over the last many years, Dr. Khatib was a Minister in the Government of Jordan
in many positionsplanning, water, and energy. In 1998, he was awarded the Medal of Achievement of the Institution of
Electrical Engineers in the UK. In the World Energy Congress in Rome 2007, Dr. Khatib was awarded the highly prestigious
Global Energy Award by the World Energy Council. He is a Life Fellow of the IEEE.
xiv
Preface
This book covers a very important topic in the field of power system engineering science and best practices. It aims at providing the reader with a deep insight of the fields involved in the power system
planning process comprehensively. Moreover, this book blends the theoretical and practical aspects of
power system planning.
Energy is considered one of the most important inputs for the social and economic development of
nations. It is indeed vital for better life and higher levels of comfort and welfare. Energy provides fuel
for life and for prosperity of nations. Therefore, it is sometimes used as a basis to differentiate between
countries that do and countries that dont have it as a proxy for strength of economy or political
influence. Energy sources comprise conventional and renewable. The conventional resources are not
only limited in quantities, but they are responsible for environmental pollution. On the other hand, renewable energy resources are environmentally benign, but unfortunately still not cost-effective as much
as the conventional ones.
The total world primary energy supply for 2010, as per the IEA and OECD sources, was over 12,000
mtoe (million tons oil equivalent). This is expected to increase to 14,500 mtoe by year 2020. If the value
of one ton of oil (at current prices of US$ 100 per barrel) is equivalent to US$ 750 then the value of the
amount of oil equivalent in 2010 was almost US$ 9 trillion. This figure indicates the importance of energy
in the overall world economy as its value equals about 12% of world Gross Domestic Product (GDP).
On the other hand, electricity production worldwide reached about 18,700 TWh (terra watt-hours) in
2010 according to IEA sources. If this is considered being worth 4-5 US cents per kWh, then the total
value would be almost one trillion dollars. This again is a very large figure indicating the importance
of the electricity sector to world economy. Therefore, any increase in efficiency of use or exploitation
of more efficient technologies would mean large savings. On the other hand, the future does not seem
to have good news as prices keep increasing and other problems related to energy and power get complicated. This would be reflected negatively on all economic sectors as well as on the level of comfort
and entertainment of people.
The power sub-sector represents an essential part of the energy sector in any economy. It is unique in
the sense that it is a commodity and a service at the same time. Electricity operates all sorts of machines
and appliances that fill our homes, schools, stores, offices, and even streets. It has strongly penetrated
all markets and applications. It strongly competes with all other forms of energy and surpasses them in
being a clean source. Furthermore, electricity does not need any storage or waiting time to be served as
it is an instantaneous service. The precise knowledge of future evolution of power systems will help
greatly in planning the development activities correctly and exactly; thus avoiding under-or over-planning
of future supply. The planning process is a combination of science and foresight. It needs special skills
and demands knowledge of other disciplines.
xv
The need to compile and organize power system planning methodologies that are based on both
theoretical and practical knowledge is very much in place. Every power company has its own methodologies and planning practices. However, they might not be presented and elaborated in one document.
Moreover, since these methodologies vary in extent, level of sophistication, accuracy, need for data,
it is very prudent to attempt to come up with a book that covers all aspects of power system planning.
This book was conceived and written over the past two years, and it represents the output of several
years of experience in power system planning followed by several years of teaching university students
power system operation, control and planning. The two sides; theoretical and practical, hopefully combine to yield the best combination with the most benefit to readers and scholars. The authors have a
combined work experience of over 50 years; half of which in the planning process of the power industry.
The authors also depended heavily on research work conducted at the university with the cooperation or
assistance from ex-colleagues at the electricity companies. The combination of this body of knowledge
is an important element in enhancing the value of the book.
The book is self-contained and thorough and suits the needs and is of great benefit to different categories including: a) academia where it is proposed to be taught over two semesters for undergraduates,
or in one semester postgraduate course, b) professional engineers in the area of electricity planning, c)
practical trainees attending training programs or specialized workshops, and d) regulators, policy and
decision makers in the power industry.
Very few existing books, not more than the number of the fingers of one hand, deal specifically with
power system planning. Few other books cover topics related to power system planning. Investigating
the contents and coverage of the books that deal directly and specifically with power system planning
reveals that they deal only with the process of expansion of the system and the related mathematical
and analytic tools related to this core function. In other words, they concentrate on the science of power
system planning. They do not cover as much the art and the good practices that have evolved within the
power industry. Moreover, the relationships and interactions between the planning and other business
functions within the power industry or energy sector at large are not covered in the existing books.
The contents of the book are diverse and cover topics that tackle various practices and functions
needed for proper planning of the power system. Each chapter could stand on its own as a subject for
training course or as a special topic. Moreover, the sequence and order of chapters is well suited within
the actual functions of power system planning.
This book is organized into 14 chapters. Each chapter is independent with a standard structure starting with chapter objectives, an introduction, case study, summary, and references, in addition to other
specific sections.
The book starts, in Chapter 1, with the definition of the power system and its components. Then it
discusses the planning process in general and planning of power systems in particular, and tackles different aspects related to this process. This introductory chapter provides the reader with a background
about the components and various functions of the power system. It also discusses the tasks and activities
included in the planning process. The chapter provides a clear layout of the interrelationships among the
various functions of the planning process representing the various chapters of the book. Current issues
related to power system planning are also investigated. These issues give the reader clear ideas of the
scope of their application and effects on modern power system planning.
xvi
Chapter 2 is dedicated to regulatory and market constraints. This is an essential chapter in power
system planning especially in light of the new trends of privatization and market deregulation. It also
covers the environmental considerations, which occupy an important part in the shaping of future alternatives and related decisions. These topics discussed chapter 2 form essential issues and constraints
affecting the future evolution of power systems directly and indirectly.
This is followed by Chapter 3, which is devoted to the planning criteria. It is the core of the planning
effort as it forms the boundaries and refines the selection process. Planning criteria constitute the general
framework and guidelines that govern the planning of power systems.
Load research is discussed in Chapter 4. This activity is responsible for data collection and compilation. Without such data no proper planning can be done. Load research is considered the heart of
intelligence of the planning of power systems as it attempts to identify the characteristics and nature of
consumption of the various consumers. The information generated by this activity is used as input for
many other planning activities and functions.
Chapters 3, 4, and 14 comprise the preparation stage of the planning of power systems. In reality,
Chapters 3 and 4 are the actual preparation steps needed for the planning, while chapter 14 is a general
presentation of planning tools that might be needed in the process.
Chapter 5 deals with forecasting future energy and electrical loads. This activity attempts to foresee
the future of system demand. Forecasting is considered by many as the core of the planning process. It
is considered as the first step in the assessment and evaluation phase. It involves many tools and methodologies that need to be implemented. The outcome of the preparation stage is used as input for this
essential activity.
Chapter 6 discusses energy efficiency methods and techniques. It is a very important activity for
power companies as it decreases demand of consumers and, therefore, reduces future investments needed
for new plants.
Similarly, demand side management is another activity that attempts to effect consumer behavior
and habits in order to reduce future demand. This is dealt with in Chapter 7.
Renewable energy technologies are addressed in Chapter 8. All options to generate electricity from
renewable energy sources are presented in this chapter with some special features of such alternatives.
Chapter 9 discusses the expansion planning studies. In this chapter the different concepts and methodologies are discussed. This analysis includes when to add a certain plant, in what site, size, technology
used, and impact on system performance. Naturally, the plants here mean generation, transmission, and
distribution.
All generation options including conventional, new, renewable, energy efficiency, and demand side
management when taken together the planning is called Integrated Resource Planning (IRP). In other
words, if supply and demand sides are considered in the future expansion of the power system it is then
called integrated resource planning. This important topic is included in Chapter 10.
Chapter 11 presents the topic of system interconnections with other systems. Currently there is almost
no power system that is not interconnected to other systems in the world. Therefore, interconnection has
become a standard in todays power system planning, operation and control.
Investment will be needed to cater for system expansion and enhancing interconnection with other
systems. Even performance improvement, update of outdated equipment, and improving customer satisfaction all need investments too. This is discussed in chapter 12, which is followed by tariff studies in
chapter 13. Tariffs are designed to recover the costs of the electricity company plus some reasonable return
on investment. On the other hand, electricity tariffs are very influential in all walks of life and business.
xvii
Finally, Chapter 14 presents a thorough discussion of all planning tools used in all phases and activities of the planning process. These include data collection, group thinking, decision support, and
strategic planning tools.
The authors are deeply indebted to Amman Ahhliya University for the support offered in reviewing
the book. Due gratitude and appreciation are directed to Dr. Hisham Khatib for his kind words in writing the forward of this book. The authors also express their gratitude to all individuals who participated
in publishing this book.
Finally, the authors have acted in good will in all aspects of the writing of this book to benefit the
readers and intend no harm whatsoever. Positive and constructive comments and criticisms are also
invited that will serve in enhancing the quality of this book.
Fawwaz Elkarmi
Nazih Abu-Shikhah
Chapter 1
Power System Planning Process
ABSTRACT
This chapter aims at providing the basic background and foundation to the whole power system planning process covered in this book. It helps in setting the stage for a clearer and better understanding of
the ensuing chapters. This is needed in the case of all readers, but it is especially important for readers
who are not from the power industry such as regulators, policy makers, or legislators. Moreover, the
planning process itself is also introduced in this chapter. This is particularly helpful for practicing engineers and other readers who might not be familiar with such issues. Finally, power system planning
is introduced in this chapter to emphasize specific functions used in this context, especially those that
are different than general planning functions.
INTRODUCTION
This chapter is intended to be an introduction to
power system planning, which is the title of the
book. This chapter will give a broad idea about
power systems and the components comprising
them. It will also present the various planning
functions in general and the specific issues used
in planning of power systems. We believe that for
novice readers this will be a good introductory
chapter, however, for readers who have experience
with power systems, Chapter 1 can be skipped. It
is understood that this chapter provides a broad
definition of the components of the power system
as well as the planning process.
Readers familiar and knowledgeable in power
systems can catch the general flow and inter-
linkages of the various functions of the planning

process. On the other hand, unfamiliar readers
can refer to Figure 1. This figure shows the interrelation between the book chapters resulting in
better, simpler and clearer flow of information
and better understanding.
As can be seen from Figure 1, the whole
power system planning can be divided into three
phases; 1) preparation, 2) assessment and evaluation, and 3) implementation. Chapter 2 presents
the major factors that affect and influence the
future of power industry. These factors constitute
constraints and determinants that affect the three
phases almost equally since they are responsible
for shaping and changing the future of power
systems. The rest of the book chapters fall in one
of the three phases, starting with the power system
DOI: 10.4018/978-1-4666-0173-4.ch001
Copyright 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Figure 1. The future of power system industry
planning criteria that are presented in Chapter 3,

which is followed by presenting the load research
in Chapter 4. Both chapters constitute the preparation stage for the power system planning process.
Chapter 4 is considered as the input for Chapter
6 (energy efficiency), Chapter 7 (demand side
management), and Chapter 5 (load forecasting).
It should be clear that both Chapters 3 and 4 feed
Chapter 5 that represents the backbone for any
planning process. In this chapter, load forecasting
is presented. This function opens the door to the
reader to investigate ways to meet the expected
loads by means of renewable energy generation
(Chapter 8), or through the system expansion
(Chapter 9), or by means of interconnection
(Chapter 10). Any or all of these choices can be
selected and integrated through integrated resource
planning (Chapter 11). Such integration takes into
consideration both supply and demand alternatives. Financial factors (Chapter12) will affect the
final selection for the system expansion alternatives and will lead to defining the appropriate
tariff (Chapter 13) and electricity pricing. This
results in achieving the objectives of supply continuity and economy. Finally, the planning process
as a whole is only possible when proper tools are
used (Chapter 14) which are used throughout the

whole planning process.
We recommend that readers who are familiar
with power system components and power system
planning issues are advised to start reading chapter
3 directly unless they are willing to browse through
the remainder of this chapter.
POWER SYSTEM COMPOSITION

The power system is divided into three main
components: 1) generation, 2) transmission and
interconnection, and 3) distribution. This division
is based on assets or equipment, and not necessarily on ownership of such assets. The three
components are somewhat different in the way of
operation and management. While the generation
component is concerned with the issue of power
supply and delivery to the network, the transmission component is directly involved in transferring
power from generators to distribution companies.
In addition to this the transmission component is
in charge of the exchange of power from other
power systems through system interconnections.
In fact it is in many models responsible for the
overall system operation. Finally the distribution component is quite different in that it deals
with delivery of power to final consumers. These
consumers can reach millions in number in large
systems. Usually the division between transmission and distribution is based on voltage level, i.e.
all high, extra high, and ultra high voltage levels
are considered transmission while medium and
low voltage levels distribution.
Figure 2 shows the basic structure of the
power system.
Planning of power systems involves at the
outset detailed knowledge of the characteristics
of the components of the system, the consumption
of users, socio-economic issues related to the
electricity market and much more (Willis, 2004).
This means that information needed is not only
huge but is wide in scope and covers several
domains. Therefore planners should have technical, economical, financial, and business knowledge. The update of such information is an ongoing concern. Usually data bases are created and
software packages are also utilized.
The processing of the data collected is another
major task in the planning process of power sys-
tems depending on the time frame of the plan. If

the time frame is short then it is called operational
planning. If it is medium or long it is called expansion planning. Sometimes the objective of the
planning process, in certain instances, is to attempt
to solve certain problems or system constraints.
Planners must know current technological
evolutions in new equipment and devices. The
differences among certain types and brands of
products must also be known in order to differentiate among the various alternatives. This
information is used in formulating certain technical solutions or performance improvements to
the power system. This body of knowledge is
important in the evaluations that will follow in
the planning process.
Studies and analyses follow in the planning
process. These aim at finding best solutions or
performance indicators. Benchmarking is sometimes used to set targets of performance indicators. Past trends, if acceptable, are also used as
indicators. Through studies and analyses it can be
determined how far from the target the system is
and how it can reach the target. This represents the
monitoring and verification functions of the plan.
Figure 2. Basic structure of power system
In the context of power system planning the

selected solutions must be cost effective. Therefore, the next step is to assess the feasibility of
solutions. This is accomplished through certain
economic and financial indicators that gauge the
viability of the selected solutions. Moreover,
implications of the cost of the solutions on the
ratepayers, taxpayers, and stakeholders must be
assessed (Von Meier, 2006).
Environmental, societal, and legal issues are all
factored-in in the planning process. The outcome
of the planning process must be balanced in all
respects. It cannot be complete if the plan calls
for performance improvement on the account of
environmental pollution, for example. At the same
time it is not be acceptable to have plans that call
for huge increases in electricity tariff. Finally,
legal issues of the planning must be worked out
diligently.
Planning of power systems is not an isolated
process in the sense that the electricity sector is
a sub-sector of the energy sector which is one
of the main sectors of the economy. The energy
sector along with industry, transport, services,
commercial, agriculture, and others comprise the
economic or productive sectors in any economy.
They interact and compete among each other for
resources and output in an input-output context.
This means that the most effective and efficient
sector gets its fair share of resources (input) needed
for production and accordingly produces output
to the benefit of the national economy, while the
other sectors get their shares proportionately.
In the literature the economic sectors level
is known as the macroeconomic level, while
the components of the energy sector including
the electricity sector represent the intermediate
level of the economy (Weedy, 1998, p. 494). The
electricity sub-sector is further divided into supply and demand and this level is called the micro
level (see Figure 3).
In this book we are concerned mainly with the

planning of power systems at the micro level,
however, several issues are discussed at the intermediate and macro levels as well. On the supply side we are concerned with the planning of
plants and equipment for the generation, transmission and distribution. On the demand side we are
concerned with knowing the patterns, habits and
characteristics of the consuming sectors of electricity, as well as their economic, financial, and
social drives for consumption. Pricing of electricity compared to other energy forms brings the
issue of price elasticity and switching from one
source to the other into the planning of consumers
behavior. This brings into action the competition
amongst energy sub-sectors, and maybe its effect
on the macro level (Weedy, 1998). Figure 3 describes the hierarchy of the energy structure
within the national economy.
The electricity market structure is best described as interactions among several key players.
Production and import of electricity comprises the
first player, while transmission and distribution
comprises the second. These two constitute the
supply side. The market interactions and trading
is done within a third group. Finally consumption and export is the final player in the overall
market structure (Schavemaker, 2008). In certain
special cases power may flow from production
directly into the consumption group without passing through transmission or distribution. Similarly,
distributed local generation may interact directly
with the production and import in a reverse manner again without passing through transmission
or distribution. All these make the power system
one of the most complicated systems designed,
constructed and operated. It evolves continuously
as it is driven by social, economic, political, and
regulatory issues. Figure 4 shows the relationships and interactions among the components of
the power system (Schavemaker, 2008, p.210).
Figure 3. Energy and electricity within the national economy
THE PLANNING PROCESS

Planning is one of the most important functions
of the management of any business. Without
planning the future prospects of the company/
organization will be unknown and therefore the
possibility of success will be doubtful. Prudent
planning practices will always lead to taking appropriate decisions. Planning covers the period
from the inception of an idea, project, or activity,
up to the business-as-usual of an ongoing business.
Practically the master plan is updated every
ten years, and it is amended every year based on
the annual and progress reports. The planning is
schematically illustrated in Figure 5.
It can be said that planning provides an intelligent insight on the future and the planners can
derive indicators of the chances of success or
failure from such an insight. This important input
is then provided to management to chart the future
action plans and draw the strategic directions

intended for the business.
In 1916 Henry Fayol, a French businessman,
suggested that the managers job had five basic
functions: planning, organizing, coordinating,
commanding, and control. Later, management
author Luther Gulick expanded these major functions to seven as described below (Huse, 1979,
p. 25). The acronym formed by these functions
is POSDCORB and it is well known in management science.
The person who first coined the acronym is
Luther Gulick. In his own words, the elements
of the term POSDCORB are as follows (Huse,
1979, pp. 25-26):
a. Planning, that is working out in broad outline the things that need to be done and the
methods for doing them to accomplish the
purpose set for the enterprise;
Figure 4. Electricity sub-sector relationships
b. Organizing, that is the establishment of the

formal structure of authority through which
work subdivisions are arranged, defined, and
coordinated for the defined objective;
c. Staffing, that is the whole personnel function of bringing in and training the staff and
maintaining favorable conditions of work;
d. Directing, that is the continuous task of
making decisions and of embodying them in
specific and general orders and instructions
and serving as the leader of the enterprise;
e. Coordinating, that is the all-important duty
of interrelating the various parts of the work;
f. Reporting, that is keeping those to whom
the executive is responsible informed as to
what is going on, which thus includes keeping himself and his subordinates informed
through records, research, and inspection;
g. Budgeting, with all that goes with budgeting in the form of planning, accounting and
control.
Figure 6 is a schematic representation of the

seven management functions. It should be noted
that the feedback loops from some later functions
to some earlier ones are not shown in the figure.
The definition of the planning function is
developing in broad outline the things that need
to be done and ways of doing them that will accomplish the objectives of the organization (Huse,
1979, p. 25). In other words planning determines
the broad direction of the organization.
Henry Fayol listed fourteen principles of
management as follows (Fayol, 2008):
1.
2.
3.
4.
5.
6.
Division of Work
Authority and Responsibility
Discipline
Unity of Command
Unity of Direction
Subordination of Individual Interest to
General Interest
7. Remuneration of Personnel
8. Centralization
Figure 5. The planning process
9. Scalar Chain (line of authority with peer

level communication)
10. Order
11. Equity
12. Stability of Tenure of Personnel
13. Initiative
14. Esprit de Corps
Planning is both science and art. It is science
because it deals with facts and figures through
compiling, processing, and interpreting and taking actions. This part of planning needs tools
and instruments to facilitate the sub-functions
mentioned above. It also needs guidelines and
clear instructions on what to do, how and when.
Therefore, this part is structured and can be, more
or less, performed by any planner regardless of

expertise.
On the other hand the artistic part is where
intuition, vision and experience play a major
role. The difference between an experienced and
un-experienced planner emerge in the ability of
foreseeing the future, reading the trends, interacting with the real world, or formulating scenarios.
This mixture of science and art is what makes
planning a unique function.
Another attribute of the planning function is
that it is multidisciplinary. It encompasses several
disciplines such as technical disciplines, mathematics, economics, financial analysis, decision
making, social behavior, environmental studies,
and management. Therefore, successful planning
teams must cover all such disciplines.
It is often said that plans are not as important
as the planning process. The process is both educational and productive. The education aspect of
planning is continuous and cumulative. The more
experienced the planners are the more precise
plans they can produce. At the same time while
the planners are training they will produce some
plausible plans that can be used to make certain
decisions.
Planning can be divided as corporate and technical. Corporate planning is concerned with the
strategic aspects of the business; namely core and
non-core-business of the company /organization,
the long term strategic direction of the company/
organization, and the proper structure and manpower requirements needed to meet the objectives
of the company/organization. On the other hand
technical planning is concerned with the technical
details of the business such as products and services, quality issues, performance indicators, etc.
The difference between the corporate and
technical planning is the tools and methodologies used by each type. While corporate planning
involves more of management tools, technical
planning involves mathematical and scientific
brain-ware. They also differ in the extent and
scope of coverage. Corporate planning covers
Figure 6. Management functions
the whole company/organization and is directed

towards a wider range of issues and concerns.
Technical planning is narrow in scope and covers
specific issues that work as decision tools for the
corporate planning.
Both sub-functions are important and the
planning function is not complete without any of
them. No one can say that one is more important
than the other. While technical planning serves
as input to corporate planning, corporate planning provides feedback and guidance to technical
planning. This is the essence of complementarity
of the planning sub-functions.
To highlight the differences between corporate
and technical planning let us consider the following example. If someone is preparing to take
a car trip to go somewhere, he/she will, within
the corporate planning context, review the goal
of the trip, hierarchy and organization of passengers, resources available, time planned for the
trip, tentative trip plan and route, requirements
during the trip, passengers satisfaction criteria,
and estimated time of arrival. On the other hand
within the technical planning he/she will have to
study the detailed situation of the car based on past
performance indicators, assess the capabilities of
the car and the driver, make sure that all tests have
been made and the car is reliable and ready for
the trip. Moreover, technical planning involves

detailed road maps and alternative routes, exact
duration for each route, cost/benefit analysis of
route selection, contingency plans and emergency
measures, detailed information about destination,
and some key performance indicators to gauge
progress of the trip. Moreover, the time frame of
the corporate plan is definitely long term while
for the technical plan it could be long, medium
or short term.
POWER SYSTEM PLANNING

Power system planning is needed to develop and
build modern electric power systems. In general,
planning time horizons lie in one of the following
ranges: a) short term (up to 1 year), b) medium
term (up to 2-3 years), and c) long term (between
20-30 years). The power system planning process
starts by forecasting the anticipated future loads.
The concern is about load (demand) forecasting
and energy forecasting. Load (demand) forecasting
defines the capacity needed for the system and the
expansions required in the generation, transmission, and distribution systems. Moreover, load
forecasting is needed for budgeting purposes and
energy forecast is needed to determine future type
of generating units and fuel requirements. This is

usually performed at different levels including
the customer (KWh), the city (MWh), and the
country (GWh).
Generation planning leads to determining the
capacity of units to be installed that will meet the
anticipated load demand. It also defines the fuel
to be used in addition to the size of units to be
installed over the time span. The planning should
be conducted to satisfy well-defined criteria that
reflect the strategies adopted within the power
industry, and contributes in enhancing the security,
quality, and reliability of supply at minimum cost.
Transmission and Distribution (T&D) system
planning objective, whether a short-term plan,
targets developing a deep understanding of the
existing system and prepare a roadmap for nearterm and future investments required to provide
services that are adequate, reliable, and economical
to new and existing customers.
It should be obvious that it is very important
to make as accurate forecasts as possible in terms
of peak loads and energy demands, as this will
affect the selection of generation, transmission,
and distribution expansions required, in addition
of defining the type of fuel to be selected which
is reflected on the final electricity prices.
Generally, loads are classified according to
the nature of consumption as1) residential, 2)
commercial, 3) industrial, 4) governmental, 5)
municipal, 6) agricultural, etc.
Residential loads depend on the domestic
activity of the people. Commercial loads depend
on the commercial activities during the opening
hours and type of business. Industrial loads depend
on the time of production and considered to have
the most stable load variation. The total shape of
load variation curves including all customers categories represents the daily load variation curve.
The practice is that system planners estimate the
annual peak load for the next years, based on past
data and future prediction (forecasting), and they
use a typical load duration curve for expansion
studies. The area under the load curve measures

the total energy demanded by the system.
The activities and tools used in power system
planning are essentially the same for all power
systems; however, some functions may take priority over others. Moreover, some functions may be
missing entirely due to lack of information, skills
or absence of responsible entity to perform them.
In essence the various functions, which constitute
the planning process, are interrelated and interdependent. Output from one is input to the next.
Some functions are done serially and others are
done in parallel.
Figure 7 depicts the complete environment
that affects the process of power system planning.
The figure shows clearly that too many factors
and players are involved. Bearing in mind that
different interests for each player exist, the aim of
maximizing benefits for each of stakeholder, and
the fact that some of the factors are uncontrollable
all adds up to the complexity and difficulty of the
underlying process.
The trend that is adopted worldwide involves:
a) dividing utilities into generation, transmission,
distribution, and supply businesses, b) widespread
introduction of independent power producers, c)
splitting existing generation, transmission, and
distribution into two or more competing companies to introduce competition, d) operation in
accordance with codes and licenses and more
accountability to external bodies, e) providing
choice for large customers, f) encourage implementing mergers, acquisitions, and global investment patterns, g) environmental law enforcement
and increase of share of renewables, h) establishment of power pools, where possible, and i) increases in energy efficiency. Most of these issues
are discussed in chapter 2. These important issues
constitute the difference between the power industry and other sectors in the economy.
The role of governments and regulators should
not be missed out in this context, as they will be
responsible for the following:
Figure 7. Power systems planning process environment
Guarantee commitment of current

stakeholders,
Ensure customer interests, affordability and environmental requirements are
applied,
Insist on transparency of business,
Prevent customer and shareholder interests
to get out of balance,
Urge the continuous search for better opportunities and more compatible prices.
Eventually this is reflected on customers and

lead to a win-win situation where: a) the prices will
eventually stabilize, b) customer service response
from power companies is improved, c) security,
quality, and reliability of supply are enhanced, d)
cleaner environment is enjoyed, and e) electricity is still consumed at the same levels and with
similar power quality as before.
This book is concerned with the technical
planning of power systems, although it touches
on some of the corporate planning aspects of the
power system. Corporate planning issues are covered by Chapter 2. Moreover, some minor issues
10
are partly concerned with corporate issues such

as some planning criteria or investment decisions.
All other chapters of this book deal with technical
planning issues.
SUMMARY
This chapter is needed to set the scene for ensuing chapters. It is most needed in cases of readers
who are not familiar with the technical details
of power systems such as legislators, policy and
decision makers, and investors. Furthermore, readers who have technical engineering backgrounds
and lack knowledge in other disciplines needed in
the planning of power systems such as financial,
management, economic, and regulatory aspects
will benefit from reading this chapter.
To begin with, the chapter introduced the interrelationships of the various functions of the power
system planning process, which represent the book
chapters. This is a necessary step to explain the
sequence of presenting the planning functions. It
is also a requirement to provide a full introduction
of the overall power system planning process,

showing the three phases of planning; namely 1)
preparation, 2) assessment and evaluation, and
3) implementation.
The chapter presented the reader with a description of the power system. This introduction
is helpful in understanding the intricacies and
special features of the power system. For instance,
the components of power system are presented
as the generation, transmission, and distribution.
Each component could be shared by more than
one company. Moreover, the interconnection with
other power systems is usually included with the
transmission component.
The planning process was presented in this
chapter in two contexts. The first is the general
context including the role of planning among other
management functions. The specific context, as
related to power system planning, covering all
special attributes and features of the planning
process relevant to power systems was presented
in the chapter.
Power system planning is concerned with
generation planning, transmission planning, in
addition to a wide range of topics. There are
many constraints that contribute to complicating
this planning process. These include technical,
regulatory, legislative, environmental, quality,
pricing, and others. These issues can be addressed
through: a) conducting integrated least-cost planning studies in both generation and transmission,
b) incorporation of constraints and uncertainties
directly or indirectly into power system planning,
c) performing power market pricing studies, d)
preparing feasibility studies in addition to economic and financial analysis, e) recommending
rates, tariff, and prices after thorough analysis.
Such type of planning relies heavily on multidisciplined experienced people in the fields of:
power system planning, power system operation, power contracts, regulatory requirements,
economics, and finance. Such staff may be available within the electricity utilities, consulting
companies, academic faculties at universities, and
governmental institutes. Finally, state-of-the-art

analytical tools are needed as they play a major
role in the planning process, such tools lead to
the arriving at the optimum scenario for future
power system.
REFERENCES
Fayol, H. (2008). 14-principles-of-management.
Retrieved from http://managementinnovations.
wordpress.com/2008/12/04/henri-fayols-14principles-of-management/.
Huse, E. F. (1979). The modern manager. Eagan,
MN: West Publishing Company.
Schavemaker, P., & Sluis, L. (2008). Electrical
power system essentials. New York, NY: John
Wiley & Sons.
Von Meier, A. (2006). Electric power systems:
A conceptual introduction. New York, NY: John
Wiley/IEEE Press. doi:10.1002/0470036427
Weedy, B., & Cory, B. (1998). Electric power
systems (4th ed.). New York, NY: John Wiley &
Sons Ltd.
Willis, H. L. (2004). Power distribution planning
reference book (2nd ed.). New York, NY: Marcel
Dekker, Inc.
ADDITIONAL READING
Crow, M., Gross, G., & Sauer, P. (2003). Power
system basics for business professionals in our
industry. IEEE Power & Energy, 1(1), 1620.
doi:10.1109/MPAE.2003.1180356
Grainger, J., & Stevenson, W. Jr. (1994). Power
system analysis. New York, NY: McGraw-Hill.
Hamburg, A., & Valdma, M. (2011). Energy supply problems and prospects. Oil Shale, 28(1S),
89100. doi:10.3176/oil.2011.1S.02
11
James, M. (2010). Economic market design and

planning for electric power systems. New York,
NY: Wiley & Sons, Incorporated.
Saccomanno, F. (2003). Electric power systems:

Analysis and control. New York, NY: WileyInterscience. doi:10.1002/0471722901
Momoh, J. A. (2001). Electric power system applications of optimization. New York, NY: Marcel
Dekker, Inc.
Schlabbach, J., & Rofalski, K. H. (2008). Power

system engineering: Planning, design, and operation of power systems and equipment. New York,
NY: Wiley-VCH.
Rebennack, S., Pardalos, P., Pereira, M., & Iliadis,

N. (Eds.). (2010). Handbook of power systems I.
Berlin, Germany: Springer-Verlag.
12
13
Chapter 2
Factors Affecting the Future

of Power Supply Industry
ABSTRACT
In the past two or three decades, several developments took place in the power supply industry. These
developments formed influencing factors that have a bearing on the power supply industry structure and
future evolution. It is very helpful before embarking on the planning of the power system to attempt to
identify such factors and understand how they might affect the future plans, design, composition, and
operational aspects of the power system.
In many countries the power supply industry has been transformed by means of reforms, deregulation of
markets, and public-private partnerships into new setups and hierarchies. The understanding of these
trends is essential to follow up the future structure and organization of the power systems.
Environmental considerations and consequences of power system operation have a great deal of influence on future plans. Other internal and external factors include market entry of new power system
technologies, efficiency improvements of system components, and introduction of new or renewable
energy sources.
The understanding of all factors that might influence the planning process directly and indirectly is a
prerequisite to guaranteeing a realistic outcome. This understanding provides the guiding principles
and outer boundaries of the concepts and thinking process involved in power system planning.
INTRODUCTION
This section introduces the new emerging trends
and critical factors which have shaped and continue
to influence decisions of power system planners
and operators. These new trends, or critical factors, are characterized by being greatly influenced
by market and political forces. The evolution of
new ownership models that separate government

from private sector is one such trend. Later on
the Public-Private Partnership (PPP) has taken
its due place.
The discussion about the new regulatory and
market constraints will hopefully shed some
light on all these issues and how they affect the
processes of decision making and conducting
DOI: 10.4018/978-1-4666-0173-4.ch002
Factors Affecting the Future of Power Supply Industry
business in the electricity sector. It will introduce

new terminologies, discuss new procedures and
tools, and present the philosophy underlying the
changes and trends that lie ahead.
The new trends have evolved from the deregulation strategies adopted by almost all power utilities. The model of a comprehensive monopolistic
utility is almost a fact of the past; although in few
countries it is still in place. Presently there is the
vertical model which distributes the country into
geographical regions and gives a concession to
one utility to serve one particular region or area.
Then there is the functional model which separates
generation from transmission from distribution
and gives each one to one or more companies. In
between the two models there are several variants. These variants depend on the ownership of
the power utilities. For example generation and
distribution are privatized while transmission is
kept as a government entity. In others generation
is kept with government while transmission and
distribution are privatized (Metaxiotis, 2010, p. 1).
In almost all cases, government is moving away
from controlling the power system and more into
regulatory roles and duties. This is driven primarily by the fact that governments want to divorce
themselves from the heavy burden of financing
the power system. Luckily, the private sector is
interested in assuming this financial responsibility provided it gets fair return on its investment.
The governments are somehow satisfied with
the regulatory roles, which include tariff setting,
licensing, power quality issues, and more. The
relationship between the regulatory body, which
does not by default represent government per se,
and the power companies could be a complex one
as the criteria used involve customer satisfaction,
companies profitability in addition to quality of
the power delivered.
In certain aspects these ownership models have
created competition and a drive for better quality.
Therefore, new technologies and procedures have
been tried and put into use. Moreover, customer
14
satisfaction has become an important factor in

the electricity business to the extent that in certain cases customers dictate their preferences
as to green power over other environmentally
polluting sources. In other cases performance
of power companies in relation to power quality
standards constitutes a bargaining power against
such companies.
The electricity supply industry has faced and
is still facing challenges and threats from emerging new trends. As a matter of fact the structure
and shape of the electricity supply industry have
been greatly affected and changed as a result of
these trends. These trends cover a wide spectrum
of areas and they are inter-disciplinary and interrelated. Therefore, functions and responsibilities
of the various entities must be such as to be able
to cope with this fact. Moreover, engineers currently working in the electricity supply industry
are quite different from the older ones who used
to work in the recent past. Although the basic
education is almost the same, newer curricula
have introduced newer sciences and tools, which
were not present in the past.
All these new trends have created new functions and duties for the power system planners
and operators. On one hand better tools have
been developed to improve the planning aspect
of the power system including peak load and energy forecasting, risk assessment and reliability
enhancement, integrated resource planning, and
future expansion and investment planning. On
the other hand other tools have been developed
for the proper and cost-effective operation of the
power system. These include: contingency analysis, economic dispatch with provision for tie-line
control and power exchange, energy efficiency,
demand side management, reliability and availability monitoring, optimum power flows and loss
reduction, interruption management and power
restoration, and billing and payments follow up
(Metaxiotis, 2010, p. 2).
ELECTRICITY SUPPLY
INDUSTRY REFORM
The Electricity Industry Supply (ESI) reform
dates back to 1970s. At the beginning ESI
witnessed a partial opening of the generation
component to new entrants. The next step was
establishing explicit market mechanisms which
permit economic dispatch of generation in an
attempt to create competition among generators.
The opening of the electricity markets to end
users was made parallel to the development of
the wholesale markets (Ocana, 2001). It is worth
noting that the introduction of Third Party Access
(TPA) was the basis of all recent ESI reforms.
TPA provides an obligation for any operator of
an electricity network to provide access to users
of that network. TPA was also accompanied by
liberalization of some activities such as allowing
for competition in the generation and retailing of
electricity (Ocana, 2001).
This set of new trends deals with the structure
and composition of the electricity supply industry.
In the past one utility was entrusted with generation, transmission, and distribution of electricity to
all consumers. Moreover, this same utility used to
study and decide on the tariffs to be used in billing
all consumers. This utility enjoyed monopoly in
the geographic area granted to it by government.
In essence this utility was a government body
which operated on the basis of a law (Elkarmi,
2010, p. 4).
This has changed in almost all countries of
the world, except for very few developing or
centralized government countries. In still other
countries the older setup still exists because
these countries provide a huge subsidy through
the electricity tariff to consumers and they want
to keep this privilege.
The change in ESI has two different interrelated aspects. These are restructuring and privatization. The first deals with changes in structure,
commercial agreements for purchasing and selling
electricity, separating or unbundling of assets,
and introducing choice and competition. On the

other hand privatization involves changing from
government ownership to private ownership (Hunt
& Shuttleworth, 1996).
Four different models to structure an ESI are
as follows (Hunt & Shuttleworth, 1996):
a. Model 1: No competition at all.
b. Model 2: Single buyer to purchase electricity from several producers, thus having
competition in generation only.
c. Model 3: Allowing distribution companies to
choose their suppliers among several generators, thus having competition in generation
and wholesale supply.
d. Model 4: Allowing end-use consumers to
choose their suppliers, thus introducing full
retail competition.
The reform of the electricity supply industry
was spearheaded by a deregulation trend. The
deregulation trend started very early in certain
countries and late in others. The essence of the
deregulation trend was to reform the electricity
market from one regulated by government to
another that works on market forces. This means
that newer players must come in and replace the
government or utility representing government.
This was referred to as the privatization trend. In
reality both deregulation and privatization trends
are one and the same, since if we are to relieve
government of its duties as electricity supplier,
naturally there must be some body to take up
this responsibility (Chirarattananon & Nirukkanaporn, 2006).
There are several motives for the electricity
supply industry reform or restructuring (Rothwell
& Gomez, 2003, p. 3). One such motive is the fact
that the competitive global economy requires electricity cost reduction; another is that government
cannot respond to economic and technological
changes, let alone bear the financial burden of
power system investments. Finally information
technologies and communications systems make
15
possible the exchange of large volumes of data

needed to manage the electricity markets. These
factors have helped in shaping the evolution of
power sector reform or restructuring.
The philosophy of reform varied from a vertical
model to a horizontal model and an in-between
model. The vertical model is based on separating
the country into geographical areas and giving the
complete responsibility of electricity supply to
one company (covering the generation, transmission, and distribution components). This means
that each area will be served by one electricity
company which will operate on commercial basis. The governments role, in this case, will be
in licensing such companies and in setting the
electricity tariff.
The horizontal model, on the other hand, is
based on separating the generation, transmission, and distribution components in the whole
country or in certain geographical areas. Each
component is then given to one company or more
depending on the market size and economics of
electricity supply. Naturally this should be done
through open bidding and selecting the best offer.
This model guarantees some sort of competition
among the generation companies whereas the
transmission and distribution companies have
little space for competition as they are restricted
to certain geographical areas. In most countries the
transmission is kept with one company because
it involves huge investments and does not have
very many alternatives.
Therefore, the horizontal model entails having
several generation and distribution companies
while having only one transmission company.
Usually the transmission company is called Transmission System Operator (TSO) or Independent
System Operator (ISO). In addition to purchasing
electricity from generation companies, the TSO
or ISO also is responsible for selling electricity
to distribution companies, and monitoring and
controlling the transmission system as well as
administering the power purchase over the interconnection lines with other countries. In this
16
model as in the previously discussed vertical model

the role of government is reserved for licensing
electricity companies, monitoring performance,
and setting the tariff.
It is very important, in the midst of ESI reform,
to ensure that the intended structure does not provide any supplier with excessive market power
to essentially become a regulated monopoly. Fair
competition is the key to preventing this from happening. Competition among suppliers and buyers
must be fair, consistent, and non-discriminatory
(Meritet, 2003, p. 10). The distribution of assets
among independent electric companies will enhance competition and protect consumers from any
abuses of monopolies. In order to do so utilities
have been requested to separate their generation,
transmission, and distribution assets into unaffiliated and distinct entities. The end result is to
completely separate upstream activities (generation) from downstream activities (distribution)
keeping transmission activities still regulated
(Meritet, 2003, p. 3).
DEREGULATION OF MARKETS
Many countries have undergone the transformation in the electricity supply industry during the
1990s and others are still on their way to do so.
In the European Union, for example, the European
Parliament issued the Internal Electricity Market
Directive 96/92/EC in 1996. This directive sets the
goals for opening up the electricity markets in the
member states (Rothwell & Gomez, 2003, p. 1).
The following discussion compares the electricity market structure in California, Norway,
Spain, and Argentina in order to prove that
deregulation works in any country in the world
(Rothwell & Gomez, 2003, pp. 6-8).
Table 1 lists the electricity restructuring reforms in the four case studies mentioned above.
There are several models of electricity competition that have been adopted and proven effective. The most important feature of the success
Table 1. Electricity restructuring reforms in California, Norway, Spain, and Argentina (Rothwell &
Gomez, 2003, pp. 6-8)
Issue
California
Norway
Spain
Argentina
Conditions
driving
restructuring
States electricity prices

higher than national average
Inefficient centralized
regulation
Promote efficiency in
investments and reduction of regional price
differences
Avoid cross-subsidy
among consumers
Create cost reduction
incentives
Lower electricity prices

Eliminate subsidies to
the coal industry
Power shortages due to

lack of investments and
generation unavailability
Highly inefficient
public owned sector
Need for new investment
Structural
Changes
Functional separation of
generation, transmission and
distribution
Recovery of standard costs
Generation divestiture
Accounting separation
of regulated and competitive functions
Transmission grid as a
new company
No privatization of
publicly owned sector
Legal separation of
regulated and competitive
functions
Privatization of standard
costs
Vertical (G, T, D) and

horizontal disintegration
Privatization of
federal and provincial
companies
Wholesale market
Centralized and physical

bilateral trades
Several transmission owners
Centralized and physical bilateral trades

Trading in the Nordic
Pool
Centralized and physical

bilateral trades
Mandatory pool with

financial and bilateral
contracts
Retail
Competition and
customer choice
All customers
Metering and billing competition
All customers
Gradual implementation
in a 5-year period
Large users now and

small customers in the
future.
of any model is the degree of market opening. In

other, market opening means the extent at which
competition is being encouraged. Recent ESI
reforms often share four elements as follows
(Ocana, 2001):

A large part of retail market is open to

competition in addition to generation.
Regulated TPA to transmission and distribution networks.
Unbundling of transmission networks from
generation.
Electricity is tradable both through organized power exchanges and bilateral basis.
PUBLIC PRIVATE
PARTNERSHIP MODELS
One of the most recent market structures is what
is called Public-Private Partnership (PPP), see
Chapter 12. It is a contractual agreement between
the public entity responsible for electricity and

other private sector investors, whereby electricity supply services are provided by the private
sector party. The objective of PPA is to maximize
the efficiency of the supply operation or to get
more value for the money. In general this can be
achieved through the following factors (Bacon &
Besant-Jones, 2002, p. 1):

Reduced life-cycle costs

More efficient allocation and dealing with
risks
Reduced project completion times
Improved service quality
Additional revenue.
According to the World Bank (2004, pp. 1316), Table 2 lists the degree of attractiveness of
each electricity supply industry sub-sector for the
private and public groups.
It is clear from the table that the generation,
renewable energy, and environment are the three
17
Table 2. Private, public interest in electricity markets

Sub-sector
Private sector interest
Government approach
Generation
High/investment climate must be amenable to

private sector participation in energy
Highly receptive/public support to cover

policy, and regulatory risks
Transmission and system operation
Moderate/with right structure there might be

significant interest in management contracts
Moderately receptive/transmission business may be complicated by single buyer

responsibilities
Distribution and access
Low/key challenge is how to package government reform initiatives
Moderately receptive/reluctant to push pricing reform too fast
Regulatory and market framework
Fair/predictable and transparent regulatory

framework is critical
Some reluctance regarding regulatory

independence
Rural electrification and access
Moderate to low
Moderately to highly receptive/limited

potential of pure public approaches to the
access problem
Renewable energy
Moderate to high/subsidy will almost always

be necessary
Highly receptive
Environment
Moderate to high/subsidy may be applicable in

some scenarios
Moderately receptive/coordination between

energy and environment agencies is critical
Regional integration
Low to moderate/cross-border guarantee likely

to be essential
Moderately receptive/ absence of functioning internal and/or regional markets makes

it difficult
most attractive sub-sectors in the electricity supply industry for the private sector. This is also
matched by similar enthusiasm from governments,
to some extent, for the same sub-sectors. The
other sub-sectors are either presently not ready
or require more regulatory modifications and
liberalization to become more attractive for private
sector participation.
ENVIRONMENTAL
CONSIDERATIONS
It is well known that burning fossil fuels is one
major source of greenhouse gas emissions. The
major greenhouse gas associated with burning
fossil fuels is carbon dioxide. Therefore, power
plants burning fossil fuels are responsible for the
production of CO2. As a matter of fact the increased
burning of fossil fuels to meet the growing global
demand could lead to a serious environmental
problem. Carbon emissions grew much faster in
developing countries than developed countries
18
over the past several decades. The fact of the matter is that all countries of the world are partners in
keeping the global environment clean and the pace
of pollution must be curbed if not reversed. The
solution to this problem takes several forms and
shapes. The first came from the Kyoto Protocol
which is an agreement made under the United Nations Framework Convention on Climate Change
(UNFCCC). In essence this protocol obligates
countries that ratified it to reduce their emissions
of carbon dioxide and five other greenhouse gases
or engage in emissions trading if they cannot
reduce these emissions. The overall objective
of the protocol is to limit greenhouse gases in a
collective fashion, since environmental pollution
is a global concern (United Nations, 1998, p. 2).
As a result, many countries have engaged
themselves with what is known as carbon trading
as a result of carbon credits. That is to say that a
country that does not exceed its quota of carbon
emissions is allowed to trade this emission privilege to another country which has exceeded its
quota and cannot reduce its emissions. The carbon
credit for a certain country can come from one

of the following sources (United Nations, 1998,
p. 7, 15):

Carbon emission reduction programs implemented in the country involving some

existing plants.
New renewable energy plants developed in
the country.
Emissions allowances originally allocated or auctioned through previous trading
mechanisms.
These carbon credits, if approved through

one of the UNFCCCs approved mechanisms,
are then termed Certified Emissions Reductions
(CERs). The Kyoto Protocol provides for three
mechanisms that enable developed countries to
acquire CERs as follows:

Under Joint Implementation (JI) a developed country with relatively high costs of
domestic greenhouse reduction would set
up a project in another developed country.
Under the Clean Development Mechanism
(CDM) a developed country can sponsor a
greenhouse gas reduction project in a developing country where the cost of greenhouse gas reduction project activities is
usually much lower, but the atmospheric
effect is globally equivalent. The developed country would be given credits for
meeting emission reduction targets, while
the developing country would receive the
capital investment and clean technology or
beneficial change in land use.
Under International Emissions Trading
(IET) countries can trade in the international carbon credit market to cover their
shortfall in allowances. Countries with
surplus credits can sell them to countries
with capped emissions under the Kyoto
Protocol. (United Nations, 1998, p. 11).
Other pollution abatement measures include national limitations on the production of

greenhouse gases, introduction of environmentally benign energy production technologies and
curbing the levels of consumption of energy. To
some extent the quest for a clean environment is
strongly linked to renewable energy and energy
efficiency programs and projects (see chapters 8
and 6, respectively).
The environmental awareness has also created
renewed interest in renewable energy. Some of
these renewable energy projects classify as a JI or
a CDM. Therefore, research and development in
renewable energy sources witnessed a surge in the
last twenty years, driven by fossil fuel escalating
prices (over US$100 per barrel for crude oil), and
the concern for a clean environment. As a result
we see today renewable power plants spreading
in many countries. Wind energy is considered
the most promising at the present time, although
other technologies such as photovoltaic solar, solar
thermal, geothermal, fuel cells, Micro Combined
Heat and Power (MCHP), and others are also
progressing very well.
Another issue of paramount importance is
the group of projects in the domain of energy
efficiency. This category of projects focuses on
increasing the efficiency of existing plants or
appliances. The end result is a net reduction of
emissions and reduction of electricity bills. These
projects cover the areas of energy conservation,
demand side management, loss reduction, and
plant rehabilitation. All these activities will one
way or another lead to increased energy efficiency.
According to a World Bank report (World
Bank, 2007, pp. 37-38) a total of US$1.43 billion
supported 63 renewable and energy efficiency
projects in 32 countries in 2007 alone. Moreover,
the average share of renewable and energy efficiency projects of the total energy projects has
doubled from 13% in the period 1990-1994 to
25% in the period 2005-2007. This figure reached
40% in 2007.
19
Power systems are always charged with being

responsible for environmental pollution. This is
true as the emissions from power plants; especially
the ones that burn low-quality fuels contribute to
the global pollution. Therefore, the selection of
generation technology including type of fuel and
location are two important factors in deciding on
new generation facilities. However, pollution also
comes from existing plants. The solution to this
problem lies with taking pollution into account
in dispatching the operation of existing power
plants, on the one hand to reduce pollution, and
in mitigating pollution on the other hand.
Regulations and performance incentives or
penalties are powerful tools to reduce, and possibly eliminate pollution. Although mitigation
solutions are rather expensive, it is factored-in
in the economic operation of the overall generation system. If the production from any polluting
plant is very much needed for reasons of security
of supply or other emergency conditions then
it will be balanced against the added penalties.
However, in the long run polluting plants should
be retired in order to avoid such environmental
consequences.
In power systems other pollution sources
are usually neglected due to the volume of pollution caused by power plants. However, other
pollution sources must be monitored in order to
treat any pollution emanating from them. These
secondary pollution sources include transmission and distribution lines, power transformers,
and wind energy turbine blades. Power lines are
responsible for electromagnetic pollution, which
could cause interference with communication
lines and channels. Corona discharge is another
form of pollution. In certain instances it could
escalate into flashover if not dealt with promptly.
Power transformers are responsible for oil spilling
problems as well as, sometimes producing a loud
persistent noise. Noise is also the problem with
wind turbines as they pollute the surroundings
with their whirling noise.
20
OTHER CONSIDERATIONS
AFFECTING THE POWER
INDUSTRY REFORM
In spite of the tremendous development in the
reform of the power sector or electricity supply
industry and the evolvement of private sector
participation, some difficulties still shadow the
reform process. This stems mainly from the particularities of the power sector. The following is
some account of these particularities, which could
pose some obstacles and hindrance to the reform
process (Elkarmi, 2010, pp. 18-21).
a. Transmission systems in particular and, to
some extent, distribution systems are betteroff if they are monopolies because of the
high investment involved and the difficulty
in operating different systems by more than
one company. Therefore, there is no chance
for horizontal unbundling in these two functions. However, geographical basis may be
used to create competition by allocating
each geographical area to one company. This
applies more readily to distribution rather
than transmission again due to the high per
unit investment needed for transmission of
power. This is somewhat conflicting with
the privatization trend.
b. Renewable energy (solar and wind in particular) has the following unique characteristics:
Small power output compared to conventional technologies, thus losing

the economy of scale cost advantage,
Usually connected to the distribution

network ; as a result of small power
output,
Since renewable energy sources are

connected to the distribution networks or to consumer premises directly, they compete with the distribution companies in their areas,
In certain cases there is a need to arrange for import/export metering
between renewable sources and distribution companies to financially

manage the power exchange,
Renewable energy sources, especially wind, are site-specific in the sense

that each site will have to be assessed
as to its energy potential. Usually
countries produce wind and solar
maps showing energy potentials,
Renewable energy sources are superior to conventional sources in the

environmental aspect, therefore, special cost advantage for environmental
protection should be added to renewable energy sources, but this is not
always done,
Renewable energy sources are, in

most cases intermittent and depend
on uncontrollable factors such as
weather, therefore, they need to be
augmented with energy storage or be
part of a hybrid system or a power exchange scheme with the distribution
network,
Some renewable energy sources are

still in the R&D stage and the cost of
production is still very uncompetitive
to conventional sources,
Many renewable resources are abundant in developing countries, while

the rich developed countries are not
endowed with these sources.
c. The trend in the past was to build large
centralized power plants connected to bulk
supply points through super transmission
grids. In certain countries this trend is being
reversed in favor of decentralized small local
plants as partial solution. This is driven by
the availability of renewable energy sources
at the locations designated for decentralized
plants or the remoteness of certain loads
from the network. Decentralized generation,
nevertheless, suffers from some operational
difficulties such as voltage control, reli-
ability, and stability problems. On the other

hand large centralized and super transmission grids model also has operational difficulties of its own, and some argue that
small is beautiful. It is true that operating
a decentralized system is easier than operating a centralized system, but reliability and
continuity of supply of the decentralized
system negates its advantages. Moreover,
decentralized systems might not be capable
of supplying a large industrial or commercial
complex. The optimum set up would be to
have both systems in place. The centralized
system to supply large industrial or commercial loads, and decentralized systems
for remote local loads.
d. With the advancement of the internet and
communication channels, and very high personal computer penetration into households,
businesses and offices the concept of smart
grids is becoming more and more attractive
to power companies and consumers. This is
motivated by the trends to go for innovative
electricity networks, consumers looking for
secure and cheap supply, and liberalized
markets (European Commission, 2006).
e. If in the quest for more reliability and continuity of supply more than one decentralized
system is interconnected this would complicate the operation of the overall system and
would bring us back to square zero.
f. Another operational difficulty of decentralized generation is that it does not have a
rotating mass as opposed to centralized generation; therefore, there is no stored energy
in the form of spinning reserve for frequency
control. Moreover, the little rotating mass of
decentralized generation units, especially
wind turbines is separated from the grid by
power-electronic interfaces which decouple
the speed of the rotor from the frequency
of the grid. This problem may be alleviated
through the use of energy storage units as
part of the decentralized systems. These
21
units can help in cases of supply-demand

mismatch and the associated frequency
deviations (Schavemaker & Sluis, 2008, p.
225).
g. The electricity supply industry reform has
succeeded in encouraging private sector participation and there are many success stories
to stand witness to this trend. However, issues such as energy efficiency with its broad
coverage of demand side management, and
energy conservation programs have been
negatively affected. These programs are
cost-effective at the national level. In other
words if the societal cost is taken into consideration almost all programs are feasible,
however, at the company level there is great
doubt that they are. These programs used to
enjoy a great deal of government support in
the form of subsidy which could explain a
large part of their feasibility. With subsidy
removed, these programs do not stand a
chance of being adopted by the consumers.
The only remaining hope for such programs
is the voluntary willingness of consumers
out of protecting the environment or other
patriotic feelings.
h. Pricing of energy forms including electricity
should be done on a comprehensive basis.
In other words it is not advisable to change
the tariff for petroleum products in isolation
from electricity tariff. This is because of the
switching action between energy forms.
Consumers will shift from one energy form
to another, provided this is technically possible, once the price structure of these forms
suffers from deformations. This is especially
true for heating purposes, for example. Once
diesel oil prices have increased much more
than electricity prices, then consumers
will shift to electricity heating, even if this
required capital investment. This is exactly
what happened in Jordan three years ago
when the prices of diesel oil was increased
to very high levels, to remove the chronic
22
i.
j.
subsidy, with much less simultaneous increase of electricity tariff. The result was
that most domestic, commercial and even
industrial consumers shifted to electric heating, therefore, the electrical peak load also
shifted, since then, to winter season instead
of the historic summer time. If the diesel
price was studied along with the electricity
tariff and a balanced increase was adopted
this would not have happened.
The power sector reform process is not
free from political and socio-economical
forces. In certain respects governments are
enthusiastic about the reform process and
especially the privatization trend, which
will relief governments from shouldering
the investment burden. On the other hand,
the socio-economic factors have a strong
bearing on governments, especially in democratic countries. In general there should be
an intricate balance among all key factors.
In other words the reform process should be
comprehensive in the sense that it should
include all aspects. Moreover, the pace of
the process should balance the actions and
have due consideration to possible future
national, regional and international events
and circumstances.
Some might wrongly think that with privatization electricity companies will seek
to maximize their profits and gains with
little due attention to customer satisfaction
and power quality. However, this thinking
neglects the role of the regulator. One of
the most important roles of the regulator
is to safeguard the interests of consumers
and to make sure that the reliability level of
the electricity supply is within the acceptable ranges. In order to be effective certain
regulators impose penalties and fines on the
companies that do not meet the customer
satisfaction criteria or deliver power that is
inferior in terms of several reliability indexes.
k. There are great potentials for energy savings in any community, municipality or city.
These energy saving potentials combine
electricity and other energy forms as well
as water, waste, and all other utilities in an
effort to maximize the benefit.
CASE STUDY
The following discussion describes the electricity
supply industry structure in Jordan as a model for
the new trends in the regulatory and legal status
trends.
The case of Jordan as depicted is a typical
electricity supply structure recommended for all
small electricity market countries. Jordan which is
a semi-industrialized country in the classification
of the World Bank has a population of around six
million people and the total area of the country is
about 90,000 km2. The Gross Domestic Product
(GDP) of year 2007 was about US$ 12,000 million. The generation and transmission systems of
Jordan are shown on the map presented in Figure

1 (Maabrah, 2008, p. 15.)
The key players in the electricity supply industry in Jordan and their respective roles and
duties are as follows:
a. Ministry of Energy and Mineral Resources
(MEMR): overseeing the overall energy
scene, formulating the strategy including
electricity, and negotiating with other countries for the purpose of reaching beneficial
exchange agreements.
b. Electricity Regulatory Commission
(ERC): Licensing generation; transmission;
and distribution companies, setting electricity tariffs, and monitoring the performance
of the licensed companies.
c. National Electric Power Company
(NEPCO): Purchase of power from generation companies, controlling power exchange
through interconnections with other countries, purchase of natural gas on behalf of
government and supplying it to generation
Figure 1. The generation and transmission systems of Jordan
23
d.
e.
f.
g.
h.
companies, economic dispatch of generation

and transmission systems, sale of electricity
to distribution companies. This is a 100%
government owned company operating on
commercial basis.
Three distribution companies: each
company is given a concession area to sell
electricity to consumers within its area.
Central Electricity Generating Company
(CEGCO): private generating company
operating several plants including some
renewable energy plants.
Samra Electric Power Generation
Company (SEPGCO): 100% government
owned Generation company operating one
plant.
East Amman Power Plant (Al-Manakher):
an Independent Power Producer (IPP).
Al-Qatrana Power Plant: an Independent
Power Producer (IPP).
There are three privately owned distribution

companies in Jordan. On the other hand, there are
three privately owned generation companies, and
one government owned generation company. This
Figure 2. The electricity trading model in Jordan
24
latter will be subject to privatization soon. Finally

the transmission company is fully owned by government. This is called the single buyer scheme
whereas this transmission company (NEPCO) is
responsible for the purchase of power from producers and sells it to the distribution companies;
each with a geographical area to serve. NEPCO
is also responsible for the purchase of natural gas
needed for the generation of power on behalf of
the government. It is also responsible for power
exchange with Egypt, Syria, and The Palestinian
Authority.
The electricity trading model adopted in Jordan
is as depicted in Figure 2 (Maabrah, 2008, p. 11).
SUMMARY
This chapter presented the influencing factors,
which will have a role in shaping the present and
future of the power supply industry. Regardless
of the stage of development of the power system
in any country the thorough analysis and understanding of such factors is very important. In other
words, how can a power system planner be sure
that the planning process is correct and complete if

the structure or organization of the power system
will change within the time period of the plan?
Any power system planner or interpreter of a
plan needs to be familiar with the issues discussed
in this chapter. Both the history and future status
of the issues are important. The historical development sheds light on how things progressed in the
past. This knowledge is useful in countries that are
still lagging in the deregulation and privatization
processes. On the other hand, the future prospects
of the various issues discussed in the chapter are
extremely important as they shape the plans and
form a sound basis of the planning process.
The chapter reviewed the trends that are likely
to be encountered in the planning process of the
power system. These trends and issues constitute
the outer boundaries and limitations enforced on
the plans. They represent the realities of the present and expectations of the future, which must be
taken into consideration in planning the future of
the power system. The planning process is not,
as before, free from other considerations or influencing factors. In essence there are other partners
and stakeholders involved in the planning process
of power systems. The power company can not
plan its future in isolation from the trends that
will influence the future of energy, economy, and
environment at the regional and national levels.
Environment is a global consideration; therefore,
it must be assessed and treated in this context.
Regulatory bodies and policy makers will want
to make sure that the planning process incorporated
the influencing factors. Without this due consideration the planning is incomplete. On the other
hand, the system planners will not be intelligent
enough if not equipped with such knowledge. It
should be understood that the plans for system
expansion, as an example, must be ratified by the
regulatory and government bodies. In essence,
power companies are bound to address the influencing factors in their planning processes. This
should be reflected in the various scenarios and
alternatives studied for future plans.
There are specific issues related to power

systems, which are not present in any other commodity/service-oriented system. These issues
relate to the structure of the power system being
split into generation, transmission, and distribution components. The ownership and organization
of each component depend on the nature of the
functions and responsibilities of each component. The huge investments needed to build and
maintain adequate capacities to meet increasing
demand involve certain risks and thus require
guarantees for fair returns. The risk taker is the
power company and the guarantor is the regulator.
This relationship is new and multifaceted and is
core to the planning process. Without the proper
tools and instruments to deal with the regulator
the system planner will be handicapped.
REFERENCES
Bacon, R., & Besant-Jones, J. (2002). Global
electric power reform, privatization and liberalization of the electric power industry in developing
countries. Energy and mining sector board discussion paper No.2. Washington, DC: World Bank.
Chirarattananon, S., & Nirukkanaporn, S. (2006).
Deregulation of ESI and privatization of state electric utilities in Thailand. Energy Policy, 34(16),
25212531. doi:10.1016/j.enpol.2004.08.033
European Commission. (2006). European technology platform, smartgrids vision and strategy
for Europes electricity networks of the future.
EUR 22040. Geneva, Switzerland: European
Commission.
Hunt, S., & Shuttleworth, G. (1996). Competition and choice in electricity. London, UK: John
Wiley & Sons Ltd.
25
Maabrah, G. (2008). Electricity structure in

Jordan and regional market. Paper presented at
the Joint Arab Union of Producers, Transporters
and Distributors of Electricity (AUPTDE) and
MEDELEC Conference. Sharm El-Sheikh, Egypt.
World Bank. (2007). Catalyzing private investment for a low-carbon economy. Washington,
DC: World Bank.
Meritet, S. (2003). The question of market power

in structured electricity markets. Paper presented
at the 25th Annual International Association of
Energy Economics Conference. Prague, Czech
Republic.
ADDITIONAL READING
Metaxiotis, K. (Ed.). (2010). Intelligent information systems and knowledge management for
energy- Applications for decision support, usage,
and environmental protection. In F. Elkarmi (Ed.),
Information Technology in Power System Planning and Operation under De-Regulated Markets:
Case Studies and Lessons Learnt. Hershey, PA:
IGI Global.
Ocana, C. (2001). Electricity market intelligence.
Washington, DC: OECD/IEA Publication.
Rothwell, G., & Gomez, T. (Eds.). (2003). Electricity economics: Regulation and deregulation.
New York, NY: IEEE-Wiley Press.
Schavemaker, P., & Sluis, L. (2008). Electric
power system essentials. New York, NY: John
Wiley & Sons.
United Nations. (1994). Koyoto protocol to the
United Nations framework convention on climate
change. New York, NY: United Nations.
World Bank. (2004). Public and private sector
roles in the supply of electricity services. Paper
No. 37476. Washington, DC: World Bank.
26
Aaker, D., Kumar, V., & Day, G. (1998). Marketing

research (6th ed.). Chichester, UK: John Wiley.
Beck, U., & Malden, M. (2000). What is globalization? Cambridge, UK: Cambridge University
Press.
Bendell, T., Boulter, L., & Goodstadt, P. (1998).
Benchmarking for competitive advantage (2nd
ed.). London, UK: Pitman.
Bentley, T., & Clayton, S. (1998). Profiting from
diversity. Aldershot, UK: Gower.
Brighthub. (2011). Webpage. Retrieved from
http://www.brighthub.com/engineering/mechanical/articles/9017.aspx.
Emerging-Markets. (2011). Webpage. Retrieved
from http://www.emerging-markets.com/PDF/
FutureofPowerGeneration.swf.
Research and Markets. (2011). Webpage. Retrieved from http://www.researchandmarkets.
com/reports/297475.
ScienceDirect. (2011). Webpage. Retrieved from
http://www.sciencedirect.com/science/article/pii/
S0040162506001806.
27
Chapter 3
Planning Criteria
ABSTRACT
Planning criteria, in general, constitute a set of decision parameters or design variables with which the
planner controls the planning scenarios. These criteria are similar to guiding principles and limitations
placed on the scenarios for the purpose of narrowing down the selection process. Usually these criteria
are defined and set by consensus after careful studies and analyses. Previous practices and experiences
shape and form such planning criteria. However, they need to be revised every now and then in order to
reflect changes in the power system, demand structures, and degree of acceptable risk.
Moreover, planning criteria represent boundary conditions that serve to eliminate unfeasible solutions
and keep only the feasible ones. Therefore, they are needed in expansion studies of power systems to
guarantee that the scenarios selected are all acceptable by the planners. Close coordination and continuous dialogue among power companies (generation, transmission, and distribution) are strongly
recommended for proper planning in order to meet consumers demands and satisfaction.
Usually planning criteria are set by management, although some input from planners is needed.
Knowledge of such criteriaand how they are calculatedprovides planners with good practices and
enhances the planning process.
INTRODUCTION
Planning is one of the most critical functions in the
management process. Prudent planning practices
will always lead to making appropriate decisions.
Planning covers the period from the inception of
an idea, project, or activity, up to the business-asusual of an ongoing business. Strategic planning
is the first step, where strategic directions of a
business are set out and business plans are defined.
In industrial based planning, the process covers
the operational aspects of the business as well as
the maintenance and updating of its operations

and facilities. (Elkarmi, Abu-Shikhah, & AbuZarour, 2009).
In general, power system expansion planning (Chapter 9) aims to develop economically
optimal, secure, and reliable plans that also address the environmental concerns for meeting the
growing demand of electricity in the medium to
long-term future.
Long-term expansion planning of power
system results in an investment plan for future
plant additions which will enable the system to
DOI: 10.4018/978-1-4666-0173-4.ch003
Planning Criteria
meet the growing demand. The input to such a

process is the long term demand forecast (Chapter
5). The process is, however, governed by certain
constraints and planning criteria. The constraints
cover broad categories including: the condition
of existing plants, fuel prices, regulatory issues,
environmental concerns, commercial terms of
power exchange with other systems, macro
economic conditions, and financial status of the
power company.
The planning criteria can be viewed as conditions and limitations selected by the management
of the power company. They are usually designed
to guide the evaluation process of the expansion
scenarios for the most optimal ones. In other
words planning criteria are important elements in
the decision making process. They are reflections
of the positive aspects, which the planners would
like to have in any future plan. However, they are
boundary factors to guarantee the plausibility of
the scenarios being evaluated.
Historically, planning of power system expansion was a centralized process, and was the
responsibility of one department in the power utility. The resulting expansion plan used to cover the
generation, transmission, and distribution components of the power system. This was possible and
acceptable at the time because the power utility
was a vertical entity covering all power system
components. Moreover, this planning model left
the responsibility of setting the electricity tariff
with the same utility that planned the power system
expansion. Therefore, expansion decisions were,
somehow, justified or supported by appropriate
tariff decisions (Meier, 2006).
Currently, however, the situation is more complicated as the de-regulated models are adopted,
and network planners are no longer involved in
the generation expansion process. It should be
noticeable that the lack of information leads to
increased uncertainty in the planning process in
the deregulated markets. Planners are challenged
by different degrees of uncertainties. This leads
to treating the total installed capacity, composi-
28
tion, and site issues of the future power plants as

random variables. This in turn results in complicating the planning process and leads to arriving
at suboptimal system investment. Practically, this
means that the power system utility responsibility is split among several companies and each of
them is responsible to plan the expansion of its
component or subcomponent.
Generation expansion must put into consideration that the choice and installation of new
plants is controlled by the network capabilities
for power delivery. On the other hand, any further
and future transmission infrastructure expansion
must be capable of accommodating new plants,
while preserving quality levels of supply quality
and continuity.
Furthermore, strong coordination and continuous dialogue among power companies are prerequisites for proper planning in order to guarantee
that there will be a match among all component
plans. After all, consumers satisfaction and meeting their demand is a collective responsibility
of the generation, transmission, and distribution
companies.
Expansion planning must be applied in coherence at all stages of the electric power system.
Power system planning is multidisciplinary that
is segregated into the expansion planning in the
areas of generation, transmission, and distribution planning.
The abovementioned planning areas are discussed in further details in the following sections.
PLANNING EXPANSION
Generation
All power generation planning is performed in
the context of modifications to the existing system. (Meza, Yildirim, & Masud, 2007; Kannan,
Baskar, & McCalley, 2009).The main factors that
influence the planning process are:
Planning Criteria
a. Load forecasting: Here, the total system

load demand is predicted in different time
categories (short, medium and long term).
Peak load demand is the crucial factor from
the point of view of generation planning,
since it influences the required generation
capacity to meet the demand of the power
system. The reader is referred to chapter 5
for more in depth details.
b. Capacity reserves and reliability: As
generating units run continuously to produce electric power, they require regular
maintenance. This means that they must be
put out of operation, and hence they are not
available, during some periods of the year.
Moreover, such units can be forced out of
service due to unforeseen equipment failures,
referred to as forced outages, which leads
to reduced availability. These types of unit
outages must be included in determining the
required capacity of generation for a given
load forecast. This in turn is reflected on
the capacity margins and service reliability.
Details are discussed in a following section
of this chapter.
c. Capacity resource planning: In traditional
planning analysis, the capacity resources are
found through combining a production cost
analysis with an investment cost analysis.
This is a cost based method that leads to
determining the type of the most economical
addition of generating units (hydroelectric,
nuclear, coal, gas turbine, or other). The
analysis depends on the planner preferences and experience to a large extent, and
it involves the following steps:
Prepare a set of expansion scenarios,

each including additions of multiple
units with assumptions of the type
and the number of units that should
be considered.
Set the proper assumptions on unit

additions over time
Decide which scenarios to evaluate is

a subjective process that depends on
the planner himself.
Evaluate the scenarios one at a time,
beginning with a multiyear reliability
simulation to meet the planning criteria which is unified for all studied
scenarios.
Remove inadequate scenarios and
continue to assess the scenarios that
meet the reliability target.
Select the scenario that best meets the
required criteria.
Refine the selected scenarios to better
meet the planning criteria.
It may happen that the above steps fail to give

an acceptable scenario due to the possibility of
inadequacy of assumptions of the scenarios. In
such case, the planner must alter the assumptions
and repeat the above procedure (Jae, et al., 2007;
Fonseka, Saha, & Dong, 2008).
A multiyear production simulation for each
of the potential scenarios is then performed. This
will serve in determining the unit dispatch and
the associated running costs (fuel + operation+
maintenance costs). Of course, each expansion
scenario also has associated construction costs.
The cost data from production simulation and
from investment costing are expressed on a basis of present value to account for time value of
money. The total costs then can be computed, and
the least-cost scenario can be selected by simple
inspection. The case study at the end of this chapter
illustrates how the above steps are applied using
WASP program on the Jordanian power system.
The deregulation of electric power industry
served in making the generation companies independent of other utility businesses. The generation
capacity development became a result of market
forces. In the deregulated environments, separate
markets exist for energy and capacity. The possibilities of power and energy exchange through
29
Planning Criteria
interconnections (Chapter 11) are also considered. Integration of high penetration renewable
sources (Chapter 8) into generation planning is
also incorporated.
Transmission Planning
Planning criteria within the scope of transmission planning are designed to meet the following
objectives (Silva, et al., 2006; Buygi, et al., 2006;
Meier, 2006):

Adequately serve local and wholesale customer loads.

Withstand reasonable system disturbances
on the bulk power system.
Contribute to overall bulk system integrity
Support effective competition in the energy market.
Minimize capital and operating costs while
meeting above-mentioned objectives.
The following is a list of the Transmission

planning criteria that are considered:
a. n-1 criterion, i.e. only one outage (e.g.
transmission line, substation transformer,
generating unit, etc):
The voltages must be maintained

within accepted limits
No cascading of outages
No widespread of voltage violations

b. Losing a maximum of 20% of generation
Transmission system must have adequate capacity to import required

power.
No overloading on equipment
No low-voltages below minimum at

customer side.
c. Transfer capacity
Power transfer capability is viable

across the transmission system.
Limiting elements must be identified.

d. n-2 criterion
30
Check for double outage contingencies of generating station effect in

terms of system adequacy during
peak generator output.
Check for the need of capacity upgrade schemes that will preserve
the system from possible cascading
outages.
When improvements are required on the

transmission system, all credible alternatives that
correct the associated deficiencies are investigated
and reviewed. Evaluation of alternative projects
considers four major criteria as indicated below
(listed in no particular order of preference):

Ability of the project to correct the expected system deficiency (extent to which a deficiency is eliminated or postponed).
Economic impact of the project on company assets (installation, operating and maintenance costs, and losses).
Viability of the project in relation to route
or site.
Impact of the project on the region, the
public and customers.
The effect of any improvements on the operation of the transmission system operation must
be checked in addition to their effects on the
following:
a. Transmission system adequacy: The system must be periodically reviewed which
enables checking for any violations to
the equipment ratings, and voltage levels.
Potential inadequacies can be remedied, by
recommending future expansions, before
problems can occur.
b. Reliability of service: Historical data and
customer impact are used in the analysis of
reliability. Modifications and enhancements
are made to the system to improve reliability
when needed.
Planning Criteria
c. New customer services: Significant increases in system load, resulting from major
new customer loads or significant additions
to existing customers loads often require
improvements or modifications to the system
to maintain adequacy. Modifications may
also be required to meet specific customer
operating criteria or equipment needs.
d. Bulk power system: Reliability criteria of
bulk power systems need to be evaluated to
avoid uncontrolled area-wide power interruptions under contingency conditions.
In the transmission planning process, the main
focus is on maintaining power system stability.
Stability evaluation is done assuming n-1 and
n-2 criteria for contingency analysis. As such, the
system must remain intact and stable if it loses any
one (n-1 contingency) or two (n-2 contingency)
of its elements during operation.
Distribution Planning
The main factors that are to be considered in this
planning field are (IAEA, 1984, 2001; Jae, et al.,
2007):
a. Load forecasting: The common practice is
that distribution utilities meter their customers directly, and hence have access to real
and accurate energy consumption. As load
forecasting is critically important in any
planning process, distribution utilities are
better off in making accurate load forecasts
by employing the end-use models.
b. Planning for reliability: Reliability in
distribution planning uses different indices
as compared to those used in transmission
or generation reliability or the system as a
whole. Reinforcement and planning options
are considered relative to their impact on

reliability. Typical reliability indices used
in distribution planning include: System
Average Interruption Frequency Index
(SAIFI), System Average Interruption
Duration Index (SAIDI), Customer Average
Interruption Frequency Index (CAIFI), and
Customer Average Interruption Duration
Index (CAIDI). One suggestion is to find a
baseline reliability, then evaluate the relative
impact on customer reliability resulting from
applying improvement options. The options
that have the highest cost-benefit ratio are to
be implemented. This methodology is termed
Cost-Effective Reliability Improvement
(CERI) (Brown, 2002).
In addition to the abovementioned indices, the
distribution area focuses on measuring different
phenomena that are related to reliability, as well
as quality of supply. These include: harmonics
level, voltage flicker, voltage dip, voltage unbalance, and long duration interruptions. There is
a lot of work to standardize the indices and set
benchmarking for all available (high, medium,
and low) voltage levels.
POWER SYSTEM STABILITY

CONCERNS
The stability analysis of the power system constitutes three main categories: a) rotor-angle stability,
b) voltage stability, and c) frequency stability. In
the planning process the stability related criteria
must be paid a high degree of priority as this will
affect the normal operation of the power system.
A well planned power system is defined as the
system when the catastrophic stability-related
consequences can be controlled and minimized
(Grigsby & Farmer, 2001).
31
Planning Criteria
Rotor-Angle Stability
Voltage Stability
This is generator driven, and it measures the ability

of generators in the interconnected power system
to remain synchronous after a system disturbance.
Based on the type of disturbance, rotor-angle stability consideration can be further classified into
small signal (or steady-state) stability, and large
disturbance (or transient) stability (Kundur, 1993).
On one hand, small signal stability refers to
disturbances sufficiently small that allows for
linearization of system equations around the operating point. Small signal stability is evaluated
relative to one of the following cases:
Voltage stability, is load driven, hence also called

load stability, affects the power systems as a whole,
as the system lacks the capability to transfer large
amounts of power to the loads. Two categories
exist: the short-term and the long-term.
Short-term voltage stability has a time scale
comparable to that of the rotor angle stability
(several seconds) (Kundur, 1993). Such type of
stability is usually affected by various components
such as induction motors, generator excitation,
HVDC, and FACT devices. As the effect of shortterm stability diminishes, the long-term time scale
dynamics dominate. The long-term voltage stability analysis is dependent on the right modeling
of the on-load tap, static loads, operators manual
control actions, and automatic generation control.
The voltage stability problem usually occurs
in faulty, low-reactive power, and heavily loaded
power systems. The essential cause of voltage
instability is the voltage drop that occurs on the
inductive reactances associated with the transmission network. In a heavily loaded system, voltage
supplied to the load reduces due to these voltage
drops, and this increases current draw from the
load, so the positive feedback leading to instability can be established easily. The power system
becomes voltage unstable when control on voltages of the equipment is lost.
Voltage stability studies focus on maintaining acceptable voltage levels for all the power
network elements at both normal and abnormal
conditions. The main cause of voltage instability
is the voltage drop occurring on the transmission
line inductance. In heavily loaded power systems, this voltage drop serves in increasing the
load currents leading to instability. The situation
worsens as generators reach the reactive power
capability limit, leading to voltage collapse at
the load. These events can be evaluated by time
domain simulations that include voltage-sensitive
a. Local modes (oscillations of a small group

of machines in the same power system and
the system itself),
b. Inter-area modes (oscillations of a group of
machines in one part of the system against
another group of machines in another part
of the system),
c. Control modes (oscillations brought on by
control interactions between system elements), and
d. Torsion modes (associated with the interaction between a turbine-generator shaft
system and another system element, usually
a line compensated by a series capacitor).
On the other hand, transient stability deals with
large disturbances and evaluates the ability of a
system to maintain synchronism when subjected
to a severe disturbance (Machowski, Bialek, &
Bumby, 1998). The resulting system response
involves large excursions of generator rotor angles
and the governing equations are nonlinear. The
analysis typically is done by time domain simulations that include models of generator prime
mover dynamics, excitation dynamics, and load
dynamics.
32
Planning Criteria
models of load, and the responses of generator

excitation systems (Kundur, 1993; Machowski,
Bialek, & Bumby, 1998). The voltage stability
analysis requires using both linear and non-linear
tools simultaneously.
Voltage stability studies and analyses will lead
to assessing the following parameters:
a. Available transfer capacity in single or interconnected systems.
b. Voltage stability margin: defining the difference between operation voltage collapse
points relative to specific an operating condition or parameter.
c. Voltage collapse point.
d. Maximum loading point.
As environmental constraints, and de-regulation of power systems roles dominate the power
market this serve in putting more limitations on
the transmission expansion and generation expansion near load centers. Hence generators are
fewer, larger in size and capacity and located at
distances that are far away from major loads. In
the free power market short-term electricity trade
increases the power transfer variations, hence
complicates the decision on the optimum level
of transmission expansion. This urges planners to
accurately define the safe margins of power transfer, especially for the most critical contingencies.
Frequency Stability
Frequency stability studies determine the systems
ability to maintain steady frequency within a nominal range following a severe system disturbance
that results in a significant imbalance between
generation and load. A systems response to frequency stability includes block load shedding and
other special protection schemes that typically are
not considered in simulations that deal with rotor
stability and voltage stability.
In theory, if the generation capacity is correctly
planned, then the system should not be exposed
to transients associated with frequency stability

(Kundur, 1993; Machowski, Bialek, & Bumby,
1998). Unforeseen circumstances can arise in
operations, however, and planners try to be prepared to deal with them. Furthermore, generation
capacity is planned with a very long time horizon
and construction delays or other events can cause
unplanned capacity shortages.
A final word is that in the de-regulated power
systems, it is possible to include the effect of renewable generation in the transmission planning
practices; however, this involves the following
issues that the planner must consider:

Develop appropriate and suitable models

that adequately represent distributed renewable energy generation.
Take into account the time scales of interest for transmission planning.
Standardize the models to adapt various
software tools,
Determine the (optimal) generation
dispatch.
MODELING AND PERFORMANCE

INDICATORS
Planning criteria, in general, constitute a set of
decision parameters or design variables with
which the planner controls the planning scenarios.
These criteria are similar to guiding principles and
limitations placed on the scenarios for the purpose
of narrowing down the selection process. Usually
these criteria are defined and set by consensus after
careful studies and analyses. Previous practices
and experiences shape and form such planning
criteria. However, they need to be revised every
now and then in order to reflect changes in the
power system, demand structures, and degree of
acceptable risk (Dugan, McGranaghan, & Beaty,
2003; Sankaran, 2002).
Moreover, it can be stated that planning criteria represent boundary conditions that serve
to eliminate unfeasible solutions and keep only
33
Planning Criteria
the feasible ones. Therefore, they are needed in

expansion studies of power systems to guarantee
that the scenarios selected are all acceptable by
the planners.
Planning criteria are represented by a set of
parameters, or performance indicators, which are
determined through analysis and benchmarking.
These indicators need verification and updating
every now and then, and include the following
(Elkarmi, 2010):

34
Loss of Load Probability (LOLP).

Energy Not Served (ENS) and its cost.
Contingency criterion, i.e. what type of incidents the system should withstand without collapsing. It is designated as n-1 or
n-2 etc. It is used for transmission as well
generation sub-systems.
Permissible loading of transformers, transmission lines, or other equipment such as
reactors or capacitors.
Reserve margin, which is the percentage
of excess generation required to sustain
the system intact in cases of contingencies. This percentage varies from an isolated system to a strongly interconnected
system. It simply means that an isolated
system will require certain percentage of
generating plant in excess of expected load
more than an interconnected system.
Permissible voltage and frequency variations. These are actually power quality
criteria, but they are used in determining
the level with which power system operators can tolerate contingencies. As a matter of fact, any excursions on these limits
are for very short durations and are, thus
for operational purposes only. However,
in certain instances they are used for some
exceptional cases for longer durations.
Economic parameters such as discount
rates cost of energy not served, inflation
rates, financing rates, etc.
Planning criteria are usually classified into the

following categories:
a. Hardware nature of plants under consideration such as unit size, technology of operation, location, fuel requirements, etc.,
b. Performance of plant/system such as forced
outage rate, maintainability, MTBF, MTTR,
maintenance frequency and durations,
LOLP, reserve margin, etc., and
c. Economic parameters such as fuel prices,
discount rate, fuel switching and competition, environmental requirements and carbon
trading revenues, cost of un-served energy,
etc.
Planning criteria enter into play in the power
system expansion in two levels.

The first is an entry level whereby the criteria assist in forming and defining candidate plant alternatives. This includes criteria such as unit size, technology, forced
outage rate, fuel requirements, etc.
The second level is when the criteria assist in the quantification of certain parameters such as reserve margin, LOLP, or cost
of energy not served as examples. This is
when the criteria are used in the comparison among alternatives and in the final selection of best alternative.
It should be emphasized that the most important planning criteria are the ones related to
overall system reliability (IAEA, 1984; Billinton
& Allan, 1996). The load duration curve and its
related parameters is the major component that
is used in this level. These are shown in Figure
1, with parameters defined as:
Ok= the kth outage in (MW)
pk = probability of occurrence of Ok
tk = number of days Ok will result in loss of load
in the system
Planning Criteria
Figure 1. The load duration curve and related parameters
Ck= Remaining generation Capacity (MW)

Ek = energy not supplied due to capacity outage Ok
T = load duration overall time, which can be 365
days, or 8760 Hours.
The planning criteria related to the overall
system reliability include the following (Billinton
& Allan, 1996):
Reserve Margin (RM), or Capacity Margin
(CM), which is defined as the difference between
total available generating capacity and annual
system peak load:
RM =
C PL
Re serve(MW )
100% =
100%
PeakLoad (MW )
PL
(3.1)
2. Probability of occurrence of loss of

largest unit, which simply tests if the
system will successfully sustain the loss
of largest generating unit during system
annual peak load with total blackout,
3. Loss of Load Probability (LOLP),
which is defined as the proportion of
days (or hours) per year when insufficient generating capacity is available
to serve the total system load.
The mathematical formulation of LOLP is
shown in the following equation:
LOLP =
P[C
k
C k ] P[L < C k ]
Where:
Where:
RM = Reserve Margin (%)

C= Installed Capacity (MW)
PL = peak load (MW)
LOLP =Loss of Load Probability

P = probability (%)
L = Expected Load (MW)
(3.2)
35
Planning Criteria
CA= Available Generation Capacity (MW)

Ck= Remaining generation Capacity (MW)
Loss of Load Expectation (LOLE) is the expected
number of days or hours per year during
which insufficient generating capacity is
available to meet total demand:
LOLE = LOLP T .
(3.3)
Where: depending of the value of T, LOLE is

measured in (days/year) if T=365 days, or in
(hours/year) for T=8760 Hours.
5. Probability of Positive Margin (POPM),
which is simply 1-LOLP,
6. Expected Un-Served Energy (EUE) is the
sum of probability-weighted energy curtailments caused by capacity deficiencies
throughout the year,
Loss of Energy Probability (LOEP) is the ratio
of expected amount of energy curtailed owing to
deficiencies in the available generating capacity to
total energy required by the system, see Figure 1:
LOEP =
Ek pk
E
(3.4)
Where:
Ek = energy not supplied due to capacity outage Ok
tk
(L(t ) C
)dt ,
(3.4a)
Pk = probability of capacity outage Ok.

E = total energy demand during the study period
8760
36
L(t ) dt ,
(3.4b)
8. Expected Loss of Load (XLOL) is

EUE/LOLE,
9. Emergency Operating Procedure
Expectations (EOPE) is similar to
LOLE but is related to number of days
or hours per year during which various
emergency operating conditions such
as load/voltage/frequency reduction
or selective load shedding may take
place,
10. Frequency and duration of failures to
meet the load (F&D): the frequency
is the probability-weighted average
number of events of loss of load, and
the duration is the length of time of
such loss of load,
11. Effective Load-Carrying Capability
(ELCC) is the difference between an
undesired LOLP value and a desired
one resulting from adding another
generating unit to the system,
12. Firm Capacity Equivalent (FCE) is
similar to ELCC but measures the increase in LOLP as a result of removing
certain generating capacity from the
system.
CM represents the difference between capacity and peak load which gives a good measure
of reliability. Practically, capacity reserves required are determined based on a probabilistic
approach which assesses the probabilities (the
capacity outage probability in conjunction with
load duration). This will lead to computing the
LOLP index. Both scheduled and forced outages
are evaluated. Probabilistic method is preferred
to be implemented since it allows for convenient
inclusion of other factors (e.g. limitations between
interconnected systems and for simulation of a
large number of units).
Moreover, LOLP evaluates the benefits of
shared generation reserves, in addition to indicating the reliability level of that system. The
accepted value for a typical power system LOLP
Planning Criteria
is about 0.1 day per year. The practice in planning

the expansion is to meet the desired LOLP at the
minimal cost (Billinton & Allan, 1996).
POWER QUALITY (PQ)

CONSIDERATIONS
PQ can be measured through a set of limits that
allows operating the power system in the normal
intended manner without loss of performance or
life. Any violation to these limits will serve in
malfunctioning of the electrical devices or loads
and may fail to operate prematurely; such cases
can be described as poor quality condition of
operation of the powers system (Short, 2005).
Consequently, the quality of electrical power
may be described as a set of values of parameters,
such as: continuity of service, variation in voltage magnitude, transient voltages and currents,
harmonic content in the waveforms, etc.
PQ related problems have different causes,
and hence different solutions must be executed.
Some problems may be due to shared infrastructure
(e.g. distribution subsystem) which will affect all
connected customers; and the higher the level of
the fault, the greater the number affected. Other
problems, such as harmonics, that may arise within
the customers own installation and may propagate
onto the network and affect other customers. Such
problems can be solved by better understanding of
the problem and applying proper design practices.
At the distribution level, power conditioning (i.e.
modifying the power to improve its quality) can
be done using Uninterruptible Power Supplies
(UPS) to switch off power if there is a transient
(temporary) condition on the line. It is usually
recommended not to use cheap UPS units, since
they usually contribute to poor-quality power
(Heydt, 1991; Bollen, 2000).
PQ can be considered as a compatibility
problem from the equipment connected to the
grid point of view. Compatibility means to face
the events on the grid, and to the PQ delivered
by the grid. This problem of compatibility may

have two solutions: a) improve the power quality
or b) increasing or making the equipment tougher.
It is important to understand the complex
phenomena of power quality and distortion in
AC systems. Also, the practical side of the field
must also be considered and experience must be
applied to real systems particularly in the current
restructured industry environment.
Modern systems use Phasor Measurement
Units (PMU) distributed throughout the network.
This will monitor power quality and in some cases
respond automatically to them. Such smart grids
sensing will serve in promoting an automated self
healing of anomalies in the network and serve in
leverage of PQ to higher levels. This is accompanied with lowering downtimes and simultaneously
supporting power from intermittent power sources
and distributed generation.
For a responsible and disciplined power utility
the main items that encompass this field in the
world today include: voltage sags, harmonics,
momentary events, interference, and waveform
distortion. These topics must be understood in
terms of definitions and theoretical bases; international standards implemented; measurement
and instrumentation; circuit analysis methods;
standards; sources of problems; and alternative
solutions; impact of renewable sources on power
quality.
Within a power utility, the staff responsible
for quality aspects must possess the previously
mentioned knowledge which must be accompanied with detailed understanding of:

Knowledge of quality indices and the use

of power acceptability curves.
Measuring PQ (Fourier transform, event
recorders, voltage, current, power, and energy measurements)
Knowledge of standards, e.g. IEEE 519,
IEC 555, and their impact.
Modeling of power element components,
including: transmission and distribution
37
Planning Criteria
systems shunt capacitors, transformers,

and machines.
Modeling of certain phenomena such as
resonance, inrush current, and effect of inefficient grounding systems.
Sources of PQ problems such as singlephase ac/dc converters, three-phase ac/dc
converters, high phase order static converters, battery chargers, arc furnaces, fluorescent lighting, pulse modulated devices,
adjustable speed drives, and renewable
sources.
Harmonics and their PQ effects, and filters
design. This must consider the injection
current method harmonic power flow studies and applications, comparison of harmonic power flow analysis, state estimation, filtering methods, and implementing
intelligent system methods
UPS designs.
Renewable sources and loads modeling
and simulation.
Using specialized tools and PQ follow up
procedures.
PQ improvement using harmonic filters,
active filters, phase multiplication, power
conditioners, UPS, constant voltage transformers, SVC, FACTS, STATCOM, and
UPFC devices (Hingorani, & Gyugyi,
1999; Zhang, Rehtanz, & Pal, 2006).
PQ other issues including non-periodic PQ
occurrences, flicker, impulses, radio frequency issues, common mode and transverse mode noise, geomagnetic interference, susceptibility of loads, and loss of
life of components .
For power distribution systems, power reliability measures the degree of performance of
the elements in a bulk system which will result in
electricity delivery to customers within accepted
standards and in accordance with demand (Short,
2005). IEEE Standard 1366 defines the reliability
most common indices namely the SAIFI, SAIDI,
CAIDI, and CAIFI, these are defined as:
38
SAIFI: system average interruption frequency

index, which is designed to give information about
the average frequency of sustained interruptions
per customer over a predefined area.
SAIFI =
=
NT
. (3.5a)
Total No.of Customer Interruptions
k
Total No.of Customers Served

SAIDI: system average interruption duration
index. This index is commonly referred to as
customer minutes of interruption and is designed
to provide information about the average time the
customers are interrupted.
SAIDI =
N R
k
=
NT
.
Customer Interruption Durations
k
(3.5b)
Total No.of Customers Served

CAIDI: customer average interruption duration index. CAIDI represents the average time
required to restore service to the average customer
per sustained interruption.
CAIDI =
N R
N
k
SAIDI
.
SAIFI
(3.5c)
CAIFI: customer average interruption frequency index. CAIFI measures the average number
of interruptions per customer interrupted per year.
CAIFI =
No
=
Nk
k
Number of Interruption s
Total No.of Customers Interrupted
. (3.5d)
Planning Criteria
CIII: customer interrupted per interruption

index, and it is the reciprocal of CAIFI.
CIII =
1
.
CAIFI
(3.5e)
MAIFI: momentary average interruption frequency index. MAIFI is calculated by summing

the number of device operations (opening and
reclosing is counted as one event), multiplying the
operations by the number of customers affected
and dividing by the total number of customers
served. MAIFI is rarely used since it is difficult
to know when a momentary interruption has occurred.
MAIFI =
ID N
k
NT
(3.5f)
Where:
K: An interruption event
No: Number of interruptions
Rk: Restoration time for each interruption event
(in minutes)
Nk: Total number of interrupted customers for
interruption event k.
IDk: Number of interruption device operations.
NT: Total number of customers served for the area
being indexed
The calculation of the above reliability indices
must exclude the interruptions due to load shedding, EHV openings (distress load shedding),
forced interruption, interruptions caused by events
outside of distribution and interruptions due to
natural calamities.
The main problem with these indices is that it
is difficult to make comparisons of these indices
from one geographic area to another. Moreover,
they are not normalized for adverse weather conditions. Hence, it is usually required that electri-
cal utilities compute and track certain reliability

indices. However, comparing them for different
regions or utilities is still a pitfall, due to many
factors including the way of using data, the differences in weather, system design, etc.
Because of this, the indices are limited in their
usefulness. If the calculation method is kept the
same, they are useful within a specific geographic
area in evaluating changes in reliability over time,
perhaps as a measurement of the effectiveness of
maintenance practices. (Baggini, 2008; Kusko, &
Thompson, 2007).
The commonly adopted PQ measures and
indices of power quality include:
a. Harmonic distortion, including:
Harmonic Distortion (HD), Total

Harmonic Distortion (THD), and
Total
Interharmonic
Distortion
(TIHD) indices. These indices are
defined as the rms of the harmonics
or interharmonics respectively, expressed as a percentage of the fundamental or the original distorted
signal, i.e. the ratio of the RMS value
of the sum of the individual harmonic
amplitudes to the rms value of the
fundamental frequency.
Total Demand Distortion (TDD),

which is similar to the THD concept
except that the distortion is expressed
as a percentage of some rated or maximum load current magnitude, rather
than as a percentage of the fundamental current.
Distortion Band Factor (DBF), this

gives an estimation of waveform
distortion caused by the frequency
component of a respective frequency
band, computed as:
DBFf =
Vrmsf
Vrms
(3.6)
39
Planning Criteria
Where:
Vrmsf =rms voltage value in the frequency band
f = fu fL
Vrms = rms voltage value in the whole spectrum.
b. K factor: The sum of the squares of the
products of the individual harmonic currents
and their harmonic orders divided by the sum
of the squares of the individual harmonic
currents.
c. Crest factor: ratio of a waveforms peak or
crest to its RMS voltage or current.
d. Flicker: perceptible change in electric light
source intensity due to a fluctuation of input
voltage. It is defined as the change in voltage
divided by the average voltage expressed as
a percent.
Standardization is a crucial step in PQ since
it enables designing power quality tolerance in
end-use equipment, in addition to building up a
win-win situation for the customer, the utility, and
the equipment manufacturer. Table 1 shows the
correspondence between International ElectroTechnical Commission (IEC) and some other
PQ standards.
It is worth noting that the IEC standards result
from multinational input and are the result of
international consensus, while IEEE and ANSI
are U.S. standards. Some incompatibilities can
exist between these standards.
UNCERTAINTY CONSTRAINTS
AND RISK ANALYSIS PLANNING
Uncertainty can be defined mathematically as
the difference between the true value and the
estimated value. Uncertainty includes errors in
observation and calculation, and can be associated with different factors including demographic,
econometric, environmental, social and political.
It is a fact that high levels of un-accommodated
40
uncertainty in planning may result in the reduction of power reliability, thus more outages. The
importance of a reliable electric power system is
dramatically underscored by power outages that
affect a large sector of customers or populations
(Bollen, 2000).
Power system reliability is generally divided
into two aspects: system adequacy (during steadystate operation), and system security (response of
the power system to sudden changes or disturbances in generation and/or Transmission systems).
As mentioned in a previous part of this chapter,
power system security deals with two categories:
a) ability of the system to withstand internal
failures and sudden natural disturbances, including network overload, voltage problems, and
instability problems, b) ability of the system to
avoid external interference, attack, or coordinated
physical assault on the system. System planners
usually deal only with the category (a).
Risk, on the other hand, provides a measure
of both probability and consequence or degree
of hazard for some event. The variables to be
evaluated in risk assessment include, but are not
limited to probability of event occurrence and
the associated risk, frequency and duration of
the outage, number of customers and amount of
customer load affected, lost revenue, customers
damage claims, and cost of transmission system
upgrades (e.g. land rights).
Planning of power systems is associated with
multi-disciplined uncertainties including: 1)
growth of demand and economy, 2) fuel costs, 3)
electricity prices and tariffs, 4) energy and financial
markets behavior, 5) new technology availability,
6) interest and inflation rates variability, 7) reliability and quality of supply, etc. As the planning
period increases, the uncertainty becomes larger,
and it will be inherent in the planning process.
The deregulated market has contributed to
increasing the risk for producers and decreases it
for customers. Growing environmental concern
and regulations may also contribute to making uneconomic planning decisions to comply with such
Planning Criteria
Table 1. Correspondence between IEEE, ANSI, and IEC power quality standards (EPRI, 1989)
regulations. The planning optimization becomes

more complicated as the environmental impacts
and regulations must be considered simultaneously
with the economic costs in the planning process.
CASE STUDY: GENERATION

EXPANSION PLANNING
This case study was conducted, and published by
the authors in cooperation with the National Electric Power Company (NEPCO). Interested readers
are advised to read full article in the Journal of
Energy Policy/Elsevier (Elkarmi, Abu-Shikhah,
& Abu-Zarour, 2009). The main results obtained
are presented here.
The Jordanian power system has undergone
several phases of development in terms of capacity requirements and generation/transmission
technologies. The main driving force for such
expansions was the high growth rate of demand
which as associated with socio-economic development of the country. Geopolitical situations
represented a major contributing factor for the

need for such an expansion. This required the use
of reliable technical and economical methods to
develop evolving expansion plans. During the
period 1985-now the NEPCO adopted the use
of WASP program for conducting its generation
expansion studies (IAEA, 2001). There are 4
companies responsible for electricity generation,
transmission and distribution. These are: NEPCO,
JEPCO, IDECO, IDECOD several
Generation expansion studies performed
within NEPCO evolves around a base case
which is used to further assess other cases that
are derived by varying different parameters. The
underlying expansion planning criteria of this
base case study are:
1. The base year for the study is 2009, with
peak load =2.23 GW and load duration curve
obtained from NEPCO.
2. The types and sizes of the generating plants
to be used in the expansion studies are the
most probable alternatives used by NEPCO.
41
Planning Criteria
3. Loss of Load Expectation (LOLE) = 40 hr/

yr which is equivalent to 0.456621%
4. The Reserve Margin (RM) is = 2.3%
5. The Cost of Energy Not Supplied (CENS)
is $1/KWh
6. The Forced Outage Rates (FOR) of the generating units are actual long-term average
values.
7. The expansion candidate plants intended to
be installed in the system are versatile, and
include:
a. Gas Turbines that can burn Diesel Oil
(DO) or Natural Gas (NG).
b. Steam turbine that operate on Heavy
Fuel Oil (HFO).
c. Plants using Renewable Energy technologies (RENE).
d. Nuclear plants using Nuclear Fuel (NF),
and
e. Plants burning Oil Shale (OS).
Different variations were proposed in the
analysis of the expansion studies applied to the
base case. These variations were applied to the
expansion criteria including LOLE (30 to 80 hr/
year), RM (3% to 6%), FOR (-2% to +2%), ENS
($0.5 to $3/KWh), and peak load (-2% to +2%).
The period of the study covered the years 2009 to
2037. Latest NEPCO load forecast was used, and
the discount rate was set equal to 8%.
The expansion study metric was the overall
Cumulative Expansion Cost (CEC) evaluated at
the year 2037 (as per WASP), and was estimated
to be about US$ Billion 16.69.
This base case solution states that during the
period 2009-2037 a total of 10 gas turbine units
burning diesel of 60 MW capacity, 2 gas turbines
burning natural gas of 100 MW capacity, 5 combined cycle units of 300 MW capacity, 2 nuclear
plant units of 600 MW capacity, and 3 oils-shale
burning units of 300 MW capacity will be added
to the system. The total cumulative cost (capital as
42
well as O&M) will be US$ 16.69. This optimum

solution is based on meeting the criteria set for
the case as mentioned earlier. Sensitivity analysis
to study the effect of different planning criteria
on the total cumulative costs was performed and
the results showed that:
a. Effect of LOLE variations
The cost variation vs. LOLE variations is given
by the following equation:
C LOLE = -0.01 LOLE 0.0689
(3.7)
This means that a change of 1% in LOLE (i.e.
LOLE=1%) is reflected as a decrease of 0.01%
in the CEC of the system covering both capital
and O&M costs.
b. Effect of RM variations
The linear fitting of the cost variation vs. RM
variations is given by the following equation:
C RM = 1.6657 RM 2.6073
(3.8)
CEC will reach saturation (i.e. CEC=0) for

RM > 4.5%, implying that there is no significant
change in CEC for any variations in RM above
4.5%. However, the change in CEC is almost
linear for RM4.5%. For this latter segment a
change of 1% in RM is reflected as an increase
of 2.9% in CEC.
c. Effect of ENS variations
The cost variation vs. ENS variations is given
C ENS = 0.0063 ENS + 0.3542
(3.9)
Planning Criteria
It can be seen that the ENS is directly proportional to CEC. In other words, a 1% increase in
ENS is associated with a 0.0063% increase in CEC.
d. Effect of FOR
The cost variation vs. FOR variations is given
C FOR = -1.4737 FOR 0.0546
(3.10)
Hence, FOR is inversely proportional to CEC.
In other words, a 1% increase in FOR is associated
with a 1.4737% increase in CEC.
e. Effect of Peak Load
The cost variation vs. Peak Load variations is
given by the following equation:
C Load = 1.4751 Load 0.1021 (3.11)
It is clearly noted that the change in peak load
has a direct impact on the CEC, As a matter of
fact, a change of 1% in Load results in an increase
of about 1.47% in the CEC.
Results proved the validity of the following
points:
1. The effect of RM on CEC has two regions.
The first is a linear effect for RM4.5, and
a second region is almost flat with no effect
for RM>4.5%.
2. The most influential planning criterion is RM
(in the linear region), followed by the Load.
Both have a proportional relationship with
CEC. This is a logical result, as both criteria
reflect an increase in the demand to be met
by the system. This implies the installation
of more plants to meet the increased demand.
3. FOR and LOLE have an inverse relationship
with CEC. This is logical since the increase
in any of them put less stringent constraint

on the system and leads to lower investment.
4. The impact of FOR is much higher than that
of LOLE, as the latter is a system related
parameter, while the former is unit-related
parameter, meaning that any change in FOR
affects all candidate units.
5. The effect of ENS on CEC is negligible.
This is due to the assumption that the cost
of Energy Not Served is relatively very low
($1/KWh). This assumption was imposed by
the fact that it is the adopted ENS cost for
Jordan.
This study suggests that the system planners in
Jordan must focus on studying scenarios involving
changes in RM and peak load in the first degree.
It is also recommended that extra studies need to
be performed to investigate the effect of changes
in FOR and LOLE on CEC. Finally, the more
realistic and up-to-date values of ENS costs must
be adopted and related costs must be assessed.
SUMMARY
This chapter is one of the chapters of the preparation stage of the planning process. It covers a set
of parameters or indicators that are very important
for the outcome of the planning process.
The planning criteria can be viewed as conditions and limitations selected by the management
of the power company, regulator or policy maker.
They are usually designed to guide the evaluation
process of the expansion scenarios for the most
optimal ones. In other words planning criteria are
important elements in the decision making process. They are reflections of the positive aspects
or realities, which the planners must have in any
future plan. However, they are boundary factors
to guarantee the plausibility of the scenarios being evaluated. Previous practices and experiences
shape and form such planning criteria. However,
they need to be revised every now and then in order
43
Planning Criteria
to reflect changes in the power system, demand

structures, and degree of acceptable risk.
Planning criteria represent boundary conditions that serve to eliminate unfeasible solutions
and keep only the feasible ones. Therefore, they
are needed in expansion studies of power systems
to guarantee that the scenarios selected are all
acceptable by the planners.
Planning criteria are represented by a set of
parameters, or performance indicators, which are
determined through analysis and benchmarking.
These indicators include the following:

44
Loss of Load Probability (LOLP).

Energy Not Served (ENS) and its cost.
Contingency criterion, i.e. what type of incidents the system should withstand without collapsing. It is designated as n-1 or
n-2 etc. It is used for transmission as well
generation sub-systems.
Permissible loading of transformers, transmission lines, or other equipment such as
reactors or capacitors.
Reserve margin, which is the percentage
of excess generation required to sustain
the system intact in cases of contingencies. This percentage varies from an isolated system to a strongly interconnected
system. It simply means that an isolated
system will require certain percentage of
generating plant in excess of expected load
more than an interconnected system.
Permissible voltage and frequency variations. These are actually power quality
criteria, but they are used in determining
the level with which power system operators can tolerate contingencies. As a matter of fact, any excursions on these limits
are for very short durations and are, thus
for operational purposes only. However,
in certain instances they are used for some
exceptional cases for longer durations.
Economic parameters such as discount

rates cost of energy not served, inflation
rates, financing rates, etc.
Planning criteria enter into play in the power

system expansion in two levels.

The first is an entry level whereby the criteria assist in forming and defining candidate plant alternatives. This includes criteria such as unit size, technology, forced
outage rate, fuel requirements, etc.
The second level is when the criteria assist in the quantification of certain parameters such as reserve margin, LOLP, or cost
of energy not served as examples. This is
when the criteria are used in the comparison among alternatives and in the final selection of the best alternative.
REFERENCES
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quality. New York, NY: John Wiley & Sons, Ltd.
doi:10.1002/9780470754245
Billinton, R., & Allan, R. N. (1996). Reliability
evaluation of power systems. Berlin, Germany:
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Bollen, M. (2000). Understanding power quality
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York, NY: IEEE Press.
Brown, R. E. (2002). Electric power distribution
reliability. New York, NY: Marcel Dekker, Inc.
Buygi, M., Shanechi, H., Balzer, G., Shahidehpour,
M., & Pariz, N. (2006). Network planning in unbundled power systems. IEEE Transactions on
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Planning Criteria
Dugan, R. C., McGranaghan, S. S., & Beaty, H.

W. (2003). Electrical power systems quality. New
York, NY: McGraw-Hill Companies.
Elkarmi, F. (2010). Information technology in
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de-regulated markets: Case studies and lessons
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Elkarmi, F., Abu-Shikhah, N., & Abu-Zarour, M.
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Hingorani, N. G., & Gyugyi, L. (1999). Understanding FACTS: Concepts and technology of
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Planning Criteria
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47
Chapter 4
Load Research
ABSTRACT
Load research results provide a valuable input to decision makers in the electricity companies prior
to embarking on any plan, project, or program that touches on the supply of power or power quality
to consumers. The information not only covers technical matters, but also covers socioeconomic and
market information.
With the information collected through load research, electricity companies will be aware and hopefully
knowledgeable in the composition and trends of consumer demands. This essential knowledge will be
the basis for pricing electricity properly and fairly. Moreover, this information forms a good basis for
predicting future demand. Therefore, new expansions, enforcements, and extensions will be affected to
cater to future demand.
Load research data is also useful in the operation and performance of the power system. This information will help system operators to take appropriate actions, in cases of emergency, or in normal cases
without adversely affecting the system or customer satisfaction and comfort.
In a load research study the objective is to formulate the load curves of all consumer categories. The
daily load curve is an essential building block for achieving this objective. With information, the power
system planner can perform many important activities and functions within the planning process.
INTRODUCTION
Energy has become an almost life-line type of
commodity for all societies. It fuels the socioeconomic process and enables people to attain
a comfortable life style. However, consumption
of energy forms should be rationalized because
sources are limited and indeed they are diminishing. Electricity is one key source of energy. It is
DOI: 10.4018/978-1-4666-0173-4.ch004
known as a relatively inexpensive as well as

clean source of energy. However, if demand
for electricity grows beyond control there might
not be enough supply to cover all the demand.
This unfortunate situation will cause discomfort
to people and probably disruption of economic
production. Therefore, it is very important to
properly plan, operate and control the power
system which delivers electricity to all consumers
(Elkarmi, 2008, p. 1).
Load Research
Consumers of electricity vary in the amount

of electrical energy and electrical demand drawn
from the network. That is why electrical power
companies classify such consumers, or customers,
into several classes. This classification is based
on characteristics of demand; behavioral issues;
and other considerations related to location,
climate, and status to name a few. The quest and
accumulation of this customer-related information
is called load research. With load research the
electricity company, or companies, will be aware
and hopefully knowledgeable in the composition
and trends of demand of consumers. This essential
knowledge will be the basis for pricing electricity properly, and fairly. Moreover, the electricity
company can predict future demand based on
such information. Therefore, new expansions,
enforcements, or extensions will be affected to
cater for any future demand.
On the other hand proper operation and control
of the power system requires all the information
available on consumers and consumption patterns.
With the aid of this information the electricity
company can minimize production cost, plan
maintenance schedules, and control the quality
of power delivered to all consumers. This would
be reflected in leaner electricity tariff and consequently in affordable bills (Elkarmi, 2008, pp. 1-2).
Electric companies historically believed their
business is simply to sell electricity, thinking they
had no choice but to keep supplying the demand.
Some still think this, but the majority now realizes that its usually cheaper to convince their
customers alter their consumption habits rather
than try to sell them more of it. Demand side
management, is the act of attempting to manage
demand of consumer to achieve energy efficiency
(Elkarmi, 2008, p. 2).
Load research is a very essential tool and a
prerequisite for demand-side management. It has
been, and still is being, used by electricity companies throughout the world. Load research data
48
is used to develop kWh-to-peak-kW conversion

factors, diversity factors, and average time varying
load data as a function of customer class, month,
and type of day (Broadwater, et al., 1997, p. 2).
Load research can provide useful information for
planning and designing utility distribution systems
by means of proper load estimation. The estimation
of loads determines the size and location, or site,
of an electric plant and the associated network
equipment needed to deliver the electric power
to consumers. Moreover, the estimation of future
loads requires an understanding of the characteristics of the various load components (Nazarko,
Broadwater, & Tawalbeh, 1998).
Load research enables the management of
power companies to make effective decisions.
Through detailed studies of electricity usage
pattern of their customers and other influencing
factors the possibility of making certain changes
on end-use patterns can be assessed. Such studies
are based on either individual end-uses or in total
aggregates and they require sound knowledge in
the areas of statistics, marketing research, electrical engineering and social sciences. For example,
the load research effect on demand side management and energy efficiency is shown in Figure 1.
At many utilities end-use load data are collected from a large number of customer sites at
15-minute intervals for multiple seasons and even
years. As a result load research data is voluminous.
Thus, designing a load data system that can respond
to data requests in a timely and effective manner
is becoming an important planning and operations
goal facing many electric companies (Burns &
Powers, 1994).
The main distinguishing characteristic of load
research is its focus on the time-related pattern of
electricity usage, throughout any time period. A
major application of load research analysis is the
design and setting of retail tariffs for electricity
supply (Allera, Alcock, & Cook, 1990).
Load Research
Figure 1. Load research effect on demand side management and energy efficiency
Due to lack of field measurements, data used

in network analysis have various degrees of uncertainty. The use of fuzzy load models can address
this issue. Customer hourly loads obtained from
load research are converted to fuzzy membership functions based on a possibility-probability
consistency principle (Chang, Leou, & Lu, 2002).
Hourly load research data for residential
customers is used to calculate diversity factors
and kWh-to-peak-kW factors. The customers are
grouped into two classes based on their consumption patterns. With the use of control samples,
comparisons are made between estimated and
measured peak kW. Estimated daily load profiles
are also calculated and compared to measured
daily load profiles (Sargent, et al.,1994).
Load behavior needs to be considered in the
algorithms for distribution systems fault locations to reduce the resulting error to practical
limits. A new modeling methodology referred to
as the fast response model reduces such errors
(Reineri & Alvarez, 1999). Load research data is
used to assess the cost/benefit of various Demand
Side Management (DSM) programs. The costs
and benefits of each DSM program are easily
and readily estimated according to load research
information.
LOAD RESEARCH METHODOLOGY

A typical electrical consumption survey may
contain general information regarding the customer, the monthly, daily, and annual electrical
consumption, ownership of electrical appliances,
etc. This addition information is usually filled by
the customer during an interview. See Table 1, as
an example.
Moreover, the lighting information can be
collected using a survey similar to the one shown
in Table 2.
SAMPLING DESIGN
This is an important step in the load research overall
process; since it will guarantee that the collected
data and results reached are of high confidence
and represent real life. The design involves the
following important factors:

Defining the Target Population:

Definitions are made in terms of elements
(e.g. old meters or new meters), sampling
units (e.g. households, industrial), extent
49
Load Research
Table 1. Customer loads survey

Electrical
appliance
Description
Total
No.
Power
rating
(watt)
Time of Use
0.005.00
5.007.00
7.009.00
9.0013.00
13.0018.00
Total
time
used
(hrs)
18.0021.00
21.0024.00
Lights
Water heater
AirConditioner
Iron
Fans
Cooler
Television
Dishwasher
Washing
machine
Dryer
Refrigerator
Kettle
Blower
Miscellaneous
50
(geographic aspect, e.g. city) and time (e.g.

winter).
Determining the sampling Frame: This
step consists of preparing a list or set of
directions for identifying the target population, e.g. (connected load, type of industry,
etc).
Selecting a Sampling Technique: This
step results in several decisions of a broader nature. A Bayesian, traditional, probability, and/or non probability sampling
approaches can be used. These involve:
Simple Random Sampling
Systematic Sampling
Stratified Sampling, and
Cluster Sampling.
Determining the sample size: Sample
size is influenced by the average size of the
samples in similar studies, and are defined
based on experience. A guideline steps

may be as follows: a) specify the level of
precision, b) specify the Confidence Level
(CL), c) determine the z value associated
with CL, d) determine the standard deviation of the population, e)determine the
sample size using formula for the standard
error. To control this procedure, then the
following factors must be considered:
Apply finite population correction

when the sample size is represents
10% of the population Re-estimate, if
necessary, the confidence interval
Apply statically defined equations

to define sample size if precision is
specified in relative terms.
Executing the sampling process: Detailed
specifications of how to implement the
sampling design decisions must be provid-
Load Research
Table 2. Lighting survey

Watts
1
Fluorescent
Incandescent
Total No.
20
40
40
60
100
150
CFL
Mercury vapor
Sodium vapor
Halogen lamps
Others (Specify)
16
ed. This requires design of a preliminary

questionnaire to identify various DSM
projects. The analysis of the preliminary
questionnaire my require developing a detailed questionnaire that leads to further
setting of standards and best practices for
different utilities looking forward to implement DSM initiatives
USES OF LOAD
RESEARCH RESULTS
Load research activities are carried out by electric
companies in order to know the appliance ownership characteristics, load profile, and consumption
habits of the various consumers being served. With
this information the essential elements for taking
any decision are basically secured. Information
generated through load research serves several
business functions within the electricity company.
These include the following:

Load forecasting
Energy efficiency and demand
management
Tariffs and power purchase prices
Power system expansion studies
side
Operation optimization of power system

Customer relationships and market
preferences
Load profiling and consumption habits
Socio-economic drives and influencing
factors
Competitive advantage and benchmarking
studies.
Load research results provide a valuable input

to decision makers in the electricity companies
prior to embarking on any plan, project or program
that touches on the supply of power or power
quality to consumers. It involves huge amount of
data to be collected periodically and diligently.
The information not only covers technical matters, but it also covers socio-economic and market
information. One example for the need for added
information is when an electricity company notices a shift in the consumption pattern of certain
consumer groups towards heating or cooling
requirements. In such a case information regarding availability, characteristics of such electric
appliances, prices and consumption figures are
all needed. Moreover, information regarding all
competing alternative appliances is also collected.
The load research studies and analyses would
lead to the identification of any possible shifts in
51
Load Research
the load profile or timing or value of peak loads,

etc. These results are very important in all the
categories listed above and their effect in any
decision can not be overemphasized.
DRIVING FACTORS
The electric load is influenced by many factors.
These are called driving factors which determine
how the load is shaped during a given period of
time. The driving factors or influencing factors
determine in addition to the load profile the estimation of future load profile including consumption
pattern, peak load, minimum load, and load factor.
The latter parameter is a measure of the efficient
use of the power system. Higher load factor means
better utilization of plant and equipment installed
to meet customer loads. The driving factors are
classified as follows (Seppala, 1996, pp. 15-17):
a.
b.
c.
d.
e.
f.
g.
h.
Customer factors
Time factors
Climate factors
Other electric loads
Previous load values
Socio-economic situation
Market conditions
Regulatory framework of the electricity
supply industry.
The first factor is related to the customer categories. These usually are classified into industrial,
commercial, services, residential, agriculture, etc.
Each customer class must be sized according to
energy consumption and contribution to peak load.
Moreover, the details of consumption for a typical consumer from this category must be known.
Statistics of customer numbers, locations, type and
size of electricity consumption are key factors to be
collected. More importantly, the future estimates
of such statistics are also very much needed. This
group of factors helps in determining or designing certain demand side management or energy
52
efficiency programs. It also identifies candidates

for tariff changes or certain regulatory measures.
Time factors come into play because the
electric load varies with time. This variation is
important to consider as its effect on the total
load profile is great. Therefore, daily load curves
for each customer category or even sub-category
are needed. This information shows the pattern
of consumption during the day. The same is also
needed for each month of the year and the year as
whole. From this data the shape of the aggregate
daily load curve is determined. The seasonality
of consumption comes from comparing month
by month. Finally the overall annual load curve
determines the annual peak load, minimum load,
and their respective timing during the season and
the year. This group of factors helps in determining
the timing of certain demand side management or
energy efficiency programs. Moreover, the impact
on the total system performance can be depicted
from this information.
Time factors are inter-related to climate factors
as explained later. Other loads that can be affected
by the time include seasonal tourism, and other
special national occasions. Also on a daily scale
the variation of electric load from week day to
week end is very important.
Climate factors are those related to the climate
and weather expectations. There are certain climate
conditions that are fixed throughout the year for
each country. However, temperature variations and
climate changes have been witnessed in certain
regions of the world recently. The combination
of both types of information gives an insight on
what to expect from the climate in the near future.
It should be understood that electric loads are
divided into weather-sensitive and non-weathersensitive loads. Time factors naturally affect and
shape the weather-sensitive loads. These include
heating or cooling loads. In certain countries that
have a clear dominance of residential and commercial loads the effect of climate factors is of
paramount importance. In other countries where
producing sectors, such as industry, agriculture,
Load Research
and services, represent the majority of total system

load these climate factors are of less importance.
The interaction of electric appliance loads is
another group of factors that have an influence
on load research. For example if using certain appliances requires the use of other appliances or if
it negates the need for other appliances, this will
have an effect on load profile and shape. On the
other hand the interchangeability among several
forms of energy to have a final use such as heating
or cooling have an impact on load research results.
Sometimes, switching from one form of energy
to another could take place because of efficiency
differences or tariff considerations.
It is well known that electric loads have many
periodic patterns. This characteristic is often used
to attempt to predict future load values. Segmentation of previous load values per customer class is
needed to be able to accurately predict future loads.
This information is essential for load forecasting.
Socio-economic situation information includes
the sectoral as well as the national economic
production and efficiency measures. With this
information one can determine priorities for
load research activities, starting with the most
influential sectors. Moreover, government plans
for developing certain geographic areas or social
class of citizens must also be incorporated in load
research activities (Yamayee, et al.,1990). For
example if government plans to encourage the
establishment of large industrial or commercial
complex in one area, what will be the implications on the electric power networks in that area?
Information on income levels of various consumer
categories is also very important. This provides
insight on the willingness to participate in any
future energy efficiency or DSM programs.
Market conditions regarding availability of
certain appliances in the market as well as their
market share, competition, efficiency, prices, etc.
are important to load research. They determine
the possibility of switching from one form of energy to another. They also determine the chances
of success of certain programs or projects. The
competition among electricity companies in an

open market situation enters into play here to
attract customers.
Regulatory framework of the ESI determines
the speed and ease of introducing certain energy
efficiency programs. If the regulatory body offers
certain incentives for energy efficiency programs
then the electric companies will work hard to
implement such programs. If this is built in the
tariff determination process then it will be even
more pronounced.
LOAD MODELING
Load modeling is the process whereby the planner obtains adequate information regarding the
variation of load during a given time period. The
difficulty in load modeling is that information
regarding electric load or demand (MW) for all
consumer groups is not readily available. For those
consumers that are charged per their demand the
information is logged, while for all other consumers such as residential, small commercial, small
industrial and others only energy consumption
figures (KWh) are available. Therefore, modeling
is needed to derive demand consumption details.
The information collected and analyzed in load
research leading to estimating load modeling can
be classified into the following:

Consumption related information

Market information
The consumption related information is, in turn,

divided into 1) appliance ownership statistics, 2)
consumption attitudes, trends and habits, 3) awareness about cost of supply and energy efficiency
issues, 4) willingness to participate in voluntary
or incentive-driven energy efficiency programs.
The appliance ownership statistics, along with
consumption attitudes; trends and habits, will
contribute to estimating demand curves for the
various consumer classes. The aggregation of
53
Load Research
such information on the country level will result

in estimating the demand curves for the country.
Moreover, future changes and demand curves can
be extrapolated from such information.
The information related to awareness about
cost of supply and energy efficiency is important
to gauge any present or future attitudes towards
changing the consumption pattern. On the one
hand the knowledge about cost of supply will
drive the change mechanism and formulate the
motive. On the other hand the awareness about
energy efficiency issues will constitute the foundation and bases for energy savings. Finally the
willingness-to-participate in energy efficiency
programs will modify the consumption pattern
and influence the change in consumption.
The market information can be divided to: a)
consumption drivers, b) change drivers, and c)
exogenous drivers.
The consumption drivers are related to the
socio-economic status of the consumer. In particular this information includes income, cost of
living, inflation, electricity tariff, social status, and
living standard. This information is combined with
the consumption related information to produce
the consumption figures.
Change drivers on the other hand are related
to factors that will have some influence on consumption. These include

National economy parameters and future

estimation thereof
Population and demographic information
The exogenous drivers include the technological trends regarding energy efficiency of electrical
appliances, development of the power system,
and deregulation of the electricity supply industry.
In a load research study the objective is to formulate the load curves of all consumer categories.
The daily load curve is an essential building block
for achieving this objective. However, to have
useful information consumers must be divided
54
into sub-levels. The criterion in the division is to

group all consumers of the same category having
the same consumption trends. This division, within
the same consumer group, could be attributed to
socio-economic status, geographic location, tariff,
etc. By doing this a sample is selected to represent
each sub-group. Then from analyzing the results
of the samples the overall consumption of the
consumer group can be derived. The aggregation
over all consumer groups will result in depicting
consumption curves for the overall system.
The daily load consumption of typical customers is shown in Table 3. The loads shown are
the normalized values referred to the peak load
of the day. The corresponding daily load curves
of these different normalized demand types are
shown in Figure 1 (a-d).
Figure 2(a) shows that the peak load is at
20:00hrs (8 p.m.), for a typical residential customer. The curve has two peaks. A morning peak
at 9:00hrs and the evening peak at 20:00hrs. This
information means that for any effective energy
efficiency or demand side management program
to be effective it must be directed towards midmorning or evening consumption. If this information is readily available typical conclusions can
be drawn to formulate the big picture about the
consumer group. Naturally the other factors might
have some influence on consumption and their
effect must also be incorporated.
Figure 2(b) shows that the daily load curve is
rather flat which is typical for large industrial
plants. It is evident that the operation of the plant
is 24 hours (3 shifts). The daily peak load of the
large plant is around 14-16 hrs or in the early
afternoon. During this period all plant facilities
and machinery is in full operation, in addition to
administration and other departments.
On the other hand a medium industrial plant
operating for 2 shifts will have a different daily
load curve as can be seen in Figure 2(c). Both
large and medium industrial plants have a flat
curve; however, the medium-sized plant has no
Load Research
Table 3. The normalized electric load (p.u.) of various typical customers

Typical Customer
Hour of day
1
10
11
12
residential
0.4
0.36
0.28
0.22
0.34
0.42
0.68
0.75
0.88
0.76
0.7
0.63
Large-size industrial
0.8
0.8
0.8
0.8
0.85
0.85
0.85
0.9
0.9
0.9
0.95
0.95
Medium-size industrial
0.1
0.1
0.1
0.1
0.4
0.58
0.85
0.9
0.9
0.9
0.95
0.95
Commercial
0.1
0.1
0.1
0.1
0.15
0.15
0.2
0.26
0.5
0.55
0.6
0.65
13
14
15
16
17
18
19
20
21
22
23
24
0.4
residential
0.7
0.8
0.8
0.8
0.85
0.9
0.95
1.0
0.76
0.6
0.5
Large-size industrial
0.95
1.0
1.0
1.0
0.95
0.95
0.85
0.85
0.8
0.8
0.8
0.8
Medium-size industrial
0.95
1.0
1.0
1.0
0.95
0.95
0.85
0.85
0.8
0.3
0.2
0.15
Commercial
0.75
0.8
0.71
0.64
0.58
0.85
0.85
0.8
0.3
0.2
0.1
demand during the third shift. This is because

some operations start before the regular working hours to prepare the plant for full operation.
Moreover, some work also starts prior to operation hours to prepare for the working day. This
is shown by the increase in demand around 5:00
hrs. in the morning.
Figure 2(d) represents the daily load curve of a
typical commercial center. The center is not open
for cleaning and maintenance crews until after 5:00
hrs. It is not open for employees until 8-9:00 hrs.
and for shoppers until 10:00 hrs. During the early
afternoon hours 13-15:00 hrs there is a morning
peak. The daily peak load occurs at around 19:00
hrs. This naturally changes with the season. In
other words the daily load curve is different for
summer than winter. The difference will be in
the timing of the peak loads, as well as the shape
and the amount of the loads. For example during
winter the early afternoon peak might disappear
as there is no air-conditioning load. On the other
hand it might simply be replaced by a heating
load. The afternoon peak load will be definitely
earlier in winter than in summer.
The seasonal differences mentioned above
are not present in the load pattern of industrial
plants, but very much present in residential and
commercial loads.
CASE STUDY
This case study comes from work conducted for
the United Nations Department for Economic and
Social Affairs (UN DESA). The study is called
Integrated Resource Planning (IRP) study form
Jordan, 2000. IRP refers to the concept of combining the demand side as well as the supply side
in studying electrical system expansion. From the
demand side point of view it involves the analysis
of consumer demand profiles. In particular, the
contribution of the peak loads of the various consumer categories are of paramount importance.
Furthermore, the contribution of each end-use at
each consumer sector is needed for this study.
From all this information demand side management programs and tools are designed. These
programs are then included as part of the supply
options being considered for system expansion.
In other words the possibility of reducing demand
is equivalent to new demand. However, it needs a
lot of measurements, field surveys, and estimates.
This is because not all consumers are charged for
peak load in Jordan as only bulk consumers, large
and medium industries and large water pumping consumers have peak load meters. All other
consumers have only the regular energy meters
(kWh meters). Therefore the challenge was to
55
Load Research
Figure 2. Typical daily load curves for various electric demands
construct near exact estimates of demand for all

consuming sectors as well as all end-uses in order
to assess the feasibility of the various demand side
options. The starting point in the analysis was the
electrical energy consumption by sector. Figure
3 shows this distribution.
As the objective of the effort is to determine
the end-use contribution in peak load, information
related to specific consumption of the various
end-uses at each sector as well as the load profile
during the day, the month, the season and the year
are needed. This is a very large amount of information. It was compiled from previous studies,
field surveys, assessment of typical consumer
load profile and finally from several load research
demand meters which were installed at various
consumers at different times. Table 4 lists the
electrical energy consumption percentages per
end-use for all sectors, and Figure 4 presents their
pie chart representation.
Alternatively, Table 5 on the other hand is the
distribution of demand by end-use.
56
Figure 5 illustrates the distribution of demand

by end-use for all sectors.
With the aid of load factor information for
each end-use; i.e. typical pattern of use during the
hours of the day, the energy consumption was
converted to demand consumption. This is the
main outcome of the contribution being discussed
here.
The contribution of end-use loads into the
system peak load, which is very important in
planning studies in general and demand side
management studies in particular, is estimated
using coincidence factors and connected loads
of the individual end-use loads.
SUMMARY
Load research has a pivotal role in providing
accurate, valuable, and reliable data for the decision making. This information is useful in many
power system planning activities, including: 1)
Load Research
Figure 3. Pie-chart of electrical energy consumption by sector
data to be collected periodically and diligently.

The information not only covers technical matters, but it also covers socio-economic and market
information.
Load research activities are carried out by
electric companies in order to know the appliance ownership characteristics, load profile, and
consumption habits of the various consumers
being served. With this information the essential
elements for taking any decision are basically
secured. Information generated through load
research serves several business functions within
the electricity company such as load forecasting,
energy efficiency and demand side management,
tariffs and power purchase prices, power system
expansion studies, operation optimization of
power system, customer relationships and market preferences, load profiling and consumption
habits, socio-economic drives and influencing
factors, and competitive advantage and benchmarking studies.
The electric load is influenced by many
factors. These are called driving factors which
determine how the load is shaped during a given
period of time. The driving factors or influencing
factors determine in addition to the load profile
the estimation of future load profile including
consumption pattern, peak load, minimum load,
demand side management, 2) tariff and regulatory

decisions and agreements, 3) financial planning,
4) system expansion, and 5) in customer service
improvement.
Load research results provide a valuable input
to decision makers in the electricity companies
prior to embarking on any plan, project or program
that touches on the supply of power or power
quality to consumers. It involves huge amount of
Table 4. Consumption (in %) by end-use
Domestic
Commercial
Service
Industrial
Water
pumping
P.
lighting
Total
AC
1.3
11.8
14.0
6.0
2.0
0.0
5.1
Refriger.
33.0
0.0
0.0
0.0
0.0
0.0
9.7
End-use
Hot water
1.1
0.0
0.0
0.0
0.0
0.0
0.3
Lighting
21.1
27.4
43.4
5.0
2.0
100.0
17.4
Motive
power
0.0
9.4
14.7
66.0
95.0
0.0
39.1
Office
equip.
0.0
11.0
13.1
0.0
0.0
0.0
2.3
Heating
0.0
0.0
0.0
15.0
0.0
0.0
4.6
Other
43.5
40.4
14.8
8.0
1.0
0.0
21.5
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
57
Load Research
Figure 4. Electrical energy consumption contribution by end-use appliances
Figure 5. Electrical demand contribution by enduse appliances
and load factor. The latter parameter is a measure

of the efficient use of the power system. Higher
load factor means better utilization of plant and
equipment installed to meet customer loads. The
driving factors include: 1) customer factors, 2)
time factors, 3) climate factors, 4) other electric
loads, 5) previous load values, 6) socio-economic
situation, 7) market conditions, and 8) regulatory
framework of the electricity supply industry.
The information collected and analyzed in load
research leading to estimating load modeling can
be classified into the following:
The consumption related information is, in

turn, divided into 1) appliance ownership statistics, 2) consumption attitudes, trends, and habits,
3) awareness about cost of supply and energy
efficiency issues, 4) willingness to participate in
voluntary or incentive-driven energy efficiency
programs.
The appliance ownership statistics, along with
consumption attitudes, trends and habits, will
contribute to estimating demand curves for the
various consumer classes. The aggregation of
such information on the country level will result
in estimating the demand curves for the country.
Moreover, future changes and demand curves can
be extrapolated from such information.
Consumption related information

Market information
Table 5. Demand (in %) by end-use

Domestic
Commercial
Service
Industrial
Water
pumping
P.
lighting
Total
AC
5.6
12.0
16.0
8.0
2.0
0.0
8.5
End-use
Refriger.
47.4
0.0
0.0
0.0
0.0
0.0
8.2
Hot water
2.2
0.0
0.0
0.0
0.0
0.0
0.4
Lighting
10.9
30.0
40.3
15.0
2.0
0.0
18.8
Motive power
0.0
11.6
14.7
65.8
95.0
0.0
40.8
Office equip.
0.0
6.7
14.9
0.0
0.0
0.0
3.5
Heating
0.0
0.0
0.0
5.0
0.0
0.0
1.5
58
Other
33.9
39.7
14.1
6.2
1.0
0.0
18.3
Total
100.0
100.0
100.0
100.0
100.0
0.0
100.0
Load Research
The information related to awareness about

cost of supply and energy efficiency is important
to gauge any present or future attitudes towards
changing the consumption pattern. On the one
hand the knowledge about cost of supply will
drive the change mechanism and formulate the
motive. On the other hand the awareness about
energy efficiency issues will constitute the foundation and bases for energy savings. Finally the
willingness-to-participate in energy efficiency
programs will modify the consumption pattern
and influence the change in consumption.
The market information can be divided to: a)
consumption drivers, b) change drivers, and c)
exogenous drivers.
The consumption drivers are related to the
socio-economic status of the consumer. In particular this information includes income, cost of
living, inflation, electricity tariff, social status, and
living standard. This information is combined with
the consumption related information to produce
the consumption figures.
Change drivers on the other hand are related
to factors that will have some influence on consumption. These include:

National economy parameters and future

estimation thereof
Population and demographic information
The exogenous drivers include the technological trends regarding energy efficiency of electrical
appliances, development of the power system, and
deregulation of the electricity supply industry.
REFERENCES
Allera, S. V., Alcock, N. D., & Cook, A. A. (1990).
Load research in a privatized electricity supply
industry. In Proceedings of the Sixth International
Conference on Metering Apparatus and Tariffs for
Electricty Supply, (pp. 1-5). ACM.
Broadwater, R. P., Sargent, A., Yarali, A., Shaalan, H. E., & Nazarko, J. (1997). Estimating
substation peaks from load research data. IEEE
Transactions on Power Delivery, 12(1), 451456.
doi:10.1109/61.568270
Burns, J., & Powers, J. (1994). Load-data access tools cultivate productivity. IEEE Computer Applications in Power, 7(4), 2629.
doi:10.1109/67.318918
Chang, R. F., Leou, R. C., & Lu, C. N. (2002).
Distribution transformer load modeling using
load research data. IEEE Transactions on Power
Delivery, 17(2), 655661. doi:10.1109/61.997955
Elkarmi, F. (2008). Load research as a tool in
electric power system planning, operation, and
control: The case of Jordan. Energy Policy, 36(5),
15771820. doi:10.1016/j.enpol.2008.01.033
Nazarko, J., Broadwater, R. P., & Tawalbeh, N. I.
(1998). Identification of statistical properties of
diversity and conversion factors from load research
data. In Proceedings of MELECON 1998, (Vol.1),
(pp. 217 220). MELECON.
Reineri, C. A., & Alvarez, C. (1999). Load research for fault location in distribution feeders.
IEEE Proceedings- Generation. Transmission,
and Distribution, 146(2), 115120. doi:10.1049/
ip-gtd:19990124
59
Load Research
Sargent, A., Broadwater, R. P., Thompson, J. C.,

& Nazarko, J. (1994). Estimation of diversity
and kWh-to-peak-kW factors from load research
data. IEEE Transactions on Power Systems, 9(3),
14501456. doi:10.1109/59.336118
Seppala, A. (1996). Load research and load
estimation in electricity distribution. PhD Dissertation. Helsinki, Finland: Helsinki University
of Technology.
Yamayee, Z. A., Brossette, R. A., Freyder, J. M.,
& Diehl, W. F. (1990). Modeling and analysis of
a programmatic residential insulation plan. IEEE
doi:10.1109/59.49120
60
ADDITIONAL READING
AEIC. (2011). Webpage. Retrieved from http://
www.aeic.org/load_research/.
KEMA. (2011). Webpage. Retrieved from http://
www.kema.com/services/consulting/efficiency/
market-strategies/load-research.aspx.
LOADRESEARCH. (2011). Webpage. Retrieved
from http://www.loadresearch.co.uk/.
LOADRESEARCHONLINE. (2011). Webpage.
Retrieved from http://www.loadresearchonline.
com/.
POWERSYSTEM. (2011). Webpage. Retrieved
from http://www.powersystem.org/load-research.
61
Chapter 5
Electricity Load Forecasting
ABSTRACT
Forecasting is the backbone of any planning process in all fields of interest. It has a great impact on future
decisions and this is reflected as profits or losses to the institute. This chapter aims to provide the planning engineer with sufficient knowledge and background of the different scopes of forecasting methods,
in general, and when applied to power system field, in particular. Various load and energy forecasting
models and theoretical techniques are discussed from different perspectives, time frames, and levels.
The mission of any electrical utility/company that operates the power system is to match load with electric energy supply, in addition to meeting the expected peak load of the power system. Electrical load
forecasting provides input to the rational planning of future resources.
A focus on a practical implemented case study presents an added value for the better appreciation of
this topic.
INTRODUCTION
One of the crucial tools of planning is to attempt
to foretell or foresee the future. The term forecast
stands for predictions of future events and conditions. The process of making such predictions is
called forecasting. The process of attempting to
predict the future encompasses many business
activities such as: following up technological
evolutions, estimating sales, knowing cost trends
and competition, maintenance requirements, and
replacement of major plant or equipment. Forecasting has evolved over the years into an exact
science and many models and tools are presently
available commercially. The main purpose of

forecasting is to meet future requirements, reduce
unexpected cost and provide a potential input to
decision (Montgomery, Johnson, & Gardiner,
1990; IAEA, 1988).
Energy has always received great attention
from countries and individuals since it represents
a commodity essential for comfortable life. With
the advent of increased civilization and economic
development energy has become a life-sustaining
commodity. No one can dare to imagine what
would be the status of life without energy. However, conventional energy resources on earth are
limited and will last for only a certain period of
DOI: 10.4018/978-1-4666-0173-4.ch005
time. Therefore, it is of paramount importance that

people look for new energy resources; especially
environmentally benign and renewable ones. It is
also essential that exact methodologies for predicting the future load for energy be developed to
meet future supply. This, in turn, will guarantee
that energy is used rationally and that exploration
and development efforts are not wasted.
Moreover, the precise knowledge of future
energy load will help countries to plan their development activities correctly, thus, avoiding under-or
over-planning of future supply. Extreme deviations
(under or over) predictions are considered to be
waste of resources as the former leads to supply
shortages, while the latter leads to unnecessary
extra cost of supply.
In many societies electricity constitutes a major
share of the total energy requirements and sometimes it is termed clean energy, although some
electricity generating plants are great environmental pollutants (Gellings, 1991). Nevertheless,
electricity has the least pollution record compared
to all other energy sources if one considers the
transportation of energy from source to final
destinations. Furthermore, electricity networks
lend themselves to be utilized as sources of live
or on-line information about electricity consumption. Therefore, electricity has earned the privilege
of having this chapter devoted to forecasting its
future load, as part of this book.
In operating a power system the mission of
the utility/company, from the forecasting point
of view, is to match load for electric energy with
available supply, in addition to meet the expected
peak load of the power system. Electrical load
forecasting provides input to the planning of
future resources.
Here, the focus is on total annual consumption
of electric energy that leads to predicting system
requirements. The electrical energy requirements
to be supplied by generating units and/or load
imports/exports comprise the sales to consumers, and the associated generation, transmission,
and distribution losses. In this chapter the terms
62
load and load are considered to provide the same

meaning from the forecasting point of view, and
they will be used interchangeably.
Since a major objective of any power company
is to accurately predict future loads (Srivastava
& Veankataraman, 1997; Soliman, et al., 2004),
then forecasting can be broadly classified, in the
sense of time frames, as : a) long-term forecasting
(1-20 years), b) medium-term (1-12 months), c)
short-term (1-4 weeks ahead), and d) very short
term (1-7days ahead).
Long-term load forecasting is intended for
applications in capacity expansion, and long-term
capital investment return studies. Medium-term
forecasting is utilized in preparing maintenance
scheduling, and to plan for outages and major
works in the power system. Short-term forecasting
is used in operation planning, unit commitment,
and economic dispatching. The very-short term
forecasting is devoted for load exchange and
contracting with neighboring networks, and to
maintain a secure power system (Amjady, 2001).
Electricity load forecasting has reached an advanced level because of the attention devoted to it
by all electricity companies (Alfares & Nazeeruddin, 2002). Meanwhile, researchers in universities,
research institutes, electricity regulatory bodies,
and electricity companies have contributed greatly
to the development of this science. Further collaboration between the academic and industrial
fields shall imminently lead to better implementation of this science and result in more prosperity
to the societies in terms of better utilization of the
scarce resources of our planet.
In any power system, there is vital need for
an overall generation plan. This requires a system
level forecast of total generation requirements
and peak load. Information about total system
energy sold is readily available through utility
bills. However, the main problem for such a plan
is the determination of load in the future. This is
achieved through calculating future load from
forecasted energy and load factors (using the relationship Peak load = energy/load factor*hours).
This is applied to each consumer category and

then the total peak load is calculated through
summing the individual loads using certain
pertinent coincidence factors. Because electrical
energy cannot be stored appropriately, correct
load forecasting is very important for the correct
investments (Gellings, 1991; Feinberg, Hajagos,
& Genethliou, 2003).
This chapter presents concepts, ideas, methodologies, and practices for electricity forecasting.
Load forecasting of the Jordanian power system is
presented as a case study at the end of the chapter.
We shall use the term forecasting to stand for
either load or energy forecasting.
Figure 1 shows the steps involved in the general
forecasting steps applied to various areas. The
process will answer three major questions: Why
forecasting? How to forecast? and what are the
results of forecasting? This, of course, involves
data gathering, analysis and modeling in addition to the feedback. This in turn will serve in
validating the proposed models and implemented
analysis techniques.
CLASSIFICATION ELECTRICAL
LOAD FORECASTING
General
Electricity load forecasting is usually divided into
three or four time frame categories. 1) Long-term
for a period of one year up to 20 years. This is used
for system expansion planning, long-term financial
planning, and tariff studies. 2) Medium-term for
a period of one to 12 months. The purpose of this
forecast is to properly plan maintenance schedules, major tests and commissioning events, and
outage times of plants and major equipment. 3)
Short-term, which covers a period of one day up to
several days. It is used for operation planning, unit
commitment of generating plants, and load flow

studies for economic dispatch. 4) Very short-term
is specifically for one to few hours ahead and is
used for power exchange and purchase contracts,
and tie-line operation. In many power companies
the last two forecasts are combined in one under
the title short-term forecasting. In this chapter the
focus will be on the long and medium term-load
forecasting as they represent a corner stone in the
planning process (IAEA, 1984; Amjady, 2001).
Forecasting is also classified according to the
entity conducting the forecast. For example the
regulatory body conducts forecasts related to the
financial planning and tariff issues. The government body, such as ministry or administration,
conducts total energy forecasts including electricity to study policy issues and fuel switching
potentials. Finally power companies conduct
almost all forecasts, as per the four time-frames
mentioned above, for their specific purpose. In
other words generation companies conduct longterm forecasts for generation expansion planning
(Srivastava & Veankataraman, 1997; Soliman, et
al., 2004).
Transmission and distribution companies do
the same but for the Transmission and Distribution (T&D) networks respectively. The same also
applies to the other time frame forecasts; namely
short, and medium. The objective of medium
forecast for any power company is the same as
mentioned earlier. On the other hand, the objective of short-term forecast for T&D companies
is to properly plan daily switching operations
according to load profile, and economic operation of T&D plants including loss minimization.
In cases of partial or total blackouts, forecasts are
used in guiding restoration plans to recover the
networks back to normal. In certain cases, forecasts are conducted for the purpose of assessing
the potential success of Load Side Management
(DSM) programs and activities.
63
Figure 1. General view of the forecasting process
Characteristics of Load
Forecasting Model
Electrical forecasting models must have certain
characteristics or conform to certain criteria in
order to guarantee a minimum level of credibility
and accuracy of results. The forecasting model
must (IAEA, 1988):
1. Attempt to identify causality in all
forecasting variables. In other words the
independent variables which are chosen by
the forecasting model, to estimate the load,
must be carefully assessed and evaluated on
the basis of their effect on load. There is no
reason, therefore, to select variables which
have no or little effect on load. On the other
64
hand certain variables might have indirect

relationship with load, and if this is strong
then it should also be considered in the model.
This is why it is sometimes strongly recommended to have one comprehensive model
for energy forecasting including electricity,
especially for the long-term. The reason of
the previous recommendation is the fact
that energy forms, including electricity, are
somehow competitive and switching from
one energy form to the other is possible based
on availability, market conditions, ease of
access, and price inter-relationships.
2. Be reproducible. This implies that any person running the algorithm will get similar
results. This can be accomplished by satisfying two things. Firstly, the model must
not include personal biases or inferences.

Secondly, mathematical modeling enhances
the reproducibility of the forecasting model.
3. Be functional. This means that the model
must conform to the purpose of the forecast.
In other words if the purpose of the forecast
was to prepare maintenance schedules for
generation and transmission plants, then a
medium-term forecasting model must be
used.
4. Maintain simplicity. There is no gain in
making complicated or sophisticated models
if the results are far from accurate. On the
other hand, the simpler the model, the easier
it is to satisfy all above characteristics. Any
complication of the forecasting model must
be weighed against the advantages gained in
more accurate results or useful information.
5. Include a built-in uncertainty. This is
needed due to the fact that all forecasting
models are based on assumptions. Therefore,
planners must include in their models certain mechanisms to test the results as per
changes in the independent variables due to
changes in the assumptions. These are called
scenarios, whereby the forecast is repeated
several times with different values for the
main independent variables to see if results
change drastically or marginally.
application (e.g. long term planning or operation

planning), and the tools to be implemented to
achieve confident level of forecasting (Feinberg,
Hajagos, & Genethliou, 2003; Gellings, 1991).
These are discussed in more details as follows.
Moreover, forecasting horizon, data availability, purpose of forecasting, computational

capabilities, skills available, budget availability,
and time as a constraint are important factors that
have potential impacts on the forecasting process.
Global vs. Disaggregated
FORECASTING PERSPECTIVES
Load and energy forecasting are viewed from many
perspectives. This depends on factors including
the application type, the area of application (e.g.
generation, T&D), the time frame, the field of
Descriptive vs. Quantitative

Descriptive approaches depend on the expertise and judgment of the planner rather than on
mathematical or statistical relationships. They
are, therefore, intuitive and subjective in nature
(Taylor & Espasa, 2008). This category of forecast
approaches includes expert systems methods.
On the other hand, quantitative forecasting
is dependent on mathematical and statistical
modeling. This category of forecast approaches
is more appropriate when the scope of analysis
and the interrelationships among variables are
somewhat complex.
Other decision support approaches, such as the
Analytic Hierarchy Process (AHP) (see Chapter
14) combine subjective value judgment with some
mathematical formulation. Moreover, fuzzy logic
is a combination of subjective judgment with
statistical analysis.
Quantitative approaches are further classified
into: 1) time series, 2) econometric or causal, and
3) simulation or end-use methods.
The global approach focuses on the global relationships rather than specific relationships. For
example, when energy forecasting is considered
it is related to global parameters such as state of
the economy, population, geopolitical trends, etc.
The reason behind this is that energy is comprised
from many energy forms, including electricity and,
therefore, the global approach is more appropriate
(Taylor & Espasa, 2008). This approach is chosen when the interrelationships among the main
parameters are very strong and interchangeable.
65
The disaggregated approach, on the other

hand, looks into the specific economic sector or
geographic region. The total country load forecast
can be obtained by summing up the load of all
sectors or regions.
Both approaches are useful and in many countries they are used in a parallel fashion. This is
because global approaches provide information
pertaining to global policy decisions, while the
disaggregate approaches provide specific detailed information regarding economic sectors or
geographic regions pertaining to specific policy
decisions.
Projective vs. Normative

Projective approaches are concerned with predicting how the future will evolve, while the
normative approaches are concerned with how a
desired future can be attained.
The projective approaches use the historical
relationships of electricity consumption with respect to other driving forces. These approaches
are based on the future evolution of the driving
forces responsible for electricity load and from
this evolution derive the future electricity load
itself. On the other hand the normative approaches
formulate a priori a certain target condition such
as a consumption trend in the future and attempt
to predict the electricity load associated with this
target condition.
Both approaches can be used together in
formulating the future electricity load. As an
example, let us consider an electricity company
that wants to forecast future load for the purpose
of defining future investment plans. At the same
time the same company wants to assess the effect of adopting a certain load side management
program on curbing future electricity load for one
consumer category. The first objective requires a
projective approach, while the second objective
needs a normative approach both of which to be
used simultaneously.
66
FORECASTING DRIVING FACTORS

Prior to the selection of a forecasting model certain
factors must be studied and assessed in order to
guarantee selecting a suitable model. These factors include the following:
State of the Economy

The state of the national economy in any country
is a decisive factor in the selection of forecasting
model. If the economy was mature, like most
industrialized countries, then electricity future
load will be stable and easily predictive. On the
other hand, in developing countries economies are
still evolving and economic growth rates do not
have a stable trend. Therefore, the forecasting of
future electricity load is more challenging. Moreover, since their economies are still developing,
electricity consumption has not reached a sate of
maturity. This creates two things. The first is suppressed load, which means that because of lack of
financial resources of the electricity entities and
the desire not to increase electricity tariffs beyond
the capability of consumers, consumers are left
without adequate supply. As soon as funds are
available then supply enhancement projects will
lead immediately to sizable increase in load. The
second is any major addition of load will have a
large impact on electricity load, which is not the
case of industrialized countries.
Type of Economy
In certain countries the economy is heavily based
on one sector or two more than others. In industrialized countries the economy is basically based
on industry. In some developing countries the
economy is based on the services sector. Other
countries depend on agriculture as the basis for
their national economies. The type of economy
may have some influence on the type of model or
method of forecasting. For one thing the informa-
tion requirements needed to do load forecasting

for different sectors are different. Another aspect
is the availability of information, as it might be
readily available for some sectors while not available for other sectors.
Clear Vision
The presence or absence of clear vision and availability of transparent policies and strategies for
the future direction of the national economy have
a great impact on investment decisions in any
country. Investments in certain economic sectors
are energy intensive. This creates a strong load
on electricity associated, perhaps, with financial
burdens on the electricity sector. Moreover, absence of transparency in policies and strategies
plays a central role in attracting or distracting
potential investments. Furthermore, absence of
clear vision and strategies for energy as a whole
will distort the future load.
Status of the Electric Power System

In certain countries the network itself is not yet
developed, therefore, consumers may not be in a
apposition to receive electricity. In other countries the generation system suffers from chronic
shortages leading to frequent power interruptions.
These cases result in difficulties in forecasting,
or in some cases render the whole exercise futile
or unnecessary.
Status of Electricity Market

The status of the electricity market is concerned
with the stakeholders involved in one way or
another in regulating, policy making, investing
or operating power plants or networks. As more
players are involved the forecasting issue gets
more complicated. This is because the process is
fragmented as each company or entity forecasts its
share of the total load using its own methodology.
The process needs integration to become useful.

Sometimes this integration is either lacking or
not proper.
Understanding of the Interrelations

with Other Energy Forms
It is very important that the electricity planner
understands very well the interrelationships between electricity load and other energy forms. This
knowledge enables the planner to make reasonable
assumptions, which in turn have great impact on
forecast results. In certain instances the change in
prices of some energy forms will lead to sudden
shift to the less expensive competing forms. This
happens more often in developing rather than
developed countries. The planner must reflect this
possible scenario in the forecast model.
Integrating Other Load Manipulation

Programs in the Forecasting
Load side management programs, which are defined as activities aiming at altering load pattern or
consumption of certain users by means of policy,
price, or other voluntary or incentive scheme.
The success of such DSM programs will result
in a reduction in electricity consumption, shift
in time of use, or complete change in consumption habits. These changes, or any one of them,
are cause enough to change load and thus affect
forecast accuracy.
The following sections discuss the different
forecasting models.
The forecasting methods are generally classified into: 1) statistical-based methods, and 2)
artificial intelligence-based methods. There is no
clear preference of one group of methods over the
other. It all depends on the application on hand.
However, the artificial intelligence-based methods have recently overtaken the statistical-based
methods and are being adopted by more users at
the present time.
67
In this section, different models and techniques

that are used for performing the electrical load
forecasting are presented. The specific application related to the time frame forecasting is also
shown in relevant parts of the following models
Statistical-Based Methods
Statistical-based methods are widely used in
many branches of forecasting. For electricity
load forecasting, these methods run well under
normal conditions, however, their performance
worsens during abrupt changes in environmental
or sociological variables that affect load patterns.
Moreover, those techniques require a large number
of complex relationships, accompanied by long
computational times, and may result in numerical
instabilities
It should be evident that these methods cannot
represent the complex nonlinear relationships existing between the load and different components
affecting it, making forecasting an uneasy task
(Feinberg & Hajagos, 2003; Vapnik, 1998; Jolliffe, 1986). The statistical-based methods include:
Regression Methods
Regression is the one of the most widely used
statistical techniques which focuses on the study of
relationships among variables. Resulting formulae
can then be used to predict, or estimate the value
of one variable from known or assumed values of
other variables related to it. As for electric load
forecasting, regression methods are usually used
to model the relationship of load consumption
and other factors such as weather, day type, and
customer class. Deterministic influences such
as holidays, stochastic influences (e.g. average
loads), and exogenous influences such as weather
are to be incorporated for better forecasts. These
methods include Ostrom and Lewis-Beck (1990),
Seber and Lee (2003), Fox (2008), and Haida and
Muto (1994):
68
a. Simple linear regression

Here, a linear equation is assumed to fit the
observed data and it uses one predictor. Given
an N-point observations of the actual load (L),
then, the estimated values are governed by the
following relationship:
Lk = a1 tk + a 0 .
(5.1)
Where:
Lk : is the kth estimated load based on the selected
model
tk : is the time of the load (can be hour, day,etc)
a0, a1: are the model unknowns to be estimated
k: is the index of data =1,2, , N
Denoting the estimation error for sample (k) as
(k), the procedure to estimate model parameters
involves minimizing the sum of squared errors (E)
between observed load (Lk) and estimated data.
This is expressed as:
N
min . E = min . k2
k =1
= min . (Lk Lk )2
(5.2)
k =1
N
= min . (Lk a1tk a 0 )2

k =1
This implies solving the two simultaneous

equations:
a 0
(L
k =1
and
a 1
a1tk a 0 )2 = 0
N
(L
k =1
(5.3)
a1tk a 0 ) = 0
This can be solved to find the optimum values

of a0 and a1, to give:
a N
0
a = N
1 t
k
k =1
tk
k =1
N
2
k =1
N
k
k =1
N
.
L t
k k
k =1
(5.4)
b. The polynomial regression, in which the

load variation is assumed to follow an pth
order polynomial model described as:
variables and a dependent or criterion variable.

The problem can be simplified by assuming a
linearized mode. In such cases, the regression
line cannot be visualized in the two dimensional
space, but can be computed just as easily. For the
load prediction case, the independent variables
affecting the load can include, weather factors,
customer classes, humidity, time of the year,...etc.
Here, the linearized model has the form:
Lk = b0 + b1X1 + b2X 2 + + bp X p .
Lk =
m =0
t .
(5.5)
m
m k
In a similar way as described in method (A)

above, this can be solved to obtain an optimized
set of polynomial coefficients am, m=1, 2,p,
which are computed from:
N
a
0 N
a t
1 k
= k =1

a p N p
t
k =1 k
tk
k =1
N
t
k =1
2
k
t
k =1
p +1
k
Where:
Lk : is the kth estimated load based on the selected
model
Xi : are the independent variables, i=1, 2,, p
and the bs are termed the regression coefficients
to be estimated.
tkp Lk
k =1
k =1
N
N
p +1
L t
k k
k

k =1

k =1

N
N
p
2p
tk Lk tk
k =1
k =1
N
(5.7)
(5.6)
c. A selected model-function regression, which

may include exponential, trigonometric,
and other selected functions. The selection
of such model depends on the experience
of the forecaster and on the load pattern.
The optimum model parameters are found
through the minimization of the sum of
squared errors.
d. Multiple regression
Multiple regression problem is, in general, a
non-linear problem that seeks to extract the relationship between several independent or predictor
It should be noted that when it is difficult to assume a linearized model, linear regression cannot
be used. In such cases, the model parameters must
be solved with nonlinear regression techniques.
Unfortunately, it is hard to find the solution to such
nonlinear equations if there are many parameters.
Time Series
Time series methods are based on the assumption
that the data have an internal structure, such as
autocorrelation, trend, or seasonal variation. Time
series forecasting methods detect and explore such
a structure. Our goal is to determine a model that
explains the observed data and allows extrapolation into the future to provide a forecast. In other
words, the aim is to find a filtering function that
explores the structure of the load behavior and enables such extrapolation (Abu-Shikhah & Elkarmi,
2011; Abu-Shikhah, Elkarmi, & Aloquili, 2011).
The components of any given time series can
be one or more of the following:
69
Trend component (T) representing the long

term pattern of a time series.
Cyclical component (C) representing the
up and down movement around a given
trend.
Seasonal component (S) showing regular
fluctuations during a given period of time
(day, month, quarter, year)
Irregular component (I) in which the effect
of irregularities or randomness of the system is seen.
The above mentioned components can be

combined for forecasting purposes as:
Lk = LkT + Lkc + LkS + LkI ,
(5.8)
or,
Lk = LkT Lkc LkS LkI .
(5.9)
Some of the mathematical models implemented

include:
a. ARMA (autoregressive moving average)
which is used assuming a stationary processes (Yang & Huang, 1998). The general
expression for an ARMA-process can be
described by the ARMA(p,q) filter described
as:
q
Q(z ) =
1 + bk z k
k =1
m =1
(5.10)
Where:
Q(z ) : is the ARMA filter described in z-transform
p: is the order of the AR-part of the ARMA model;
a1, a2 , , a p : are the coefficients of the AR-part
of the model
70
q: is the order of the MA-part of the ARMA model;

b1, b2 , , bq : are the coefficients of the MA-part
of the model
m, k: are indices
z:: is the z-transform operator.
b. ARIMA (the acronym of Autoregressive
Integrated Moving Average, also known
as Box-Jenkins model), ARMAX, and
ARIMAX (Autoregressive Integrated
Moving Average with Exogenous Variables),
and FARMAX (Fuzzy Autoregressive
Moving Average with Exogenous Input
Variables) are used assuming a non-stationary processes. The mathematical formulation
of these models is well formulated and is
available in the literature.
c. Exponential Smoothing is used when the
variable to be predicted is not stable. This
smoothing will filter out such variations to
get the underlying trend. A simple smoothing
formula is given as:
P
Lk = a(1 a )i 1Lk i .
(5.11)
i =1
Where:
Lk : is the kth smoothed load.
a: is a smoothing factor with 0<a<1.
d. The Principal Component Analysis (PCA)
is used in load forecasting. PCA aims to
separate the basic structure or pattern of
the load from the disturbance or random
component (filtering process more or less).
In other words PCA is used for reducing the
dimension of multivariate data sets, where
variables are highly correlated, to a smaller
set of variables (Jolliffe, 1986; Blanco &
Stefiszyn, 2002). This in turn, reduces the
number of variables affecting the load and
leads to a better forecast. The main drawback of the PCA is that it requires a long
computational time, and the difficulty of

selecting the optimum order of the principal
components.
Similar-Day Approach
This method uses the trend parameters of similar
days of pervious years. Hence a search on the
data of previous years concerning load, weather,
day of week, and date are performed to identify
similar days. It is possible to adopt the load of a
similar day as a forecast, or to make the forecast
by including several similar days in a linear combination or regression procedure.
Econometric or Causal Method

The econometric or causal method attempts to
formulate the mathematical relationship between
an independent variable, electricity load PD in our
case, with other independent variables, X1, X2, X3,
etcas follows:
PD = f (X1, X 2, X 3,..........., X n )
(5.12)
Where, X1, X2, include: population, electricity

prices, income, etc.
The major difference between econometric
and time series methods is that the former helps
in providing an understanding of why changes in
load occur the way they do. Since such changes
will only have a greater impact on the longer
term, econometric methods are more useful for
long-term forecasting than time series methods.
Moreover, the added information helps in making
sound future decisions and thus in proper planning. However, this requires more effort, time
and understanding of the causal relationships
between electricity load and the other socioeconomic variables. This sometimes leads the
planner to estimate the future evolution of these
socio-economic variables rather than forecasting
electricity load directly. Therefore, forecasting of
electricity load requires extensive research into the

driving forces of this load. This is accomplished
through load research and economic studies, which
must be conducted periodically or whenever a
major shift in load, social, or economic trend occurs. Most electricity companies have dedicated
departments performing these kinds of regular
studies and researches or they sometimes contract
such activities to consulting offices or research
institutions.
In general multiple regression techniques are
used for this type of forecasting. These techniques
rely on specifying an equation, which relates the
future estimates of electricity load to a set of
independent socio-economic and technological
variables or factors. The measure of quality of the
relationship between the load for electricity and
the independent variables requires the application
of certain statistical tools such as regression coefficient, correlation factor, t-statistics, etc.
Simulation or End-Use Methods

Simulation or end-use methods are also known
as process-engineering models. They are used
to emulate a system in detail and in the most
realistic fashion. In applying such methods to
electricity forecasting load is disaggregated to its
elemental components; i.e., the total system load
is decomposed into load of the various consuming
sectors of electricity. Naturally each consuming
sector, such as industry, commerce, households,
etc. has different consumption pattern and is affected differently to price signals and other policy
instruments. For example household consumers
value electricity service differently than do industrial or commercial consumers. For households
it is a matter of convenience and comfort, while
for the other two sectors it is profitability and
customer satisfaction. Moreover, the analysis of
the sectorial consumption and thus the estimation of future load for electricity are subjected to
detailed needs for electricity for each end-use.
In other words, analysis of the household sector
71
load with respect to each electrical appliance or

end-use such as space heating, air-conditioning,
lighting, etc. is needed. Moreover, the timing and
pattern of such uses are also estimated. The final
result is accomplished when all the end-uses are
summed up to make the total system load.
Many simulation or end-use models have been
designed, tested and applied by research institutions and international organizations. They are all
simple and could be applicable to any country or
electric company. The most important factor in
determining which model to choose is the availability of expertise and the level of effort to be
devoted to running such models. Some adaptation
or simplification may be necessary when introducing a certain model in order to guarantee the
suitability of the selected model to the specifics
of the country or electricity company.
The mathematical formulation of an end-use
or simulation model is as follows (IAEA, 1988):
Xt = ft [Z (t ), Z (t 1),....., Z (t n ),

X (t 1), X (t 2),....X (t n ),U ]
(5.13)
Where:
Z: indicates the exogenous variables (specified
by the user prior to the running of the model
based on other research work and analyses)
X: indicates endogenous variables (estimated by
the model itself during iterations or running
of the model)
U: indicates stochastic disturbance (error) term
T: indicates time.
If some of the variables in the above equation
are random variables then the model is termed
stochastic model, otherwise it is deterministic.
72
Artificial Intelligence (AI)Based Methods

Historically, many AI-based techniques were
proposed to be implemented for load forecasting,
however, the limitations in computer resources
and the huge processing times required put a great
barrier to efficient implementation. The view has
changed dramatically due to the advent in computer technology, and the introduction of multiprocessing techniques, in addition to the increased
efficiency of software, which lead to considerable
reduction in processing times (Khaled, El-Naggar,
& Al-Rumaih, 2005; Bunnoon, Chalermyanont,
& Limsakul, 2010).
The majority of the AI-based techniques
focus on STLF which is necessary for operation
planning. The rationale behind it being that the
randomness introduced to loads in STLF is small
and the predictions will be more accurate. On contrast, LTLF has a large degree of uncertainty due
to the larger time frame that makes the AI-based
methodologies less efficient and result in large
forecasting errors when compared to traditional
methods. In the following sections different AIbased techniques are discussed briefly that will
give the reader a better insight.
a. Artificial Neural Networks (ANN)
The ANN methods have been widely used as an
electric load forecasting technique in Short-Term
Load Forecasting (STLF) since 1990 (Dash, Liew,
& Rahman, 1996). ANN methods are usually
applied to perform non-linear curve fitting. The
literature has a variety of ANN publications in the
power system load forecasting (Szkuta, Sanabria,
& Dillon, 1999; Khotanzad, Afkhami-Rohani, &
Maratukulam, 1998; Haydari, et al., 2004).
Figure 2 shows a typical block diagram of
ANN scheme.
It should be noted that for load forecasting
problem, the input vector (which feeds the input
layer) may include different parameters affecting
the load such as temperature, humidity, and previous hourly, daily, monthly, and yearly loads,
etc. The output vector for the case of load forecasting can be the estimated loads at the required
time level.
In applying a neural network to electric load
forecasting, one must select:

Architectures (e.g. Hopfield, back propagation, Boltzmann machine)

Connectivity of layers set
Links (use of bi-directional or uni-directional) between input, output, and internally
Format set (e.g. binary or continuous) used
internally and by inputs and outputs.
The most popular artificial neural network

architecture for electric load forecasting is back
propagation shown in Figure 2. Back Propagation
(BP) neural networks use continuously valued
functions and supervised learning. That is, under
supervised learning, the actual numerical weights
assigned to element inputs are determined by
matching historical data (such as time and weather)
to desired outputs (such as historical electric loads)
in a pre-operational training session. Artificial
neural networks with unsupervised learning do
not require pre-operational training.
The outputs of an artificial neural network are
some linear or nonlinear mathematical function
of its inputs. The inputs may be the outputs of
other network elements as well as actual network
inputs. In practice network elements are arranged
in a relatively small number of connected layers
of elements between network inputs and outputs.
Feedback paths are sometimes used. Many factors
affect the accuracy and efficiency of the ANNbased load forecaster. For a BP architecture, these
factors include: The BP network structures, input
variables of BP network, the selection of training set, the modification of the BP algorithm, the
number of hidden neurons, and the parameters of
the BP algorithm.
The input variables can be classified into the

following classes: historical loads, historical and
future temperatures, hour of day index, day of
week index, wind-speed, sky-cover, rainfall, and
wet or dry day.
For normal load prediction, ANN outperforms
conventional methods. However, ANN treats
abnormal data (e.g. sudden change of load) as
bad-readings, which are typically neglected. Some
research has been performed to improve the ANN
performance in such cases by incorporating a
transient detector that is utilized to increase the
accuracy of load prediction in transient state. The
combination of multi-resolution techniques (the
wavelet transform) in conjunction with ANN resulted in decreasing prediction error in STLF at
the expense of extra computational time.
It can be stated that ANN methods are performing well in the STLF where the time frames
are small and there is a good follow up of the
change of different parameters, particularly the
temperature (i.e., the abrupt changes are minimum
or non-existing during such small times). However,
this is not true for long term load forecasting,
which makes ANN not a suitable member for
such time frames.
b. Expert systems
Here the system incorporates rules and procedures used by human experts in the field of interest
into software that is then able to automatically
make forecasts without human assistance. The use
of expert systems-based techniques began in the
1960s, and they work best when a human expert
is available to work with software developers for
a considerable amount of time in imparting the
experts knowledge to the expert system software.
Also, an experts knowledge must be appropriate
for codification into software rules (i.e. the expert
must be able to explain his/her decision process
to programmers). An expert system may codify
up to hundreds or thousands of production rules.
In the forecasting field, historical operators
73
Figure 2. ANN with back propagation (BP) architecture
knowledge and the hourly observations, weather

parameters, and any important factors related
to forecasting must be incorporated and shared
between the parties contributing to the building
up of the expert system. In general terms the developed algorithms perform better compared to
the conventional statistical methods. The more
incorporation of the actual experience of system
operators at different sites will serve in improving
the performance of the forecast.
c. Fuzzy logic systems
The title fuzzy logic implies that there is a
logic with non obviously defined rules relating
the input and output. The fuzzy inputs are mapped
to outputs through defined qualitative rules. This
enables to logically deduce outputs from fuzzy
inputs. In the sense of load forecasting, fuzzy logic
does not need precise models relating inputs and
outputs and disturbance. The proper selection of
74
rules and related logic of this method becomes

robust when used for forecasting (Song, et al.,
2005; Malkocevic, Konjic, & Miranda, 2006).
Once the fuzzy inputs are logically processed,
an inverse process called the de-fuzzification
can be used to produce the outputs. Fuzzy logic
systems can be applied for SLTF as well as for
Long Term Load Forecasting (LTLF). For example: an ANFIS (Adaptive Network based on
Fuzzy Inference System) was used for LTLF and
it showed more accurate load forecasting using
minimum econometric or end-user information.
Another example presents the DMS (Distribution
Management Systems) model which was used
successfully to predict loads at both substation
and feeder levels.
d. Support Vector Machines (SVM)
SVMs and its least squares version represent a
more recent and powerful learning technique that
is used for solving data classification and regression problems. Both methods represent a learning
SVM that perform nonlinear mapping of the data
into a high dimension (referred to as mapping the
kernel functions to features). SVCMs use simple
linear functions to create linear decision boundaries in the new space. The main problem is that of
choosing a suitable kernel for the SVMs (Suykens,
et al., 2003). The method was applied to STLF
and produces competitive results compared to that
of the statistical methods (Christiani & Taylor,
2000; Stojanovic, Bozic, & Stankovic, 2010).
e. The Particle Swarm Optimization (PSO)
algorithm
The PSO is a new adaptive algorithm based
on a social-psychological metaphor that may be
used to find optimal (or near optimal) solutions
to numerical and qualitative problems. Most
particle swarms are based on two socio-metric
principles. The principle is based on the fact that
particles fly through the solution space (Telbany
& Elkarmi, 2008), and are influenced by both the
best particle (called global best) in the particle
population and the best solution that a current
particle has discovered so far. The best position
that has been visited by the current particle is
donated by (local best). The (global best) individual conceptually connects all members of the
population to one another. That is, each particle
is influenced by the very best performance of
any member in the entire population. The (local
best) individual is conceptually seen as the ability
for particles to remember past personal success.
The particle swarm optimization makes use of a
velocity vector to update the current position of
each particle in the swarm. The position of each
particle is updated based on the social behavior
that a population of individuals adapts to its environment by returning to promising regions that
were previously discovered.
FORECASTING TIME FRAMES

Short-Term and Very ShortTerm Forecasting Models
STLF is a very crucial element in the process of
power system operational planning that affects the
performance of many functions. Such functions
cover load flow studies, security and contingency
analysis, economic dispatch, unit commitment,
hydro-thermal coordination, preventive maintenance plan for the generators, transaction evaluation, reliability evaluation of the power system
and trading of power in interconnected systems.
Practically speaking, STLF focuses on predicting electrical hourly loads and energy load for
periods up to one week a head taking into account
that load is highly volatile on a day to day basis.
This is due to varieties of factors that affect the
systems load level including: 1) trend effects,
2) seasonal effects, 3) special effects, 4) weather
effects, 5) random effects such as: human activities, load management, pricing strategy, electricity tariff structures, visibility, illumination level,
and thunderstorms. Moreover, sudden changes in
system load or system outages represent another
type of uncertainty associated with load forecasting process (Amjady, 2001; Agnaldo, Rocha, &
da Silva, 2005).
In performing STLF, it should be known that
load values for normal days are functions of the
short-term historical data and forecast values
of weather parameters (e.g. high and low temperatures). Moreover the load of the first and
last working days of the week (e.g. Mondays and
Fridays) is different from that on other weekdays
due to pickup loads on Monday mornings when
all business and industries just start work, and
evening loads on Fridays.
All of the above adds to the complexity of
getting an accurate STLF for electrical loads, and
press to focus on the different factors involved in
this process and in the continuous development
75
of new methodologies to minimize the errors encountered (Srivastava, & Veankataraman, 1997).
Several factors need to be considered in shortterm load forecasting including time factors,
weather data, and possible customers classes.
a. The time factors: These include the time of
the year, the day of the week, and the hour
of the day. There are important differences
in load between weekdays and weekends.
The load on different weekdays also can
behave differently.
b. Weather data: practically weather variables
are the most important factors that influence the load in short-term load forecasts.
Temperature and humidity are the most commonly used load predictors. Rainfall, wind
speed, and wind chill affect the forecasting
accuracy during summer and winter.
c. Customer classes: Electric usage pattern
is different for customers that belong to
different classes but is somewhat alike for
customers within each class. Therefore,
most utilities distinguish load behavior on
a class-by-class basis
The majority of the methods explained previously can usually be applied to STLF, including
the statistical and AI-based methods.
Medium-Term Forecasting Models

As the name Medium Term Load Forecasting
(MTLF) implies the purpose of medium term forecasting is for maintenance planning. The forecast
period is from several weeks to 12 months ahead.
This type of forecast depends mainly on growth
factors, i.e. factors that influence load such as
main events, addition of new loads, load patterns
of large facilities, and maintenance requirements
of large consumers (Abu-Shikhah & Elkarmi,
2011; Abu-Shihah, Elkarmi, & Aloquili, 2011).
This type of forecast is not concerned with hourly
loads like short term forecast, but rather predicts
76
the peak load of days or for the weeks ahead. With

this information it can be decided to whether take
certain facilities/plants for maintenance or not
during a given period of time. The methods used
for this type of forecast are similar to the short
term forecast except that there is less need for
accuracy and simpler methods might do.
This type of forecast is suitable for power
companies for the purposes of maintenance planning of the available plants. Such forecasts are
also useful in studying the seasonality of load
patterns. Such information is very useful in load
research and tariff studies.
Long-Term Forecasting Models

Again as the name implies this type of forecast is
used to plan the expansion of the power system, i.e.,
what type of generation or transmission plant(s)
are needed, when, where, and what size. Usually
generation system planning is done separately
from transmission system planning. The study
period of this forecast is from 1 year to 15-20 years
ahead. The output of this forecast is usually the
peak load and annual energy requirement of the
system. That is to say that the peak load and energy
requirement for the coming years of the study
period are determined by the forecasting method
(Kandil, El-Debeiky, & Hasanien, 2002). Usually
econometric or regression analysis methods are
widely used in this type of forecast. However,
end-use and expert system methods are also used.
In power utilities, the general practice gives
the responsibility for conducting the LTLF to the
planning department, while the MTLF is the responsibility of the system, operation departments
(e.g. Generation, Transmission, and Distribution
operations). However, other departments use the
estimated forecasts for conducting various studies related to financial and investment planning
within the utility.
The following discussion pertains to both
medium and long-term forecasting horizons. In
addition to the following methods it should be
understood that some of the methods discussed

above for the short-term forecasting horizon also
apply for medium or long-term as well. This is true
for the time series methods in particular although
it is also true for the other methods as well.
CASE STUDY
Different models are used for various time frame
studies of the Electric load within Jordan. Different companies use various models that are
self-designed and developed by the companies.
In the following a long-term electricity load forecasting study is presented (NEPCO, 2009; Wang
& Wang, 2010).
Load forecasting methodology adopted by
the National Electric Power Company (NEPCO)
depends on segmenting the electricity consumption into six homogenous sectors: domestic, commercial, services, industrial, water pumping, and
public lighting sector (NEPCO, 2009). The GDP
growth, population growth and the electricity
prices are the main driving factors that affect the
electricity consumption. The current forecasting
methodology used in NEPCO is a combination
of market survey and econometric (regression
analysis) approaches.
The market survey approach is used to forecast
the electricity load of the bulk supply consumers.
The operational plans of such customers are preprogrammed and such surveys provide NEPCO
with good information about the future expected
load. Those customers also provide NEPCO
with valuable information regarding their efforts
and plans in the fields of load management and
energy conservation activities, which have to be
considered during the forecasting process.
The economic approach, on the other hand,
assumes econometric models that are based on
single or multiple regression models. In NEPCO
studies, econometric approach is used to forecast
the electricity consumption of the different six
sectors mentioned above. The previous 22 years
historical data (1986-2007) have been used to

obtain the mathematical models that explain the
relation between electricity load and the independent variables.
The report shows that the different sectors
load depends on the different factors as presented
in Table 1.
Where:
Pop: population (in thousands)
GDP: Gross Domestic Product (in Jordanian
Dinars(JD))
CGDP: Commercial GDP (in JD)
AGDP: Agriculture GDP (in JD)
Phh: House hold sector price*. (in Fils/KWh)
Pc: Commercial sector price*. (in Fils/KWh)
Pi: Industrial sector price*. (in Fils/KWh)
JD
Fils: 1
1000
KWh: Kilo Watt Hour
GWh: Giga Watt Hour = 1000 KWh
*: is the electricity average constant (1994) price.
The report concludes that:

The accuracy of these methodologies is

very high and the average error is equal to
2.0% by for the period 1986-2007.
Total electricity consumption is expected
to be (71,938 GWh) in the year 2040 and
the average growth rate is equal to 6.0%
per annum through the period 2008-2040.
The current per capita annual electricity
consumption equal (1,817 KWh) and it is
expected to be (8,002 KWh) by year 2040.
The total system peak load is expected to
be (2,407 MW) in 2009 with a growth rate
of 8.0%.
The total system peak load is expected to
be (14,278 MW) in the year 2040 with an
average growth rate equal to 6.0% per annum over the study period
77
Table 1. Load formulae for different sectors in Jordan

Sector
House hold
Commercial
Industrial
Water pumping
Service
Street lighting
SUMMARY
Forecasting is one very important tool in the planning function for any business. With forecasting,
management can foresee the future and hence plan
properly. The accuracy of the forecast becomes an
important and critical issue. However, this should
be balanced with other important factors that assist
in making the decision regarding the forecasting
methodology to be selected. These issues include
ease of implementation, availability of resources,
and computation time and complexity. Electricity
load forecasting is one of the complicated and
highly dynamic concerns. This is due to the fact
that electricity is a commodity that is vital for all
socio-economic activities of any society. Moreover, load for electricity varies dynamically by the
hour, day, month and year based on several factors.
78
Load Formula
DH =
DC =
DI =
Pop1.1 GDP 0.907

103.986 Phh 0.113
Pop1.554 CGDP 1.141

106.66 Pc 0.02
Pop 0.098
100.566 GDP 1.165 Pi 0.754
DW =
DS =
Pop1.872 AGDP 0.112

104.146
Pop 0.942 GDP 0.797
DL =
103.742
Pop 2.082
105.444
In the previous parts of this chapter, different

models used in load forecasting were discussed
in short. The reader was advised to select the
model that best suit the time frame of interest
for the forecast. It was indicated that electricity
load forecasting is usually divided, depending
of the particular application, into time frame
categories including long-term, medium-term,
short-term, which covers a period of one day up
to several days. It is used for operation planning,
very short-term. In many power companies the
last two forecasts are combined.
The discussion showed that no one technique
can produce a vivid outperforming result over
the others for a given time frame. This is due to
the uncertainty present within the power system
that is referred to the stochastic behavior of consumers. In spite of that, it is possible to engage
several techniques together in order to produce

better forecast accuracy. Such improvement
happens inevitably at the expense of complexity
of the model and computational times. It was
also mentioned that there has been tremendous
advances in the computer field, both hardware
and software. This has contributed in implementing new methodologies and techniques and in
reducing computational times considerably. The
precision of prediction has also improved, which
enabled the on-line implementation of forecasting software. However, there is still a long way
for improvements in the forecasting field which
remain an active and important area of research.
The authors have the vision that the progress in
the research in load forecasting shall focus on: firstly developing new hybrid techniques combining
and engaging statistics and artificial intelligence,
secondly developing more in depth understanding
of the load dynamics and its statistical properties,
and thirdly on utilizing up-to-date technologies,
both soft and hardware, to enhance the forecasting
process, and finally the enhancement of effective
cooperation between the academic stuff and the
power industry institutes and staff members. This
is expected to contribute to reaching to more
appropriate models and a better implementation
of such models, with more accurate forecasts in
different time domains. A case study was included
to present a detailed real time implementation of
long term load forecasting.
Abu-Shikhah, N., & Elkarmi, F. (2011). Mediumterm electric load forecasting using singular
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Alfares, H. K., & Nazeeruddin, M. (2002).
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Amjady, N. (2001). Short-term hourly load
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New York, NY: McGraw-Hill.
NEPCO. (2009). Electricity load forecast in Jordan. Amman, Jordan: NEPCO.
Ostrom, C. W., & Lewis-Beck, M. S. (1990). Time
series analysis: Regression techniques (2nd ed.,
Vol. 9). Thousand Oaks, CA: SAGE Publications.
Seber, G. A. F., & Lee, A. J. (2003). Linear regression analysis. New York, NY: Wiley Interscience.
doi:10.1002/9780471722199
Soliman, S. A., Alammari, R. A., El-Hawary, M.
E., & Temraz, H. K. (2004). Long-term electric
peak load forecasting for power system planning:
A comparative study. The Arabian Journal for
Science and Engineering, 29(1B).
Song, K., Baek, Y., Hong, D. H., & Jang, G.
(2005). Short term load forecasting for the holidays using fuzzy linear regression method. IEEE
doi:10.1109/TPWRS.2004.835632
Srivastava, S. C., & Veankataraman, D. (1997).

Short-term load forecasting using recurrent neutral networks. Paper presented at APSCOM 1997.
Hong Kong, China.
Stojanovic, M., Bozic, M., & Stankovic, M.
(2010). Mid-term load forecasting using recursive time series prediction strategywith support
vector machines. Electrical Engineering, 23(3),
287298.
Suykens, J. A. K., Van Gestel, T., Vandewalle, J.,
& De Moor, B. (2003). A support vector machine
formulation to PCA analysis and its kernel version. IEEE Transactions on Neural Networks,
14(2), 447450. doi:10.1109/TNN.2003.809414
Szkuta, B. R., Sanabria, L. A., & Dillon, T. S.
(1999). Electricity price short-term forecasting
using artificial neural networks. IEEE Transactions on Power Systems, 14(3), 851857.
doi:10.1109/59.780895
Taylor, J. W., & Espasa, A. (2008). Editorial
energy forecasting. International Journal of
Forecasting, 16, 561565. doi:10.1016/j.ijforecast.2008.08.001
Telbany, M., & Elkarmi, F. (2008). Short-term
forecasting of Jordanian load using particle
swarm optimization. Electric Power Systems
Research Journal, 78(3), 425433. doi:10.1016/j.
epsr.2007.03.011
Vapnik, V. (1998). Statistical learning theory.
New York, NY: Wiley.
Wang, J., & Wang, S. (Eds.). (2010). Business

intelligence in economic forecastingtechnologies
and techniques. In F. Elkarmi & N. Abu-Shikahah
(Eds.), Electricity Demand Forecasting. Hershey,
PA: IGI Global.
Yang, H. T., & Huang, C. M. (1998). A new
short-term load forecasting approach using
self-organizing fuzzy ARMAX models. IEEE
doi:10.1109/59.651639
ADDITIONAL READING
Bowerman, B. L., OConnell, R. T., & Koehler, A.
B. (2005). Forecasting, time series, and regression: An applied approach. Cole, CA: Thomson
Brooks.
Feinberg, E., & Genethliou, D. (2005). Load forecasting. Retrieved from http://www.ams.sunysb.
edu/~feinberg/public/lf.pdf.
Filik, U. B., & Kurban, M. (2007). A new approach for the short-term load forecasting with
autoregressive and artificial neural network
models. International Journal of Computational
Intelligence Research, 3(1), 6671.
Fox, J. (1997). Applied regression analysis, linear
models, and related methods. Newbury Park,
CA: Sage.
Ringwood, J. V., Murray, F. T., & Bofelli, D.
(2001). Forecasting electricity load on short, medium and long time scales using neural networks.
Journal of Intelligent & Robotic Systems, 31(1-3).
81
82
Chapter 6
Energy Efficiency
ABSTRACT
Energy efficiency involves activities that affect and encourage a drastic change in electricity consumption by end-users. It also involves the design and manufacture of energy efficient appliances and
systems. Energy efficiency aims at achieving the following goals: 1) buildings are constructed to have
efficient use of energy, 2) appliances are designed and designated as energy efficient, and 3) behavioral
changes to electricity end-users. If all stakeholders shoulder their responsibility then energy efficiency
will achieve its goals.
Energy efficiency reduces consumer bills, cost to utilities, and cost to the national economy. It also
reduces environmental pollution, prolongs the time needed to consume energy resources, and increases
the security of supply.
Energy efficiency is affected through electrical appliances and buildings. In the first category manufacturers compete to produce energy efficient appliances. In the latter architects and engineers compete to
build energy efficient homes, schools, shops, malls, etc. A third element is needed to affect energy efficiency. This is that the consumer must be aware of the issue and at the same time willing and motivated
to participate in energy efficiency activities.
INTRODUCTION
Energy efficiency is the efficiency of using energy.
We are interested in the broader sense of energy
efficiency meaning how much output is produced
by an end-use device when it consumes energy
and how can we improve on this situation? In this
context we are interested in doing more work for
less energy. At home for example, when we talk
about cooling, heating, or refrigeration we mean
how best to achieve our objectives with the least

consumption of energy?
The inverse of energy efficiency in called
energy intensity. Increasing energy efficiency, or
reducing energy intensity, in most cases, will reduce energy consumption and therefore, conserve
energy. It often will reduce costs and save money.
The term energy efficiency is used to describe
efforts to reduce the amount of energy required for
leisure or to provide products and services. Some
DOI: 10.4018/978-1-4666-0173-4.ch006
Energy Efficiency
of the examples include efforts such as insulation,

building materials, passive architecture, energysaving light bulbs, more energy efficient appliances, and altering consumption habits. Energy
efficiency also includes the design of efficient
systems and controls. For example temperature
control or process control are considered tools used
in effecting energy efficiency. Moreover, efficient
building designs and utilizing natural weather
conditions are ways to use energy efficiently
(McKinsey Global Energy and Materials, 2009).
The objectives of performing energy efficiency
are as follows:

Reducing energy costs, which may result

in a financial cost saving to consumers,
utilities, and the national economy
Reducing environmental pollution
Rationalizing the use of energy so that resources can last longer
Increasing security of energy supply
by slowing down the rate of depleting
resources.
Energy efficiency efforts are based on convincing consumers to adopt energy efficiency
measures. Therefore, awareness is needed to
educate consumers about energy efficiency, available technologies, processes, and benefits. When
consumers are convinced that there is a personal (or
societal) need to use energy more rationally then
energy efficiency programs succeed. Sometimes
this convincing needs either an incentive (carrot)
or enforcing (stick) or a combination of both.
Once a reasonable level of awareness is reached
consumers voluntarily accept and become part of
energy efficiency efforts.
Energy efficiency is the way to go forward;
therefore, countries are exerting all efforts to moving their citizens to be more energy efficient. One
should realize the importance of energy efficiency
as it can help prolong the useful life of existing
resources, protect the earth and safeguard human
beings. Thus energy efficiency has three main
roles: 1) protecting the environment, 2) rationalizing the use of the different forms of energy, and
3) saving money.
The first role is achieved through institutionalizing energy efficiency tools and mechanisms.
This in turn, is achieved through manufacturing
and trading energy efficient products and hence
cutting down on the amount of energy consumed,
which implies less pollution into the environment. The change may be also brought about by
making people behave differently when it comes
to purchasing appliances, or how they use such
appliances at homes and offices.
The second role is related to saving the different
forms of energy. It is seen in the global scene of
seeking alternative fuels that lead to energy efficiency. As there is an escalation of the prices of
fossil fuels, due to an imbalance between supply
and demand, energy efficiency is an effective tool
to help save on fossil fuel usage. Eventually, people
will move from being dependent on fossil fuels
and switch to depending on alternative options.
Finally, saving money is the biggest contribution of energy efficiency. At the end of the day
customers seek to reduce their energy bills which
is consumed by vehicles, appliances, heating cooling, etc. As a result of energy efficiency measures
customers will be using much less energy and
hence save money. It should be emphasized, however, that energy efficiency requires some sacrifice
on the side of customers. This is manifested by
some self-imposed changes to their lifestyles and
energy consumption patterns (Gottron, 2001).
To sum up, it can be stated that energy efficiency
is a general term used for all energy forms including domestic or industrial fuels and electricity.
Usually energy efficiency efforts are directed to
all forms of energy because of the interchangeability and switching among the various types.
This is a requirement to guarantee the success of
any energy efficiency measure, since for a single
consumer all energy forms, used by this particular consumer, compete together (Foundation for
Community Association Research, 2007).
83
Energy Efficiency
ENERGY EFFICIENCY IMPACT ON

ELECTRICITY CONSUMPTION
Energy efficiency involves activities that effect and
encourage a drastic change in electricity consumption by end-users. It also involves the design and
manufacture of energy efficient appliances and
systems. In essence what energy efficiency means
is to achieve the following goals: 1) buildings
are constructed such that to have efficient use of
energy, 2) appliances are designed and designated
as energy efficient or otherwise, and 3) behavioral
changes to electricity end-users. In all that, there
must be a shared responsibility among all stakeholders including regulatory bodies, electricity
companies, appliance and systems manufacturers,
architects, construction engineers, investors and
contractors, and end-users. If all stakeholders
shoulder their responsibility then energy efficiency
will achieve its goals (UNIDO, 2010).
In order to have a successful energy efficiency
program or activity we must make energy more
valued and appreciated by the stakeholders. We
must also build awareness by education and
motivation. This will lead us to the transformation of behavior, which is considered the critical
point in the success or failure of any energy efficiency program or activity. In other words if all
stakeholders including end-users reach to point
whereby energy efficiency is a priority to them
then we can with confidence assume that there
will be success.
Numerous benefits can be received by focusing
on increasing the efficient use of energy. These
benefits for increasing electric energy efficiency
that cannot be disputed are as follows (Elkarmi,
Hassan, & Frey, 2010; ICC, 2007):

84
Lower energy bills: By decreasing energy

consumption, as compared to what was
expected, the average user will receive a
lower energy bill.
Lower cost: Compared to supplying electricity only from new power plants. Energy
efficiency programs can help defer investments in new plants and lower the total
cost of delivering electricity.
Modular and quick to deploy: Demand
side management programs can be ramped
up over one to three years to deliver considerable savings. Programs can target
areas that are congested where providing
new supply is difficult in the near term.
Environmental benefits: Many of the
negative environmental impacts of electricity generation are mitigated through
energy efficiency: lowering air pollution,
reducing greenhouse gas emissions and
decreasing water use.
Economic development: Investments in
energy efficiency helps to create jobs and
improve local economies. Energy bill savings often gets redirected towards activities that increase employment. Long-term
economic value is increased through energy efficiency investments in long-lasting
property improvements to buildings.
Changes in energy consumption practices and

installed energy efficient measures utilized by the
consuming sectors are what provide these benefits.
These benefits are accrued by avoiding the costs
of increasing capacity for supplying energy. As
energy is reduced throughout the entire year, the
supply curve is shifted downward, therefore reducing marginal energy and capacity costs (Sarkar
& Singh, 2009).
APPLIANCE EFFICIENCY
The new designs for electrical appliances target
energy efficiency more than any other parameter.
This trend is picking up momentum world wide.
People are more aware than before about energy
efficient appliances and consider it one of the
most important factors influencing purchase. The
main driver to this behavioral change is the cost
Energy Efficiency
of energy supply to homes, offices, and other

businesses. Consumers look for more efficient
appliances to save on their bills.
Manufacturers, on the other hand, compete to
have a strong foothold in the market. They know
that if their products are not energy efficient they
will be driven out of market. Simultaneously,
governments provide several types of incentives
to both consumers and suppliers to select energy
efficient appliances. All these efforts culminate in
replacing all appliances in the market to energy
efficient models.
Many countries have adopted a labeling scheme
to point out to consumers about the energy consumption of each appliance offered in the market.
This way consumers are well informed and can
take their decision to buy based on actual independent assessment of the performance of electrical
appliances. Usually the labeling is carried out by
an independent third party.
All electrical appliances sold in the markets of
most countries carry an energy label. Figure 1 is
a washing machine label, as per EU, and Figure
2 as per Australia for heat pumps.
The energy efficiency of the product is rated
in energy levels ranging from A to G on the outside label. A stands for the most energy efficient
and G for the least energy efficient. This Energy
label for household appliances is based on EU
Directive 92/75/EU. It provides reliable and easily comparable information on the energy consumption of household appliances. For refrigerators A+ and A++ are also available for very low
energy consumption appliances.
Other information is also available on the
energy label apart from the clear color-coded
classification. For example, the energy label for
light bulbs often shows its lumen, an indication
of perceived power of light, and Watt, the consumption of joules of energy per second.
This energy label enables consumers to compare appliances on the basis of energy efficiency,
in addition to other considerations. Moreover, it
provides an incentive for manufacturers to improve
the energy performance of their products.
BUILDING EFFICIENCY
There is great potential for energy savings in any
community, municipality, or city. This energy
saving potential combines electricity and other
energy forms as well as water, waste, and all other
utilities in an effort to maximize the benefit (World
Business Council for Sustainable Development,
2009). The energy saving opportunities can be
classified as per the introduction stage as follows
(Metaxiotis, 2010, pp. 396-398):
a. Savings in the design stage of buildings and
facilities:
Selection of the most energy efficient

equipment (including central air conditioning systems, air handling units,
chillers, lighting systems, etc.)
Passive architecture designs (including natural lighting, natural air circulation and ventilation, double glazing, sun curtains, insulation materials
for walls and roofs, etc.)
Selection of most efficient utilities

(combined heat and power, district
heating system, common large-size
units, pressurized water systems, etc.)
Proper design of the local electricity network (including voltage level,

conductor cross sections, transformer
ratings, substation arrangements, etc.)
Selection of efficient street lighting

system.
Provision for mass transit systems

for passengers and freight (including
light rail, escalators and people movers, etc.)
Provision for the introduction of

renewable energy sources (including solar water heaters, photovoltaic
electricity generators, fuel cells, etc.)
Provision for biogas plant for electricity generation from solid, municipal and industrial wastes.
85
Energy Efficiency
Figure 1. EU energy label for a washing machine
Selection of local raw materials, as

much as applicable, to conserve energy in transporting such materials
from long distances.
b. Savings in the implementation stage of
buildings and facilities
Proper installation of systems and

utilities.
86
Use of original equipment and parts

from genuine OEMs.
Following recommendations of
OEMs.
Selecting energy efficiency knowledge and experience as a main criterion in selecting contractors.
Use of energy efficiency consultants

in preparing tender documents including specifications, performance
criteria, minimum requirements, etc.
Short listing of appropriate certified

and qualified contractors.
Appointing an energy manager in

large projects.
Use of energy efficiency consultants

to monitor progress of contracts.
Use of contract bonus schemes

for engineering value judgment of
contractors.
Third party inspection of equipment

for large scale utilities.
Performance testing prior to

acceptance.
Conformance to energy efficiency

specifications guarantees.
Coordination meetings with all contractors during implementation to

monitor energy efficiency issues.
c. Savings at a later stage as retrofit for existing
buildings and facilities promotion of energy
efficiency programs
Conducting life-cycle cost replacement feasibility studies for non-efficient equipment.
Replacement
of
non-efficient
equipment.
Introducing
Demand
Side
Management (DSM) studies to determine cost-effectiveness of certain
programs for implementation.
Introducing power factor improvement measures.
Energy Efficiency
Figure 2. Australian energy label for reverse-cycle air conditioner
Introduce electricity loss reduction

programs.
Introduce
harmonics
reduction
programs.
Increase electrical system reliability to increase customer satisfaction

and therefore, willingness to pay for
electricity.
Designing certain incentive schemes

for energy efficiency programs.
Conducting energy audits for industries, commercial buildings, office

buildings, recreational facilities, etc.)
Introducing energy efficiency programs as a result of the energy audits.
Provision of financing schemes for

the replacement process.
d. Promotion of energy efficiency programs at
all times
Introducing
Energy
Service
Companies (ESCOs) to provide
for energy efficiency programs for
consumers.
Negotiating with the power, water,

gas, municipal waste utilities to have
long term supply contracts to benefit
from reduced rates.
Negotiating with the power utility/company to have an agreement to
supply power to the network, from
in-site power generation facilities, for
the same rate as power purchased.
Negotiating with the power utility/
company to have interruptible load
agreements for certain non-critical
loads to reduce electricity bills.
Introduce local distribution tariffs for
electricity, fuels, gas, water, municipal waste, and all other utilities.
Conduct awareness campaigns for
energy efficiency and appropriate
programs.
Conduct training programs for energy
staff of large commercial complexes,
industries, high-rise office buildings,
facilities, etc.
87
Energy Efficiency
Promote the introduction of energy

manger posts at large commercial
complexes, industries, high-rise office buildings, facilities, etc.
Promote the concept of green energy
for businesses that use or purchase
power from green energy sources.
Introduce energy efficiency labels for
equipment as a mandatory requirement for manufacturing, importing or
selling any equipment.
Introduce energy efficiency standards
and codes for building insulation.
Introduce energy efficiency awards
and prizes.
The BER (Building Energy Rating) label provides an indication of the energy performance of
the dwelling. BER compares the energy demand
and performance of a building. It is similar to the
energy label for a household electrical appliance
like the fridge. It is related to energy use for space
heating, water heating, ventilation, and lighting.
The BER, similar to the appliance label has a scale
of A-G. A rated homes are the most energy
efficient and G the least efficient.
A detailed procedure is usually outlined to grant
the BER certificate. This differs from country to
another, however, all developed countries agree on
the vitality of issuing the BER certificate. Failure
to secure the BER certificate at the correct time
results in paying a fine and incurred delays in the
legal completion of the sale or leasing.
In the USA, a BER certificate is compulsory
for almost all new homes since mid-2008. From
1/1/2009 a BER certificate is compulsory for all
homes being sold or rented. It is the responsibility
of the seller/landlord of the property to provide
this certificate for the buyer or tenant. A BER
is valid for up to 10 years provided there is no
material change to the dwelling that could affect
energy performance. Provisional Building Energy
Ratings for houses sold off plans are valid for 2
88
years. On completion of such houses a full BER

must be supplied to the buyer.
A BER is based on the characteristics of major
components of the dwelling, i.e.:

Wall, roof, and floor dimensions,

Window and door sizes and orientations
Construction type and levels of insulation,
Ventilation and air tightness features,
Systems for heat supply,
Type of lighting.
Moreover, BER covers annual energy use for

space heating, water supply, ventilation, lighting and associated pumps and fans calculated
on the basis of a typical family with a standard
pattern of occupancy. The energy performance
is expressed as:

Primary energy use per unit floor area,

which is represented on a scale of A-G
Associated CO2 emissions per meter
squared per year.
Figure 3 shows a typical BER used in most

developed countries (Walsh, 2012).
IMPROVING ENERGY EFFICIENCY

There are many different methods for increasing
energy efficiency, but only a few of them are mentioned here. During the past three to four decades
there have been many significant improvements
in energy efficiency, mostly by doing things that
people knew by instinct. As cost of fuel costs escalated, it became more feasible to increase energy
efficiency. Some of the improvements in energy
efficiency are direct results of imposing new laws
or tax incentives. Also, regulations enforcing efficiency labels helped inform consumers about
energy efficiency and, hence, direct them to buy
more energy efficient products (Brennan, 2010).
Energy Efficiency
Figure 3. BER (building energy rating) label
89
Energy Efficiency
Manufacturing
Many energy-intensity industries use fuels for
heating, manufacturing metals, treating ores,
producing chemicals, and other uses. Much of
the heat that is exhausted up smokestacks or
otherwise wasted, or of some the steam used in
the manufacturing process can be re-used. For
example, it can be used to preheat the air which
is mixed with fuel before the fuel is burned. This
process is called preheating fuel. To recover heat,
a heat exchanger is used. A household water
heater is an example of a heat exchanger. In this
heat exchanger hot air, composed of combustion
products, is used to heat up water in a tank. There
are many types of heat exchangers and many different uses for waste heat.
Generating electricity for own use is another
way whereby some industries save energy, although this is not considered more efficient than
electricity produced by large power generating
plant. However, overall energy is saved by utilizing the waste heat. This is called co-generation.
Another way of increasing overall efficiency of
energy use in industries is what is called combined heat and power or CHP. This is where both
electricity and steam are produced and used in the
plant. The industrial plant designs a large enough
boiler to cover for both purposes instead of having
two boilers for two separate purposes. This way
the efficiency of the larger boiler is higher than
the sum of the efficiency of the two smaller ones.
Transportation
Cars today get many more kilometers per liter
than the cars of the early 1970s and earlier. This
is because newer cars are lighter in weight, have
smaller engines, and are more aerodynamic. They
dont accelerate as fast or are not built with to have
room for many passengers as their predecessors.
However, due to an increase in human mobility
and improved road networks there has been an
increase in gasoline consumption. If fuel efficiency
90
of cars did not improve the gasoline consumption

would have witnessed a much higher increase
than it really has.
The energy efficiency of trains is usually a
few times better than trucks due in part to the
low rolling resistance of the steel wheels of trains
and due to the fuel consumption per ton hauled.
There is also less wind force for a train since a
train car is partly shielded from the headwind by
the car in front of it.
Passenger energy efficiency (in passengerkilometer per liter) is usually (but not always)
about the same for most modes of transportation.
Intercity buses are the most energy-efficient.
Mass transit, as currently operated, is not much
more energy efficient than the automobile. This
is dependent on what percentages of the seats are
occupied. If the speed of a vehicle is doubled the
wind force increases 4-fold. Therefore, a short high
speed train or light rail, as they are called, may
be less energy efficient than a small automobile
at lower speed. As for airplanes, they fly high in
the sky whereby the thin air helps reduce the wind
force; however, their high speeds cancel out this
advantage (Small, 2005).
Residential and Commercial

Most of this energy is for heating, lighting, and
cooling of buildings. Buildings in this context
means residential, office, and commercial buildings. Better insulation in new buildings is required
by law in many countries. In some countries building codes require even existing buildings to install
insulation in the roofs and walls to improve energy
efficiency. Fluorescent lighting is more efficient
that incandescent lighting. Moreover, Compact
Fluorescent Lighting (CFL) is more efficient than
the regular fluorescent lighting. Solar energy can
heat water (or swimming pools), see Chapter 8,
by having the sun heat water in pipes on rooftops.
Solar collectors that do this may sometimes be
seen on the rooftops of buildings.
Energy Efficiency
INCENTIVES MECHANISMS
TO EFFECT EE
In order to institute ant energy efficiency program
or activity it should first of all be cost effective.
Otherwise it will not last and not be instrumental.
The cost of any program or activity should be
borne by someone. Moreover, the benefits that
would accrue must cover the costs and have some
balance remaining to provide incentives for participants. These incentives drive participation from
consumers and electric companies. Other indirect
participants such as market players involved in
manufacturing, importing or trading with efficient
appliances are rewarded through market itself. The
inauguration of energy efficiency programs will
open market potential and business (International
Chamber of Commerce, 2007).
The calculation of incentives is based on the
potential savings that would result from implementing the programs. However, there should
be some allowances for errors in estimating the
savings. Naturally the information needed for
program design come from load research studies.
The errors may come from several areas, including
inter-alia, the following:

Misconception on the part of volunteering participants which would lead to early

withdrawal from the programs
Wrong or overestimated information about
energy saving potential
Underestimation of costs especially costs
of administrating the programs
Market distortions including competing non efficient appliances, counterfeits,
black market, etc.
Lack of enabling legislations and
regulations.
In certain cases were electricity tariffs are

subsidized energy efficiency might not work. This
is because the market forces are distorted and do
not reflect the true cost of delivering power to
consumers. Therefore, the electricity company

will not have the motive and thus the willingness
to participate in any energy efficiency program.
At the same time the consumer will also not be
motivated to participate. Similarly the market
will not be interested to acquire energy efficient
appliances or build efficient buildings.
The aim of providing incentives is not to
create the energy efficiency opportunities, but
rather to push for their success. In other words the
program might have some chances of partial or
marginal success on its own merit, however, with
the provision of incentives success will be almost
guaranteed. There are several types of incentives
targeting utilities, consumers, and the market.
Utilities are driven by financial incentives.
These come in different forms including: 1) tariff
provision for ROI for energy efficiency programs,
2) tariff provision for acceptable return on the
overall performance of the utility, 3) financing the
EE program, and 4) sharing the cost savings resulting from generation and transmission operations.
Consumers look for electricity bill reductions.
They will also be enticed to participate if given tax
incentives or financing mechanisms to purchase
EE appliances. As for the market, tax and custom
duty exemptions form incentives that can drive
the effort to promote EE programs. Performance
awards and trade recognition in relation to EE
programs success can sometimes have an attraction to the market.
CASE STUDY
Jordans electric energy needs are predominantly
dependent on foreign supply of oil and gas, making Energy Efficiency (EE) an important option
for the countrys energy security and a tool to
reduce vulnerability to changing global conditions.
Improving electric demand side efficiency by reducing unnecessary consumption and improving
the efficiency of the consuming sectors, where
possible, allows for existing supplies to serve a
91
Energy Efficiency
larger demand base, thus delaying investment

in costly supply side options. The focus of this
case study is to assess the economic viability of
introducing an incentive scheme to increase demand side efficiency without a major increase in
consumer prices. This assessment is carried out
by studying the impact of adopting EE programs
to be implemented by the transmission and distribution companies to reduce annual electricity
consumption by 1% every year for 10 consecutive
years starting in 2012. While the programs are
expected to last for 10 years, the avoided costs
are calculated for 20 years since the installed EE
measures in the last year of the program will have
a 10-year life.
Jordan is challenged by the lack of local natural
energy resources critical for social and economic
development. Jordans expanding economy, growing population, and rising standard of living all
depend on energy services. Currently, Jordan
imports 96% of its energy supplies from across
its borders, and the electricity demand is projected
to rise at a rate of 6.4% between the years 20102020. Many issues arise due to these challenges:
a. Growing demand stresses the current system, increasing energy costs and investment
requirements;
b. Economic growth is reduced due to high
financial burdens on households and
businesses;
c. New supply side investments are vulnerable
to uncertainty of future prices; and
d. Dependency on foreign sources increases
vulnerability of the energy supply to factors
outside of the control of the country.
In mid-2009 a consulting assignment in support
of the Electricity Regulatory Commission (ERC)
in Jordan was initiated to assess the economic
viability and market possibility of developing
an energy efficiency incentive mechanism to
encourage fast deployment of electric energy
efficiency on the demand side through the elec-
92
tricity transmission and distribution companies.

This assessment mainly covers a proposal for a
mechanism that can be implemented in Jordan
with identification of technical assistance needs
to implement such a mechanism.
The overall objective of this assignment is to
search for an approach that could align electric
utility incentives with the delivery of cost-effective
energy efficiency and modify ratemaking practices to encourage energy efficiency investments.
Energy efficiency should be utilized as a resource
option to meet future demand by reducing current consumption and demand, but the existing
framework of the electricity supply chain in Jordan
does not offer adequate incentives for demand-side
efficiency. In fact, some consider that there is more
than one disincentive for the electric distribution
companies to improve efficiency.
It has been internationally recognized that
creating policies to align utility incentives with
the delivery of cost-effective energy efficiency
along with modifying ratemaking practices to
promote energy efficiency investments according
to US Department of Energy and US Environmental Protection Agency (2006) are key pieces
to effectively managing the demand side of the
electricity sector. The discussion can be framed in
terms of the financial disincentives to implementing energy efficiency programs found in traditional
utility regulatory policies and how alternative
ratemaking can address these disincentives. The
recommended alternatives - sometimes referred
to as energy-efficiency or demand-side management incentive regulation - include mechanisms
to address the following three issues:
a. Ensuring energy efficiency program cost
recovery.
b. Eliminating the throughput incentivei.e.
the increased revenue, accrued by the utility,
from increased energy consumption between
rate caseswhich is closely associated with
the issues of lost revenue recovery.
Energy Efficiency
c. Providing performance-based incentives to

utility shareholders.
The avoided marginal costs of energy and
capacity are equivalent to the Long Run Marginal Costs (LRMCs) of producing electricity.
The analysis produced LRMC results that are
voltage level-differentiated capacity and timedifferentiated energy. The benefits are ultimately
avoided investments in peak capacity and energy
production. Each of these has fixed costs (turbines,
transmission and distribution, etc.) and variable
costs (fuel, Operation and Maintenance [O&M],
etc.), both of which are avoided.
Electricity is supplied to customers directly by
the National Electric Power Company (NEPCO) at
the Medium Voltage (MV) level and to customers
served by the distribution companies at the Low
Voltage (LV) level. In Table 1, the annual marginal
capacity is shown for these two voltage levels of
electricity, which is the incremental cost saving
that results from each unit of electrical capacity
that will not have to be installed as a result of
investments in energy efficiency.
The LRMC of energy was separated into peak
(3 hours a day), mid-peak (13 hours a day), and
off-peak (8 hours a day). Table 2 lists the long
run marginal cost of each of these listed by timeof-day as well as the average level LRMC of
energy for each voltage level.
Figure 4 illustrates: the forecasted electricity
sales through 2022, which are expected to reach
26,288 GWH; and the impact on consumption
with the implementation of a program that targets
a 1% annual reduction in consumption to be
implemented for 10 consecutive years. A cumulative 2,052 GWH can be reduced over the life of
the EE program.
The following assumptions were used in
evaluating the impacts of the 1% EE program:
Table 1. 2010 annual long run marginal costs of

capacity
Voltage
Level
Marginal
Capacity Cost
(JD/KW-Month)
Annual Marginal
Capacity Cost
(JD/kW-Yr)
MV
9.79
117.5
LV
14.28
171.4
Table 2. 2010 long run marginal costs of energy

for each voltage level
Time-of-Day
Peak (JD/
kWh)
Mid-Peak
(JD/
kWh)
Off-Peak
(JD/
kWh)
Average
LRMC
of Energy
(JD/kWh)
MV
0.062
0.038
0.029
0.038
LV
0.072
0.044
0.032
0.044
Voltage
Level
1. A portfolio of EE programs will be introduced to encourage the transmission and

distribution companies to reduce annual
electricity consumption by 1% every year
for 10 consecutive years starting in 2012.
2. The EE program will target EE measures
with an average 3-year simple payback
(over the program life) before the incentive
contribution. This assumption was made
based on the likelihood that in early years,
the program would capture the low-hanging
fruits or measures with short payback but
in later years, less economically attractive
measures would be included.
3. The EE program will be financed by the
transmission and distribution companies
who will be allowed to recover their investment as well as the impact of the revenue
loss associated with reduced sales through
the electricity tariff.
4. Program implementation will be assumed
linear throughout the 10-year period even
though in reality, program operations will
93
Energy Efficiency
be slower in early years then ramping with

market maturity.
5. The average life of the EE measures is assumed at 10 years since the program will
cover a range of measures with a variety of
operational lives.
6. The average program contribution to end
users would be to cover 40% of the cost of
the EE targeted measures.
7. The EE program benefits start in 2013 while
actual market activities begin in 2012
The 1% program scenario is expected to
achieve 154,450 MWH of energy savings and
26 MW in the first year of the program (2013).
With continued implementation of the program,
the annual reduction in energy consumption will
reach 262,880 in the 10th year, providing a total
of 2,052 GWH savings in energy consumption
and 347 MW over the program 10-year span as
shown on Figures 5 and 6.
It should be emphasized that in order to capture
these potential savings, a review and analysis of
energy use patterns in all consuming sectors is
necessary to determine the approach recommended for each sector and priorities to be considered within each. Investment needs, implementation approaches, technology availability and
other relevant criteria may be different and therefore, designing customized EE programs is advisable to ensure maximum achievements.
Table 3 provides a summary of the savings
achievements, investment costs and potential
economic benefits associated with the assumed
15 EE program to be implemented over a 10-year
program.
The EE program is expected to require an
investment of approximately JD 20.5 million in
its first year (2012) and grow to reach JD 54.5
million by the 10th year as the load forecast increases and so is the 1% target. Avoided costs
associated with the 1% program are predicted to
be approximately JD 11 million in 2013, and also
growing with the program to reach JD 191.5 mil-
94
lion by the 10th year of the program as shown in

Figure 7.
The cumulative benefits for the implementation
period are then added and discounted to a total of
JD 741.0 million in net present value. When
implementation costs (i.e., total program costs
plus net customer equipment costs) incurred by
society to achieve these benefits are deducted, the
net benefits would be JD 265.8 million NPV.
In order to understand the impact of various
assumptions used in this proposed incentive
mechanism, a parametric analysis was conducted
focusing on two key assumptions: 1) the program
EE implementation period and 2) the average EE
measures life.
When the average installed EE measure life
and the program implementation period were
shortened to 7 years instead of 10 (program to
run from 2012 to 2018), the net benefits were
significantly reduced to approximately JD 75
million compared to JD 266 million that would
accrue from the base case scenario of 10 years of
implementation.
Table 4 lists the costs and benefits for each
of the 2 scenarios mentioned above, 1) a 10-year
program with average EE measure life of 10 years,
2) a 7-year program with average EE measure life
of 7 years. All values are in NPV million Jordanian
Dinars (1 JD 1.5 UD$).
SUMMARY
Energy efficiency efforts are based on convincing
consumers to adopt energy efficiency measures.
Therefore, awareness is needed to educate consumers about energy efficiency, available technologies,
processes, and benefits. When consumers are
convinced that there is a personal (or societal)
need to use energy more rationally then energy
efficiency programs succeed. Sometimes this
convincing needs either an incentive (carrot) or
enforcing (stick) or a combination of both. Once a
reasonable level of awareness is reached consum-
Energy Efficiency
Figure 4. Forecasted electricity sales and cumulative ee savings potential
ers voluntarily accept and become part of energy

efficiency efforts.
The objectives of performing energy efficiency
are as follows:

Reducing energy costs, which may result

in a financial cost saving to consumers,
utilities and the national economy
Reducing environmental pollution
Rationalizing the use of energy so that resources can last longer
Increasing security of energy supply

by slowing down the rate of depleting
resources.
The end-use energy efficiency improvements

lead to gaining multiple benefits:
1. Financial: This applies to customers and
the society. There will be a reduction of the
need for additional supply and/or distribution
facilities. This results in lowering customer
Figure 5. Annual and cumulative EE savings
95
Energy Efficiency
Figure 6. Annual and cumulative demand reduction
energy costs, reducing equipment maintenance, creating opportunities for reducing

equipment size, and mitigating risks from
future price fluctuations.
2. Social: As investments become more efficient, economic development and local
job opportunities are stimulated. Moreover,
energy security and the quality of living and
working conditions will also improve.
3. Environmental: Higher efficiency serves in
reducing the direct emissions from on-site
energy use, and the environmental impacts
resulting from fossil fuel and electricity
production and transmission.
sumption by end-users. It also involves the design

and manufacture of energy efficient appliances and
systems. In essence what energy efficiency means
is to achieve the following goals; 1) buildings are
constructed such that to have efficient use of energy, 2) appliances are designed and designated as
energy efficient, and 3) effect behavioral changes
to electricity end-users. In all that, there must be
a shared responsibility among all stakeholders
including regulatory bodies, electricity companies,
appliance and systems manufacturers, architects,
construction engineers, investors and contractors,
and end-users. If all stakeholders shoulder their
responsibility then energy efficiency will achieve
its goals.
The new designs for electrical appliances target
energy efficiency more than any other parameter.
Energy efficiency involves activities that effect

and encourage a drastic change in electricity con-
Table 3. Summary of benefits associated with 1% EE program scenario

Year
13
14
15
16
17
Cumulative Energy
Savings MMWH
154
319
494
680
877
1,086
1,307
1,541
1,789
2,052
Cumulative Demand
Reduction MW
26
54
84
115
149
184
221
261
303
347
Avoided Costs (JD Million)
11
23.5
37.5
53.1
70.6
90
111.6
135.5
162.1
191.5
23.1
26.0
29.0
32.3
36.0
40.0
44.4
49.2
54.5
Required Investment by
the Distribution and
transmission companies
(JD Million)
96
2012
20.5
18
19
20
21
2022
Energy Efficiency
Figure 7. EE program implementation costs versus systems avoided costs for a 1% EE program
This trend is picking up momentum worldwide.

People are more aware than before about energy
efficient appliances and consider it one of the
most important factors influencing purchase. The
main driver to this behavioral change is the cost
of energy supply to homes, offices, and other
businesses. Consumers look for more efficient
appliances to save on their bills.
Many countries have adopted a labeling scheme
to point out to consumers about the energy consumption of each appliance offered in the market.
This way consumers are well informed and can
take their decision to buy based on actual independent assessment of the performance of electrical
appliances. Usually the labeling is carried out by
an independent third party.
The BER label compares the energy demand
and performance of a building. It is similar to the
energy label for a household electrical appliance
like the fridge. The electrical appliances and BER
labels use a scale of A-G. A rated the most energy
efficient while G indicates the least efficient.
In order to institute an energy efficiency
program or activity it should first of all be cost
effective. Otherwise it will not last and not be
instrumental. The cost of any program or activity should be borne by someone. Moreover, the
benefits that would accrue must cover the costs
and have some balance remaining to provide incentives for participants. These incentives drive
Table 4. Cumulative benefits and costs for EE

program variations
Program Scenario
10-Year EE
Program
With Avg.
Measures
life = 10 years
7-Year EE
Program
With Avg.
Measures
life = 7 years
Avoided Costs
Benefits
JD 741.0
JD 401.5
Total Program
and revenue Loss
Costs
JD 475.2
JD 326.9
Net Benefits
JD 265.8
JD 74.6
participation from consumers and electric companies. Other indirect participants such as market
players involved in manufacturing, importing or
trading with efficient appliances are rewarded
through market itself. The inauguration of energy
efficiency programs will open market potential
and business.
REFERENCES
Brennan, T. J. (2010). Optimal energy efficiency
policies and regulatory demand-side management
tests: How well do they match? Energy Policy,
38(8). doi:10.1016/j.enpol.2010.03.007
97
Energy Efficiency
Elkarmi, F., Hassan, E., & Fry, T. (2010). An

assessment of a cost-effective energy efficiency
scenario- A case study for Jordan. In Proceedings
of the 7th Jordanian International Electrical and
Electronics Engineering Conference. IEEE Press.
Foundation for Community Association Research.
(2007). Best practices- Energy efficiency. Washington, DC: FCAR.
Gottron, F. (2001). Energy efficiency and the rebound effect: Does increasing efficiency decrease
demand. CRS Report for Congress. Retrieved
from http://www.crswebservices.com.
International Chamber of Commerce. (2007).
Energy efficiency: A world business perspective.
Paper presented by the Commission on Environment and Energy. Washington, DC: ICC.
McKinsey Global Energy and Materials. (2009).
Unlocking energy efficiency in the US economy.
New York, NY: McKinsey.
IGI Global.
Sarkar, A., & Singh, J. (2009). Financing energy efficiency in developing countries Lessons
learned and remaining challenges. Washington,
DC: United States Energy Association.
Small, K., & Van Dender, K. (2005). The effect
of improved fuel economy on vehicle miles traveled: Estimating the rebound effect using U.S.
state data, 19662001. Berkeley, CA: University
of California.
UNIDO. (2010). Global industrial energy efficiency benchmarking: An energy policy tool.
New York, NY: UNIDO.
98
Walsh, A. (2012). Anthony P. Walsh Energy Assessments Web Site. Retrieved from http://www.
building-energy-rating.com/
World Business Council for Sustainable Development. (2009). Energy efficiency in buildingsBusiness realties and opportunities. New York,
NY: World Business Council for Sustainable
Development.
ADDITIONAL READING
Herring, H. (1999). Does energy efficiency save
energy? The debate and its consequences. Applied
Energy, 63(3), 209226. doi:10.1016/S03062619(99)00030-6
Hu, D. (1983). Handbook of industrial energy conservation. New York, NY: Van Nostrand Reinhold.
Lenssen, N. (1994). Energy efficiency: The key
to international growth. USA Today, pp. 82-84.
Owen, D. (2010). Annals of environmentalism:
The efficiency dilemma. The New Yorker. Retrieved from http://www.thenewyorker.com.
Robinson, S. (1978). The energy efficient home.
New York, NY: New American Library.
Rocky Mountain Institute Staff. (1994). Energy
efficient homes. Amherst, NH: Brick House.
Schipper, L. (1994). Energy efficiency works, and
it saves money. The New York Times. Retrieved
from http://www.nyt.com.
Schipper, L., & Meyers, S. (1992). Energy efficiency and human activity: Past trends, future
prospects. Cambridge, UK: Cambridge University
Press.
99
Chapter 7
Demand Side Management
ABSTRACT
Demand Side Management (DSM) is a term used to describe the activities and ensuing programs that
attempt to affect changes in consumer behavior leading to a reduction in electricity consumption. DSM
comprises any activity or program that is designed within the wider energy efficiency function. The
participants in any DSM program are carefully selected such that their collective response to the program results in energy saving or shift in timing of load demand. Therefore, the objective of any DSM
program could be peak load saving or simply shifting in its timing from the peak load period to other
off-peak periods.
The implementation of DSM programs is likely to introduce improvement in the efficiency of power
systems, reduce financial burdens on utilities to build new energy facilities, improve the environmental
situation, and lower the cost of delivered energy to consumers; thus lowering O&M costs as well as
consumer bills, enhance system reliability by reducing power shortages and power cuts, improve the
national economy by improving the value added of the electricity sector, and increase job creation and
new business ventures.
INTRODUCTION
Electricity supply industry is one of cost-based
administered pricing in retail markets with average
rates that often ignore highly variable supply-side
costs, i.e., wholesale electricity costs. Demand
Side Management (DSM) is customer response

(Violette, 2007, p. 2). The changing use of energy
in response to market factors including controlled
by the conservation of energy, demand response
defined by the prices and/or production costs, and
load management which involves the demand
DOI: 10.4018/978-1-4666-0173-4.ch007
shifting from high price to low price periods. It

is realized that efficient markets require the appropriate interaction of demand and supply. In an
inelastic demand the supply-side will set prices
(Violette, 2007).
Demand Side Management (DSM) is defined
as the cooperative activities between the power
company and its customers (sometimes with the
assistance of third parties such as various trade
allies and energy services companies). The main
objective of such cooperation is to implement
programs for increasing the efficiency of energy
use, with resulting monetary gains to the customer,
utility and society as a whole (Hirst, 1994).
DSM was put under focus during the 1980s to
mid 1990s after the oil embargo. The latter caused
a sharp increase in energy prices and caused governments and electric utilities to look for ways to
reduce energy demand so that the overall energy
bill is reduced. This results in higher interests
in Energy Efficiency (EE) and the associated
incentive policies, and in the restructuring of
wholesale and retail markets to meet the move
to the competitive market.
Another stimulus was triggered after the year
2000, which was caused by the sharp increase of
energy costs (oil and gas), cost volatility causing price spikes, power system constraints, and
environmental uncertainties (Koomey & Krause,
1997). As such EE and Deregulation (DR) can be
viewed as hedges against a wide range of risks.
It is seen that linking wholesale and retail
markets through appropriate pricing is important
for the industry. This leads to more pricing-types
of solutions.
Both EE and DR are viewed as integrated solutions of the same spectrum of services. However,
EE supporters resist DR investments and EE/DR
integration.
The present situation is ambiguous, as DSM
supporters are spending substantive amounts,
while many utilities are actively supporting DR
to enhance reliability and to go to floating prices
100
where the customer can shop around for the best

deals.
Moreover, as incentives for DSM investment
are highly supported, and renewables are becoming
more viable alternatives. DSM options are now
viewed as diversified resources and can provide
a physical hedge against different uncertainties
(Loughran, 2004).
Benefits of the DSM initiatives are numerous
(DSMTI, 1993). Some of the most salient benefits
are described as follows:
a. Customer benefits including the following:
1) meet customer demand, 2) reduce electricity bills, 3) improve level of service, and 4)
improve comfort, lifestyle, and productivity.
b. Utility benefits including the following: 1)
lower cost of service, 2) improved operating
efficiency, 3) postpone capacity additions,
4) reduce capital needs, and 5) improve
customer service by enhancing system
reliability.
c. Societal benefits including the following: 1)
reduce environmental pollution, 2) introduce
new resources, 3) increase economic efficiency, 4) introduce new job opportunities
and business formulation, and 5) maximize
customer welfare.
CONCEPTS AND
CHARACTERISTICS OF DEMAND
SIDE MANAGEMENT (DSM)
The accelerated growth in demand for electricity
causes financial burdens on consumers as well
as on electric utilities. Increased electricity bills
causes consumers to consider the adoption of a
more rational use of electricity. At the same time
electric utilities are forced to take into consideration efforts which will slow down this growth.
Certain measures and activities can curb this
growth in demand into manageable levels which
are also economical and beneficial to consumers,

utilities and the national economy. These measures
and activities are integral parts of DSM programs
(Sarkar, 2009).
DSM is a term used to describe the activities and ensuing programs that attempt to effect
changes on consumer behavior leading to a reduction in electricity consumption. DSM falls under
the more general concept of energy efficiency. It
strictly deals with consumer consumption and is
not concerned with improving appliance efficiency
or other design considerations.
DSM comprises any activity or program that
is designed within the wider energy efficiency
function. The participants in any DSM program
are carefully selected such that their collective
response to the program results in energy saving
or shift in timing of load demand. Therefore, the
objective of any DSM program could be peak
load saving or simply shifting in its timing from
the peak load period to other off-peak periods
(IIEC, 2006).
DSM programs are implemented by consumers
willing to reduce their electricity bills, electric
utilities attempting to reduce investment requirements as well as operational costs for electrical
plants and networks. The national economy will
benefit by optimizing the use of energy resources
in a sustainable way.
The following figures illustrate all DSM
programs. The first strategy is concerned with
improving the load factor by filling the valleys
by introducing incentives for consumption in the
low consumption periods of the day. Peak shaving/clipping, as the name implies, is to reduce the
peak load or to remove demand form the peak
period. The removed load may be relocated at
other times or completely removed. Load shifting
means removing loads from certain time periods
to other time periods. Flexible load shape is to
affect dramatic change for certain consumers to
completely change the load shape. This is usually

done to certain consumer groups with complete
consumption elasticity. It does not work for all
consumers. Finally strategic load growth and
strategic conservation are strategies dealing with
conflicting directions. The first is applied when it
is required to increase demand in order to improve
load factor or to improve utilization of certain
supply facility. This applies to a newly developed
area being supplied from a new substation. The
latter, which deals with strategic conservation,
is concerned with long term actions aiming at
enhancing conservation among consumers.
The definition of each load objective shown
in Figure 1 is as follows (DSMTI, 1993):

Peak Clipping/shaving: the reduction of

utility load mainly during periods of peak
demand (morning or evening).
Valley Filling: the improvement of system
load factor by encouraging consumption
during off-peak periods.
Conservation: the reduction of utility
loads, more or less equally, during all or
most hours of the day.
Flexible Utility Load shape: refers to programs that design some options to change
customer energy consumption on an asneeded basis, as in interruptible/ curtailable contracts.
Load Building: this is a strategic requirement which could happen. It involves
building loads, more or less equally, during all or most hours of the day. The objective could be to improve utilization rates of
available capacities.
Load Shifting: the relocation of loads
from periods of peak demand to off-peak
periods. Load shifting typically does not
substantially alter total electricity sales.
101
Figure 1. Load shape objectives
High pressure sodium exterior lighting

Window shading
Window films
Central air conditioner servicing
Ground water source heat pumps
Whole-house fan
Ceiling insulation
Wall insulation
Basement/crawlspace/foundation
wall insulation
High performance windows
Infiltration reduction
Residential thermal energy storage
Clock thermostat
Microwave
Induction range
Dryer exhaust heat recovery
Heat pump dryer
Microwave dryer
Air conditioning cycle
Water heater control
BENEFITS OF DSM
ALTERNATIVES OF DSM
The following DSM is a list of alternative programs usually used for the residual, commercial,
or industrial consumers (DSMTI, 1993):

102
Water heater thermal trap

Heat pump water heater
Water heater tank insulation
Duct insulation
Water pipe insulation
Low temperature dishwashers
Front loading clothes washer
Low flow showerheads and faucet aerators
Solar water heaters
Compact fluorescents
Standard high efficiency incandescent
lamps
DSM programs, if cost-effective, will produce

savings in the form of reduced investment required
to expand the supply system to meet expected
demand. It could delay the need for investment,
which is equivalent to reducing the interest on
capital loans. On the other hand DSM programs
are also beneficial from the customer point of
view. Finally these programs are also useful for
the national economy (Dunn, 2003).
The benefits for the electric companies participating or administering DSM programs are
as follows:

Savings in investment costs

Additional revenue in the form of program
costs to be covered by consumes or other
government bodies. Moreover, the utilities
may spin-off into doing DSM programs
Serving additional customers as a result of

reducing demand of original customers
Improving load factors and hence improving efficiency of production and delivery
of electrical energy
Increasing customer awareness and participation, which would lead to better relationship and cooperation in other programs
The benefits of DSM programs on customers

can be summarized as follows:

Reduced bills
Information update and increased awareness regarding DSM activities and latest
technologies
Building up the energy saving culture
which could be generalized to other commodities and services
Participation in pilot programs for free
Special treatment and assistance during
outages due to appreciation for the participation in DSM programs
Finally the benefits that would accrue to the

national economy are:

Introducing new DSM appliances or tools

in the market
Providing for new employment and business opportunities as DSM contractors
Enhancing cooperation activities among
contractors, utilities, and customers
Improving environmental situation by reducing pollution
The implementation of DSM programs is likely

to introduce the following changes (Charles River
Associates, 2005):

Improve the efficiency of power systems.

Reduce financial burdens on utilities to
build new energy facilities.
Improve the environmental situation.
Lower the cost of delivered energy to consumers; thus lowering O&M costs as well
as consumer bills.
Enhance system reliability by reducing
power shortages and power cuts.
Improve the national economy by improving the value added of the electricity sector.
Increase job creation and new business
ventures.
IMPLEMENTATION OF DSM
DSM programs are very much dependent on the
power company and its associated customers.
Figure 2 describes various steps involved in
implementing a given DSM program.
Step 1: Load research - This stage in the DSM
implementation will typically assess the
customer base, tariff, load profile on an
hourly basis and will identify the sectors
contributing to the load shape. This step is
achieved through performing market and
consensus surveys, and it will identify peak
load contributors. (See Chapter 4).
Step 2: Define load shape objectives - Based
on the results of the load research in the
power company, the DSM unit defines the
load shape objective(s) most appropriate for
the current situation. Peak clipping, valley
filling, shape shifting, load conservation,
load building, and flexible load shapes are
identified in this step.
Step 3: Assess program implementation strategies - This step will identify the end-use
applications and technology options that
can be potentially targeted to reduce peak
demand, specifically in sectors contributing
to system peak. This step will also carry out
a detailed benefit-cost analysis for the enduses and the power companies. In particular
societal as well as environmental benefits
must be assessed.
103
Figure 2. DSM implementation steps
Step 4: Implementation - Implementation stage

includes program design for specific end-use
applications. Moreover, program promotion
is carried out to the target audience. This is
accomplished through marketing approaches
such as advertising, bill inserts, and focus
group meetings. Testing of the viability of
the program, as well as the customers fed
back is also considered in this stage.
Step 5: Monitoring and evaluation -This step
tracks the actions designed to be carried out
during program design and implementation
and compares the same with proposed goals
set by the DSM program. A detailed and
real benefit-cost analysis is to be performed
for customers and utilities. Moreover, the
demand reduction and recovery in addition
to customer goodwill must be assessed.
In this stage it is important to implement
methodologies that serve in identifying the
avoided cost of supply for the power company against the total program cost. Items
such as administration and O&M costs for
the power companies as well as benefits to
the participants including the reduced bills or
incentives to the end-users must be included
(Frisch, 2008).
EVALUATION OF DSM
ALTERNATIVES
In todays energy efficiency-conscious situation, it
is important that power companies engage in well
conceived and detailed planning in order to meet
future demand. It is equally important to examine
and develop in the plan all feasible DSM options
that help in meeting customer demands and satisfies system performance criteria. The plan should
optimize a mix of supply that includes fossil-fuel
and nuclear commercial generating options, commercial and near-commercial renewable generation options and best practice DSM/EE measures
(Simmons, 2010; Koomey, Rosenfeld, & Gadgil,
1990). These three elements are integral parts of
any Integrated Resource Plan (IRP). There are
a variety of tools to do this task which include:
1.
2.
3.
4.
5.
6.
7.
8.
104
Comprehensive DSM/EE measure databases

Robust analysis tools
Technical and achievable potential analytics
Life-cycle economic analyses experience
and tools
Comprehensive analysis and reporting
processes
Conditional demand modeling capability
Energy and peak weather normalization
capability
Load and energy forecasting capability
9. Load research sample design and sample

capability
10. Load shape and measure data migration
services
11. Market transformation evaluations
12. IRP development capability
When DSM/EE assessment is completed, a
significant effort may be indicated, or perhaps
ordered by a power company. As the IRP elements
are approved, the next step is to turn groups of
measures into focused DSM/EE Programs (Brennan, 2010). The main objectives include:

Bundling appropriate measures into cohesive programs

Developing comprehensive cost and labor
budgets
Setting goals for individual program
Implementing an ongoing evaluation protocols in place
Identification of internal and external
resources.
Identifying and contracting with, equipment and service providers
Presenting the overall business for sponsors, and for clients senior management
team
CASE STUDY
In the Appendix the implementation of DSM to
the Jordanian power system is outlined through
the illustrated questionnaire that was used to collect necessary data. These were implemented for
industrial and commercial sectors.
SUMMARY
Demand-Side Management (DSM) is based on
customer action. The changing use of energy in
response to market factors including control by
demand side and defined by the prices and/or

production costs, and load management which
involves the demand shifting from high price
to low price periods. It is realized that efficient
markets require the appropriate interaction of
demand and supply. In an inelastic demand situation the supply-side will set prices. Demand side
response to such prices, or other signals, is what
is known as DSM.
Demand-Side Management (DSM) is defined
as the cooperative activities between the power
company and its customers (sometimes with the
assistance of third parties such as various trade
allies and energy services companies). The main
objective of such cooperation is to implement
programs for increasing the efficiency of energy
use, with resulting monetary gains to the customer,
utility and society as a whole.
Benefits of the DSM initiatives are numerous.
Some of the most salient benefits are described
as follows:
d. Customer benefits including the following:
1) meet customer demand, 2) reduce electricity bills, 3) improve level of service, and 4)
improve comfort, lifestyle, and productivity.
e. Utility benefits including the following: 1)
lower cost of service, 2) improved operating
efficiency, 3) postpone capacity additions,
4) reduce capital needs, and 5) improve
customer service by enhancing system
reliability.
f. Societal benefits including the following: 1)
reduce environmental pollution, 2) introduce
new resources, 3) increase economic efficiency, 4) introduce new job opportunities
and business formulation, and 5) maximize
customer welfare.
DSM may take on of the following types: 1)
improving the load factor by filling the valleys by
introducing incentives for consumption in the low
consumption periods of the day. 2) Peak shaving/
clipping, as the name implies, is to reduce the peak
105
load or to remove demand form the peak period.

The removed load may be relocated at other
times or completely removed. 3) Load shifting
means removing loads from certain time periods
to other time periods. 4) Flexible load shape is
to affect dramatic change for certain consumers
to completely change the load shape. This is
usually done to certain consumer groups with
complete consumption elasticity. 5) Strategic load
growth and 6) strategic conservation are strategies dealing with conflicting directions. The first
is applied when it is required to increase demand
in order to improve load factor or to improve
utilization of certain supply facility. This applies
to a newly developed area being supplied from
a new substation. The latter, which deals with
strategic conservation, is concerned with long
term actions aiming at enhancing conservation
among consumers.
REFERENCES
Brennan, T. J. (2010). Optimal energy efficiency
policies and regulatory demand-side management
tests: How well do they match? Energy Policy,
38(8). doi:10.1016/j.enpol.2010.03.007
Charles River Associates. (2005). Primer on
demand-side management with an emphasis on
price-responsive programs. Paper presented to
the World Bank, CRA No. D06090. Washington,
DC: The World Bank.
DSMTI. (1993). Demand side management course
materials. New York, NY: DSMTI.
Dunn, R. (2003). Electric utility demand-side
management 1999. Washington, DC: US Energy
Information Administration.
Frisch, C. (2008). Electric utility demand side
management: Defining and evaluating achievable potential. Masters Thesis. Durham, NC:
Duke University.
106
Hirst, E. (1994). Electric-utility DSM programs in

a competitive market. Oak Ridge, TN: Oak Ridge
National Laboratory.
IIEC. (2006). Demand side management best
practices guidebook for pacific island utilities.
Washington, DC: IIEC.
Koomey, J., & Krause, F. (1997). Introduction to
environmental externality costs. In CRC Handbook on Energy Efficiency. Boca Raton, FL: CRC
Press, Inc.
Koomey, J., Rosenfeld, A. H., & Gadgil, A. (1990).
Conservation screening curves to compare efficiency investment to power plants: Applications
to commercial sector conservation program. In
Proceedings of the 1990 ACEEE Summer Study
on Energy Efficiency in Buildings. ACEEE.
Loughran, D. S., & Kulick, J. (2004). Demandside management and energy efficiency in the
United States. The Energy Journal (Cambridge,
Mass.), 25(1). doi:10.5547/ISSN0195-6574-EJVol25-No1-2
Sarkar, A., & Singh, J. (2009). Financing energy efficiency in developing countries Lessons
learned and remaining challenges. Washington,
DC: United States Energy Association.
Simmons, D. (2010). Demand-side management:
Government planning, not market conservation
(testimony of Dan Simmons before the Georgia
Public Service Commission). Augusta, GA: Master
Resource.
Violette, D. (2007). Demand side management
(DSM): Future role in energy markets. Paper
presented in Energy Futures Speaker Series: Panel
Discussion on Consumer Response to High Energy
Prices. New York, NY.
ADDITIONAL READING
Alexander, B. J. (1980). The welfare analysis approach to the time-of-day pricing decision. Public
Utilities Fortnightly. Retrieved from http://www.
fortnightly.com.
Barakat & Chamberlin Inc. (1993). Principles
and practice of demand-side management. EPRI
TR-102556. Palo Alto, CA: Stanford University.
Braithwait, S. D. (1994). What standard practice tests dont tell us about DSM induced price
impacts. In Proceedings of the 1994 Innovating
Electricity Pricing, EPRI TR-103629. EPRI.
Devraj, R. (2001). New Delhi power grab. Asia
Times. Retrieved from http://www.atimes.com.
Dreze, J. H. (1995). Forty years of public economics: A personal perspective. The Journal of Economic Perspectives, 9(2). doi:10.1257/jep.9.2.111
Faruqui, A., & George, S. (2002). The value of
dynamic pricing in mass markets. The Electricity Journal. Retrieved from http://www.journals.
elsevier.com/the-electricity-journal/.
Harberger, A. C. (1971). Three basic postulates for
applied welfare economics: An interpretive essay.
Journal of Economic Literature, 9(3), 785797.
Ranganathan, V., & Narasimha, D. (2004). Power
sector reforms in India. Management Review,
16(1). Acton, J. P., & Mitchell, B. M. (1979).
Evaluating time-of-day electricity rates for residential customers. R-2509-DWP. Santa Monica,
CA: RAND Corporation.
107
APPENDIX
1. Questionnaire for DSM: A Field Survey for the Industrial Sector
This is a project that was implemented in cooperation with NEPCO in July 1997.
All information requested in this form are for statistical purpose only, for the assessment of Demand side
management potential. The information obtained from this survey shall be kept confidential according
to statistics Law No 24 year 1950 and its amendments.
Date:
Name of responsible person:
Industrial Sector:
__________________________________________________________
I. Information to be compiled by the company:
1. General:
Company name:
Person in charge:
P.O. Box:
Tel:
Fax:
Ownership:
Public shareholding
Limited shareholding
Private
Year established: ____________________

Year of start of production: ____________________
Factory area: ____________________m2
Office area: ____________________m2
1.1 Human Resources
Admin.
108
Engineer
Tech.
Worker
Total
1.2 Work Schedule 1 shift 2 shifts 3 shifts

Number of working hours:
From: ____________________ To: ____________________
Number of monthly working days: ____________________
Number of annual maintenance days: ____________________
2. Production for year ____________________ (give most recent)
Product
Capacity
Actual Production
Cost of Production
1234-
3. Sales for year ____________________ (give most recent)

Product
Local Sales
Exports
1234-
4. Source of raw material: Local market Imports

5. Energy Consumption (Monthly)
Energy Form
Quantity
Value (J.D.)
Electricity
Heavy fuel oil
Diesel
Other
Other energy forms:______________________

Electricity is: Purchased Self generated
Are you being supplied from a private substation: Yes No
What is the rating: KVA
Do you have stand by supply : Yes No
What is the capacity: ____________________ KW
109
II. Information to be completed during the field survey visit

1. Energy use: Lighting Motors Lifts Compressors Boilers Heating

Air conditioning Cooling Pumps Other
2. Lighting:
Type
Offices
Factory
Rating
Incandescent
Florescent
Mercury
Energy saving
Other
What is the % of lighting load ____________________ %

Do you know about energy saving bulbs: Yes No
Do you intend to purchase energy saving bulbs: Yes No
Hours of daily operation of lighting: ____________________
Do you intend to reduce operational hours for some bulbs for some of the time: Yes No
3. Motors
Rating
Number
Power factor*
Daily hours of operation
1 - 5 hp
5.1 - 10 hp
10.1 - 20 hp
> 20 hp
*Power factor = Cos , where P = V.I. Cos
110
Do you have maintenance program for the motors: monthly seasonally annually
Do you rewind motors locally: Yes No
Do you know about energy-efficient motors : Yes No
Do you take into consideration motor efficiency or power factor rating when purchasing motors:
Yes No
Is it possible to alter the operational regime (mode & hours) of motors to effect savings in electricity bill: Yes No
Do you know that an oversized motor can have more harmful effects than benefit due to increased
losses: Yes No
4. Lifts (people / cargo movers)

Type
Rating
Daily Operational hours
Maintenance
Lift
Crane
Forklift
Escalator
5. Compressors
Motor Rating
Maintenance
1234-
6. Boilers
Fuel used
Rating
End use
Electricity
Heavy fuel oil
Diesel
Other
Maintenance: monthly seasonally annually

Insulation used for boilers: tubes walls
Maintenance coverage: complete burner controls adjustment cleaning
Do you have an intention to reduce fuel consumption in boilers by means of reducing operational
hours, burner adjustment or other means: Yes No
7. Heating
Type
Heating Device
Thermal
Daily Operational Hours

Electric
Central
Local
Other
Is heating for offices only: Yes No

Monthly fuel consumption for heating: ____________________
It heating system operation timer-controlled: Yes No
Is heating system operation temperature-controlled: Yes No
Is heating system operation according to production: Yes No
111
8. Air conditioning
Type
Offices
Factory
Daily Hours of Operation
Blowers only
Central system
Split units
Is air-conditioning system operation timer-controlled: Yes No

Is air-conditioning system temperature-controlled: Yes No
9. Cooling / Refrigeration
Type
Electricity
Ice
Cooler/ Refrigerator
Freezer
Is cooling system operation timer-controlled: Yes No

Is cooling system operation temperature-controlled: Yes No
10. Other energy consuming devices

Type
Use
1234-
11. Renewable energy devices
Solar water heaters: Yes No
Hot water volume ____________________Liter
Solar heating: Yes No
Heated space area ____________________m2
Natural lighting: Yes No
Natural Ventilation: Yes No
Other: _______________________________
12. Total energy cost
Electricity ____________________JD/ month
Fuel ____________________JD/ month
Total ____________________JD/ month
112
Hours of Operation
13. Percentage of energy cost to total production cost:

Electricity / Production ____________________%
Energy / Production ____________________%
14. Do you consider these percentages high? Yes No
15. Do you think there is a way to reduce energy cost? Yes No
16. Which energy use can lead to the required reduction in energy cost?
Lighting Motors Lifts Compressors Boilers Heating
Air Conditioning Cooling Pumps Other
17. Do you have an idea about the electricity tariff applied for the industrial sector (large, medium and
small)? Yes No
18. Is energy consumption different from summer to winter? Yes No
19. Is it possible to shut-down certain devices without affecting the production process? Yes No
20. List these devices:
1.
2.
3.
21. Do you know that reducing the power factor (Cos ) reduces losses which, in turn, leads to a
reduction in your electric bill? Yes No
22. Do you want to reduce your plant power factor? Yes No
23. Do you know the basis of calculation of your electricity bill? Yes No
24. Do you check and verify your bill? Yes No
25. Which time of the day the electrical load of the factory reaches its peak? __________________
26. Do you know that the maximum demand period is between 19 and 22 hrs in summer and between
17 and 20 hrs in winter? Yes No
27. If your maximum demand falls within the specified periods in Q.26 is it possible to reduce it or
shift it? Yes No
28. If you were given the chance to choose between your present tariff category and another one which
enables you to manage your demand, leading to a reduction in consumption, would you switch?
Yes No
113
29. Do you think that the tariff which is based on both energy consumption and time of use could give
you an opportunity to reduce your bill? Yes No
30. Do you like to participate in a national program which aims at saving in energy consumption?
Yes No
31. What is the extent of your participation? Cover own costs Experiment
32. Have you ever conducted an energy conservation or demand side management study for your
facilities? Yes No
2. Questionnaire for DSM: A Field Survey for the Commercial Sector

All information requested in this form is for statistical purpose only, for the assessment of Demand side
management potential. The information obtained from this survey shall be kept confidential according
to statistics Law No 24 year 1950 and its amendments.
Date:
Name of responsible person:
Commercial Sector:
___________________________________________________________
I. Information to be compiled by the company:
1. General:
Company name:
Person in charge:
P.O. Box:
Tel:
Fax:
Ownership:
Public shareholding Limited shareholding
Year established: ____________________
Year of start of operation: ____________________
Office area: ____________________m2
114
Private
1.1 Human Resources

Admin.
Finance
Eng./Tech.
Worker
Total
1.2 Work Schedule: 1 shift 2 shifts 3 shifts

Number of working hours:
From: ____________________ To: ____________________
Number of monthly working days: ____________________
2. Production for year ____________________ (give most recent)
Activity
Capacity
1234-
3. Energy Consumption (Monthly)

Energy Form
Quantity
Value (J.D.)
Electricity
Heavy fuel oil
Diesel
Other
Other energy forms:______________________

Electricity is: Purchased Self generated
Are you being supplied from a private substation Yes No
What is the rating: ____________________KVA
Do you have stand by supply Yes No
What is the capacity: ____________________ KW
II. Information to be completed during the field survey visit

1. Energy use: Lighting Motors Lifts Compressors Boilers

Heating Air conditioning Cooling Pumps Other
115
2. Lighting:
Type
Offices
Other locations
Rating
Incandescent
Florescent
Mercury
Energy saving
Other
What is the % of lighting load ____________________%

Do you know about energy saving bulbs: Yes No
Do you intend to purchase energy saving bulbs: Yes No
Hours of daily operation of lighting: ____________________
Do you intend to reduce operational hours for some bulbs for some of the time: Yes No
3. Motors
Rating
Number
Power factor*
Daily hours of operation
1 - 5 hp
5.1 - 10 hp
10.1 - 20 hp
> 20 hp
*Power factor = Cos , where P = V.I. Cos
Do you have maintenance program for the motors: monthly seasonally annually
Do you rewind motors locally: Yes No
Do you know about energy-efficient motors: Yes No
Do you take into consideration motor efficiency or power factor rating when purchasing motors
Yes No
Is it possible to alter the operational regime (mode & hours) of motors to effect savings in electricity bill Yes No
Do you know that an oversized motor can have more harmful effects than benefit due to increased
losses: Yes No
4. lifts (people / cargo movers)

Type
Lift
Crane
Forklift
Escalator
116
Rating
Maintenance
5. Compressors
Motor Rating
Maintenance
1234-
6. Boilers
Fuel used
Rating
End use
Electricity
Heavy fuel oil
Diesel
Other
Maintenance: monthly seasonally annually

Insulation used for boilers: tubes walls
Maintenance coverage: complete burner controls adjustment cleaning
Do you have an intention to reduce fuel consumption in boilers by means of reducing operational
hours, burner adjustment or other means: Yea No
7. Heating
Type
Heating Device
Thermal
Daily Operational Hours

Electric
Central
Local
Other
Is heating for offices only: Yes No

Monthly fuel consumption for heating: ____________________
It heating system operation timer-controlled: Yes No
Is heating system operation temperature-controlled: Yes No
Is heating system operation according to production Yes No
8. Air conditioning
Type
Offices
Other locations
Blowers only
Central system
Split units
Is air-conditioning system operation timer-controlled: Yes No

Is air-conditioning system temperature-controlled: Yes No
117
9. Cooling / Refrigeration
Type
Electricity
Ice
Cooler/ Refrigerator
Freezer
Is cooling system operation timer-controlled: Yes No

Is cooling system operation temperature-controlled: Yes No
10. Other energy consuming devices

Type
Use
1234-
11. Renewable energy devices

11-1. Solar water heaters: Yes No
Hot water volume ____________________
11-2. Solar heating: Yes No
Heated space area____________________m2
11-3. Natural lighting: Yes No
11-4. Natural Ventilation: Yes No
11-5. Other: _______________________________
12. Total energy cost
Electricity ____________________ JD/ month
Fuel____________________ JD/ month
Total____________________ JD/ month
13. Percentage of energy cost to total production cost:
Electricity / Production ____________________%
Energy / Production____________________%
118
Hours of Operation
14. Do you consider these percentages high? Yes No

15. Do you think there is a way to reduce energy cost? Yes No
16. Which energy use can lead to the required reduction in energy cost?
Lighting Motors Lifts Compressors Boilers Heating
Air Conditioning Cooling Pumps Other
17. Do you have an idea about the electricity tariff applied for the commercial sector? Yes No
18. Is energy consumption different from summer to winter? Yes No
19. Is it possible to shut-down certain devices without affecting the production process? Yes No
20. List these devices:
1.
2.
3.
21. Do you know that reducing the power factor (Cos ) reduces losses which, in turn, leads to a
reduction in your electric bill? Yes No
22. Do you want to reduce your plant power factor? Yes No
23. Do you know the basis of calculation of your electricity bill? Yes No
24. Do you cheek and verify your bill? Yes No
25. Which time of the day the electrical load of the company reaches its peak?
26. Do you know that the maximum demand period is between 19 and 22 hrs in summer and between
17 and 20 hrs in winter? Yes No
27. If your maximum demand falls within the specified periods in Q.26, is it possible to reduce it or
shift it? Yes No
28. If you were given the chance to choose between your present tariff category and another one which
enables you to manage your demand, leading to a reduction in consumption, would you do switch?
Yes No
29. Do you think that the tariff which is based on both energy consumption and time of use could give
you an opportunity to reduce your bill? Yes No
119
30. Do you like to participate in a national program which aims at saving in energy consumption?

Yes No
31. What is the extent of your participation? Cover own costs Experiment
32. Have you ever conducted an energy conservation or demand side management study for your
facilities? Yes No
120
121
Chapter 8
Renewable Energy Technologies
ABSTRACT
This chapter presents different types of renewable and/or sustainable energy resources. It discusses their
impact on the globe in terms of economy, pricing, and environment.
Renewable Energy (RE) resources have some special features and attributes that differ from conventional
energy resources. Conventional energy resources, however, put some constraints on the application or
usage of RE. Such limitations include: site specificity, small size of power output, and current marginal
feasibility. The environmental benefits of RE resources favor them over conventional resources.
The role of RE resources in the electricity industry is explained from present and future perspectives.
The promotion strategies and methods of utilizing these resources are outlined. Such promotion is a
very important issue that must be adopted by all countries. This will lead to encouraging investments in
this promising area, and will result in huge long-term benefits for countries, institutes, and individuals.
INTRODUCTION
Energy is consumed by humans for everyday use
and for their race survival, and exists in various
forms, including mechanical, thermal, chemical,
electrical, radiant, and atomic and are all interconvertible. The resources of energy on earth
are classified as renewable and nonrenewable
(see Figure 1). These include chemical reactions
(mainly combustion), nuclear reactions (fission),
the effect of gravity (mainly hydraulic) and direct
(photovoltaic) and indirect (photosynthesis and
wind) solar energy conversion. A RE Resource

(RES) can be replaced in nature at the same rate
of consumption, while a nonrenewable resource
exists in a fixed amount, or is used up faster than
it can be replaced in nature. Our demand for, and
use of, resources sometimes exceeds the supply
that is available.
In general, RE usually comes from sources
that are naturally replenish such as sunlight, wind,
geothermal heat, etc. however, new renewable
sources are developed that include: small hydro,
modern bio-mass, wind, solar, geothermal, and
DOI: 10.4018/978-1-4666-0173-4.ch008
Figure 1. Energy sources
bio-fuels (World Energy Assessment, 2001; Clean

Edge, 2009; IEA, 2007).
The concept of renewability is based upon the
scale of human events and if the source can be
replaced during that period. For instance, wood
is a renewable bio-mass energy source as long as
adequate conditions are kept for reserves to be
replenished. Rates of exploitation / deforestation
in a number of areas are so high that bio-mass
may be considered as a non-renewable source in
those circumstances.
Currently both developed and developing
countries are facing serious challenges in the
energy sector (Fanchi, 2004). Traditional energybased systems, i.e. fossil fuel-based systems,
have tremendous growing problems including the
soaring prices, over-reliance on a limited number
of suppliers, geopolitical and technical risks that
can affect supply, resource depletion and environmental damage (Sorensen, 2004).
This necessitated the need for securing reliable,
affordable and environmentally friendly supply of
122
energy. The other problem of limited amount of

available resources (e.g. oil is expected to last 40
years, gas 80 years, coal 170 years, and Uranium
for 60 more years) escalates this present problem.
Fossil fuel technologies are also changing
in response to economic and environmental
challenges, resulting in increasing efficiency of
energy generation and new ways to dramatically
reduce CO2 emissions (e.g. with carbon capture
and storage technologies).
The above represent driving forces that call
for countries, utilities, and industries to search for
more sustainable energy supplies that are associated with either new or improved RE technologies
(Fanchi, 2005). RES with less environmental
impact are attractive and are gaining market share,
while technological innovation is bringing further
efficiency gains and cost savings.
Figure 2 shows the sources and usage areas
of RES. It is obvious that RES are potential candidates that can replace conventional fuels in the
following areas:
a. Power generation: Here, RE contributes to

about 18% of total electricity generation
worldwide. Some countries get most of their
power from renewables, including Iceland
(100%), Brazil (85%), Austria (62%), New
Zealand (65%), and Sweden (54%).
b. Heating: Solar hot water makes an important
contribution in many countries. The total
worldwide installed solar water heating
systems meet a portion of the water heating
needs of over 70 million households.
c. Transport fuels: Renewable biofuels have
contributed to a significant decline in oil
consumption. There was a total of 93 billion liters of biofuels produced worldwide
in 2009 which is equal to about 5% of world
gasoline production.
d. Rural (off-grid) energy services: Most RE
production is large-scale; however, renewable technologies can suit small off-grid
projects and installations especially in rural
and remote areas.
The share of RE of the overall energy portfolio

differs between various countries based on the
adopted policies.
Table 1 that follows show RES indicators for
the year 2009 (REN21, 2010), and it indicates
that there was huge amounts of money invested
worldwide in RES (150 billion USD).
The REN21 (2010) report showed that the RE
sector has grown strongly and steadily, where at
2010 more than 100 countries adopted policies
to promote RES (compared to 55 countries in
2005). Moreover, the report displayed some of
selected indicators of the progress in using RES.
It also indicated that RES accounts for 18% of
global electricity generation for the year 2010.
The report indicated that 47% of the 300GW new
generation capacity are RES.
Table 2, on the other hand, presents information of the goals of some selected countries on
terms of the share of primary and final energy,
the share of electricity produced and other RES
targets, during 2006 (REN21, 2007) and future
expansion up to the year 2020. It can be seen that
Figure 2. Sources and usages of RES
123
Table 1. RES indicators in 2009 (Source: REN21, Global Status Report 2010- www.ren21.net/gsr)
all listed EC countries will target to be above the

10% mark, while the ambition of some countries
is to be above the 40% mark by the year 2020.
RE AND ELECTRIC POWER

Research in finding alternative energy sources in
different areas has been extensive during the last
two decades due to key factors including: a) various
economical crises, b) rising environmental issues,
and c) new government spending regulations.
In the context of power industry, RES were
under focus and special attention was paid for
what is known as environmental friendly energy,
or what is termed as clean or green power (e.g.,
solar, wind, bio-mass) (IEA, 2008). The RE
based project involves several parties representing the stakeholders, as illustrated in Figure 3.
There would be many mutual tasks, costs and
interests amongst the stakeholders, which adds
124
more complication to the project requiring that

all parties need to be satisfied, to a large extent,
for the project success.
The main distinction among the options are
the type of supplier and where the electricity
generation equipment is located (e.g. on the electric grid or at the facility). For electricity delivered
over the power grid, the utility status will determine its position of buy/sell of green power. For
on-site green power, the resources available at
that site are the main factors determining a projects feasibility.
The range of supply options in the market
provides considerable flexibility to green power
customers. Customers, referring to buyers and/or
sellers, are able to consider factors in their purchasing decision such as: price, specific green power
generation resource, ease of procurement, and the
location and vintage of the generating facility. By
considering these issues, buyers may be able to
choose a specific type of green power product or
Table 2. Share of primary and final energy from RES in 2006 and future targets (Source: REN21, Global
Status Report 2007- www.ren21.net)
mix and match green power products to meet their

desired goals (Pernick & Wilder, 2007).
Moreover, customers will have the ability to
purchase a green power product directly from their
electricity provider/utility. In regulated electricity
markets, customers may be able to buy a green
pricing product from their local utility. Green
pricing is an optional service offered by regulated
entities to allow customers to support a greater

level of utility investment in RE by paying a
premium on their electric bill.
In competitive electricity markets, customers
can switch electricity service providers if their
current provider does not offer a green pricing
product. In this market, the customer can purchase
his needs from an external provider, other than
125
Figure 3. RE project stakeholders
the one in his local utility. Again, this customer,

referred to as a green marketing customer, pays
a small premium in exchange for electricity
generated from green power resources (Tester,
et al., 2005).
It must be admitted that there are major problems facing the spread of RE technologies which
are categorized into the following areas:

Institutional deficiencies;
Economy of scale;
Pricing distortions; and,
Limited information on the RE resource
base.
A few options are considered in the future

development of RE technologies dissemination
including:

126
Implement long-term RE policy programs.
Develop and apply carefully-selected

strategies.
Start long-term RE training.
Implement renewable capacity building
programs.
Devise flexible financing mechanisms;
and,
Devise and apply wider innovative spreading strategies.
At present, all forms of energy are expensive;

however, RES are getting cheaper as time progresses (REN21, 2009). On the other hand, fossil
fuels get more expensive, especially after the latest
global economic crisis. The expected decline in
RE technologies prices can be referred to:

In contrast to fossil fuels, RE will be free

when the infrastructure is built.
Rapid improvement of RE technologies,

this gives a space to innovation and ingenuity that will contribute to increased efficiency of RE and continually reduce its
cost.
When a clear commitment to shifting toward RE is globally made, costs are sharply reduced with incentives introduced for
additional research and development to
further speed up the innovation process.
For RE to be a potential alternative to traditional

energy resources in the electric power industry it
must be associated with a serious consideration
of implementing practically applicable energy
generation policies (Komor, 2004). These policies
are assumed to take the following factors into
considerations: a) develop an optimal broad
sustainable energy supply strategies to utilize the
environmental resources available in a particular
country (or a region), b) evaluate existing energy
supply policies and design new sustainable energy
policies, c) develop and implement energy modeling and cost curves, d) propose alternative usage
of available resources in various electricity, heat,
cooling or fuel supply technologies and systems,
e) assess the market opportunities associated
with different sustainable energy solutions, f) be
updated of the latest existing and foreseeable technological, market, and regulatory developments,
g) cooperate with power producers and energy
users to develop sustainable energy strategies,
and h) perform market analysis and provided
market instruments (e.g. green certificates) and
other regulatory tools to identify constraints risks
and opportunities.
It can be confidently stated that the RES represent the option that would allow a more gradual and
less disruptive transition away from dependency
on fossil fuels (IEA, 2006). Mounting evidence
indicates that while fossil fuels are and will be
exhausted and hence become uncompetitive in
cost, renewable sources represent a reliable and
ecologically sound long-term alternative for virtu-
ally all countries, even for developed countries

with abundant solar, wind, and hydro resources.
GREEN ENERGY AND

SUSTAINABLE ENERGY
GENERATION
The potential capacity of green alternatives is
expected to comprise five times world current
power consumption and twice the expected consumption in the year 2100. It seems impossible
that the world energy needs be met without the
fossil fuels coal, gas, oil and nuclear power in the
few coming years. However, there are potential
options of electricity production that are seen in
wind, solar, hydro, tide, wave, bio, and geothermal
energy (REN21, 2011).
The theoretical non commercial capacity could
be twenty times this amount. The major problem
with most green alternatives is their intermittency.
Such a problem can only be overcome by costly
solutions including: diversity, power storage, and
transmission. A mix of types of generation plus
diversification via transmission should provide
the right solution to power needs. This implies
that a worldwide dc transmission system may be
necessary to connect production and customers.
In addition, generation and storage must use acceptable diversification and be implemented on
a wide scale.
To illustrate this fact the following numbers
express themselves. The DOE/EIA (2010) states
that: In 2009, REs market share reached 8 percent of total U.S. energy consumption, as total
consumption decreased nearly 5 percent while
RE consumption rose 5 percent. Total U.S. energy
consumption decreased from 99.4 to 94.8 quadrillion Btu between 2008 and 2009. The largest
decreases were for coaldown 2.4 quadrillion Btu
and petroleumdown 2.0 quadrillion Btu; these
fluctuations were larger than usual and in some
measure reflect the slow economy for 2009. At the
same time, the total RE consumption rose from
127
7.4 to 7.7 quadrillion Btu. The largest increases

were for biofuels (173 trillion Btu), conventional
hydroelectric power (170 trillion Btu), and wind
(150 trillion Btu). The largest decrease (153 trillion Btu) was for wood and wood derived fuels,
of which 127 trillion Btu was accounted for by
the industrial sector.
In conclusion, it can be said that: to supply
the whole world with green power solely, would
take a long time to implement. This means that
the world must live with present situation and
meantime seek better alternatives that will contribute in lowering energy prices, and preserving
the environment.
In the following parts of this section, the
available RES are discussed. This will display
the importance of such sources and their impact
on different energy consumption and on the environment.
the total current global energy production, or 40

times current electricity demand. Definitely, this
shall require large amounts of rich-wind land to
be used for wind turbines. Offshore is supposed
to contribute substantially more energy (WWEA,
2008). As their mean wind speed exceeds that of
land areas by about 90%.
Hydropower
This type of energy resource makes use of the
energy in water. A slow flowing stream of water,
or moderate sea swell, can yield considerable
amounts of energy.
There are many forms of water energy:
Wind power is renewable and environment

friendly type of power that has no greenhouse
gases effect during operation (Kroldrup, 2010).
Modern wind turbines, running by means of airflow, have an output rated power that range from
around 600 kW to 5 MW.
The following relation holds between power
output of the wind turbine (Pt), and the wind
speed vw:
1. Hydroelectric energy is a term usually reserved for large-scale hydroelectric dams.

2. Micro hydro systems are hydroelectric power
installations that typically produce up to 100
kW of power. They are often used in water
rich areas as a Remote-Area Power Supply
(RAPS).
3. Hydro systems that derive kinetic energy
from rivers and oceans without using a dam.
4. Ocean energy represented by all the technologies that benefit from the energy from the
ocean and the sea (Scruggs & Jacob, 2009).
Examples include: marine current power,
ocean thermal energy conversion, and tidal
power.
Pt vw3
Solar Energy
Wind Power
(8.1)
Hence, as wind speed increases, power output

increases dramatically. Therefore, the preferred
location of wind turbine farms is the areas where
winds are stronger and more constant, such as
offshore and high altitude sites. Typical capacity
factors are 20-40%, with values at the upper end
of the range in particularly favorable sites. The
long-term technical potential of wind energy is
quite enormous. It can reach about five times
128
Solar energy is the energy derived from the sun

through solar radiation. Depending on the way of
capturing, converting and distributing solar energy,
these technologies are broadly characterized as
either passive solar or active solar.
Passive solar techniques or solar-thermal
technologies use the sunlight directly in conjunction with relevant application. Passive solar
techniques include space heating/cooling through,
day lighting, water hearting, solar cooking, high
temperature process heat for industrial purposes,

in addition to designing spaces with naturally
circulated air, orienting a building to the sun,
material selection with specific properties (e.g.
light dispersing, thermal mass, etc.) (Hastings &
Wall, 2006; Russell, 2010).
On the other hand, active solar techniques
include the use of photovoltaic panels and solar
thermal collectors to harness the energy and covert
it to electricity (PV Resources.com, 2009). Solar
powered electrical generation relies on Photovoltaic (PV) and heat engines.
PV cells represent a potential green source candidate of electricity in the future. PV cells consist
of a thin film of crystalline semiconductor attached
to glass that faces the sun. The sunlight (photons)
absorbed by semiconductor material (e.g. silicon
p-n semiconductor junctions) cause electrons to
be emitted producing Direct Current (DC).
PV cells require power storage batteries, and
massive arrays of cells are needed to provide power
on a large scale, PV cell farm can provide 5 to 20
watts / sq m, and desert countries could provide
40,000 MW average from a 2700 sq km PV site
(Makower, Pernick, & Wilder, 2009; UN, 2009).
PV electricity can be visualized as illustrated in
Figure 4.
To produce massive amount of electricity PV
cells are arranged in modules, and modules are
then arranged into arrays. The direction of the
arrays will be controlled to follow the sun movement in order to produce the maximum amount
of electricity. The produced DC power can be
used directly or stored in batteries, or converted
to AC and supply the grid or the demand.
Tidal
Tidal Energy is a RES that is based on lunar gravitation. Although huge in potential, extraction and
conversion of tidal energy suffers the following
built in problems (Charlier, 1982):
1. Tidal-power projects are very expensive,

since massive structures must be built in a
difficult saltwater environment.
2. Capacity generation of individual generators
ranges between 25 to 50 megawatts due to
low water head above the turbine. This means
that many heavy duty generators are required
to produce a significant block of power.
3. The average electric power output is severely
limited by the twice-daily ebb and flow of
tides, which means that the average output
of tidal electricity is less than 40% of the
installed generating capacity (as compared
with 70-100% of installed capacity for river
dams).
4. Electricity production is governed by the
lunar cycle of 24 hours 50 minutes, implying
that tidal energy moves in and out of phase
with the normal daily pattern of electrical
demand
5. Tidal energy must be either stored or integrated with other sources of generation
that can be adjusted to accommodate the
fluctuations of tidal generation.
There are relatively few coastal locations in the
world where the tidal range (i.e., the difference
between high and low tides) is large enough to
justify exploitation of the available tidal energy
(Cruz, 2008; Hardisty, 2009). The selection of
the site is economically crucial, as it must have a
sufficiently high tidal range (at least 5 m) in addition to including a natural bay which can store
a large volume of seawater at high tide periods.
Biofuel and Bio-Mass

Biofuel means liquid fuel produced from biological processes, this includes: Oil from algae
(biodiesel), or bioalcohol, such as ethanol from
corn, and sugar cane (bioethanol), and Methanol
from wood waste (biomethanol).
Biofuels provided 1.8% of the worlds transport fuel in 2008, however, the amount of avail-
129
Figure 4. PV electricity scheme
able agricultural land is entirely insufficient for

growing enough biofuels to replace current use of
petroleum (Budny & Sotero, 2007; Gies, 2010).
With advanced technology being developed,
cellulosic bio-mass, such as trees and grasses, are
also used in bioethanol production. Ethanol can be
used as a fuel for vehicles in its pure form, but it
is usually used as a gasoline additive to increase
octane and improve vehicle emissions.
Biodiesel is made from vegetable oils, animal
fats or recycled greases. Biodiesel can be used as
a fuel for vehicles in its pure form, but it is usually used as a diesel additive to reduce levels of
particulates, carbon monoxide, and hydrocarbons
from diesel-powered vehicles. Biodiesel is the
most common biofuel in Europe that is produced
from oils or fats using transesterification process.
Bio-mass refers to biological solids such as
agricultural waste and wood. Bio-mass is a RES
because the energy it contains comes from the
130
sun. Through the process of photosynthesis, plants

capture the suns energy. When the plants are
burned, they release the suns energy they contain.
In this way, bio-mass functions as a sort of natural
battery for storing solar energy. This battery will
last indefinitely, as long as bio-mass is produced
sustainably (Chiras, 2006; Decker, 2009).
In general there are two main approaches to
using plants for energy production: growing plants
specifically for energy use, and using the residues
from plants that are used for other things. The best
approaches vary from region to region according
to climate, soils and geography.
Geothermal Energy
Geothermal energy is energy obtained by tapping
the heat of the earth itself, both from kilometers
deep into the Earths crust in some places of the
globe or from some meters in geothermal heat
pump in different places on earth. It is expensive

to build a power station but operating costs are
low resulting in low energy costs for suitable sites.
Three types of power plants are used to generate power from geothermal energy: dry steam,
flash, and binary.

Dry steam plants take steam out of fractures in the ground and use it to directly
drive a turbine that spins a generator.
Flash plants take hot water, usually at temperatures over 200 C, out of the ground,
and allows it to boil as it rises to the surface
then separates the steam phase in steam/
water separators and then runs the steam
through a turbine.
In binary plants, the hot water flows
through heat exchangers, boiling an organic fluid that spins the turbine.
The condensed steam and remaining geothermal fluid from all three types of plants are injected
back into the hot rock to pick up more heat.
The geothermal energy from the core of the
earth is closer to the surface in some areas than
in others. Where hot underground steam or water
can be tapped and brought to the surface it may
be used to generate electricity (GEA, 2010).
Such geothermal power sources exist in certain
geologically unstable parts of the world such as
Chile, Iceland, New Zealand, United States, the
Philippines and Italy. Iceland produced 170 MW
geothermal power and heated 86% of all houses
in the year 2000 through geothermal energy. There
is also the potential to generate geothermal energy
from hot dry rocks. Holes at least 3 km deep are
drilled into the earth. Some of these holes pump
water into the earth, while other holes pump hot
water out. The heat resource consists of hot underground radiogenic granite rocks, which heat
up when there is enough sediment between the
rock and the earth surface.
Table 3 shows a comparison for some evaluation criteria that is made between conventional and
RES in the context of electric power generation.
SITE SPECIFICITY
Careful specific site analysis is required for a
successful application of RE. There is a need
to make sure that a site survey is done, where
necessary data is gathered to check if that site is
a potential candidate from the RE prospective.
In the following we shall focus on the different
potential renewable types
1. Solar
Solar systems can be configured to almost any
size from a few kilowatts up to several megawatts.
On-site Photovoltaic (PV) systems may be situated on schools, homes, community facilities, and
commercial buildings (Bebic, 2008). They can be
integrated into a building, displacing other building material costs, such as for roofing shingles or
car park shading.
To decide on the site, a solar site survey must
consider collecting data related to assessing the
average number of peak sun hours available in
the region of the site. In addition to the number of
peak sun hours, local site-specific influences also
need to be included in the analysis. The effects of
shading in addition to other negative atmospheric
effects that reduce the output of the solar cell must
be included in the analysis.
Along with these general considerations, sitespecific issues need to be carefully scrutinized.
Each system will have some type of storage bank,
and the collectors proximity to the storage system
affects the systems efficiency. Keeping collectors
in close proximity to the storage area increases
efficiency and reduces consumption of materials.
Solar collectors need to be placed in an area with
access to the greatest solar exposure possible.
131
Table 3. A comparison between different energy sources

Evaluation
Capital Costs
Energy source
Nuclear
Fuel, Gas,
Coal
PV
Hydro
Wind
OTEC
Tidal
GEO
BIO
E+
Operating Costs
Efficiency (%)
35
15
5-10
80
42
7+
25
No
No
Storage
NR
NR
NR
NR
NR
Energy cost (/
KWH)
3 - 25
3-25
15 - 30
4 - 11.3
5-20
6 - 25
2 - 10
4.5-30
4.5-30
Environmental
Impact
Large Scale
TE
TE
PE
Small Scale
No
No
LC
No
No
No
No
Life span
50
25
30
30
30
30-45
30
D=Difficult, E=Enormous, L=Large, LC=Legal Constraints, M=Moderate, NA=Not Available, NR=Not Required, P=Possible,
PE=Possibly Expensive, R=Required, S=Small, TE=Too Expensive, U=Unknown,
In order to accomplish this, a survey device

is used to isolate obstructions and calculate the
resources availability at several promising locations at the site. The use of this device allows the
system collectors and mounting structure choices
to be made through accurate calculations of the
resources of each location. Comparing costs and
energy production of static roof mounting and
south wall mounting will tell us which system
will be the most economical.
If our solar window (the path clear to the sun
across the horizon from the site) is large a pole
mounted tracking device that moves the PV array
through the daykeeping it pointed directly at
the sunmay be an efficient option. Fewer PV
modules can be used on a tracker to produce the
same or greater output of a static mounted array.
Where and how the solar collectors are placed
on a building or property affect both the system
performance and the aesthetics, the branch of
philosophy that is concerned with the nature of art
and the criteria of artistic judgment of the places
they are employed.
132
Careful analysis of the resource potential and

the visual appearance of the type of collector placed
at a site will result in good system performance
and a pleasing visual aesthetic. Failure to consider
all of the relevant aspects of collector placement
can yield unexpected results.
2. Wind
Wind turbines vary in size. A typical small unit
provides 100 kilowatt (KW) or less, whereas large
turbines range from 500 kW to more than 3 MW.
On-site applications are usually only possible in
nonurban areas, and often require zoning permits
to exceed 12 m height restrictions (a tower for a
250 kW turbine is 43 m high with a blade sweep
of 33m).
Such installations are most often installed in
non-urban areas and require approximately 1 acre
of land per turbine and wind speeds that average
25 km/h at a 50 m height (above the ground)
(Keel, Kilk, & Valdma, 2009). In addition, placing turbines in urban areas is inadvisable because
nearby buildings may create wind turbulence
that can disrupt the turbine performance. Careful

specific site analysis is required for a successful
application of wind power
A wind site survey must be conducted to
determine:

The average wind speed for the general

area and for the specific site.
The height off the ground the data is being
monitored.
Wind predominant direction
Wind obstructions within 500 feet of a
wind tower site as such obstructions will
cause turbulence and hence disrupt the turbine performance.
Wind monitoring needs to be done at the proposed site preferably at the same height where the
wind machine would be installed. Monitoring for
at least one year will yield information that can
reliably predict whether or not a wind resource
large enough to be practical is available for the
proposed site.

Landfill and sewage methane gas.

Methane gas derived from landfills or sewage treatment plants can be used to generate
electricity. Methane gas also may be generated using digesters that operate on manure
or agricultural wastes. The methane gas is
then converted to electricity using an internal combustion engine, gas turbine (depending on the quality and quantity of the
gas), direct combustion boiler and steam
turbine generator set, microturbine unit,
or other power conversion technologies.
Most methane gas projects produce from
0.5 to 4 MW of electrical output.
Bio-mass. Bio-mass is plant material
burned in a boiler to drive a steam turbine
to produce electricity. This system is good
for producing Combined Heat and Power
(CHP) at facilities with large thermal loads.
Bio-mass projects are best suited to loca-
tions with abundant bio-mass resources

(often using waste products from the forest
industry or agriculture).
Fuel cells. Fuel cells are another way of
producing power. They emit essentially no
air pollution and are more efficient than
other forms of generation, but they cannot
be considered a renewable resource unless they operate on a renewably generated
fuel, such as digester gas or hydrogen derived from PV or wind power.
On-site RE generation can produce significant

energy, environmental, and economic benefits for
the society, including to:

Demonstrate leadership, which can be

shown to the public to raise public awareness of the benefits of this type of energy
sources. Prototypes can bring about this
goal.
Hedge against financial risks, where the
on-site RE generation systems can contribute in the reduction of spending on fossil
fuel and hence reduce overall energy costs.
Reduce emissions of Green House Gases
(GHGs) and other pollutants. Substituting
RE for conventional energy can substantially reduce the emissions of GHGs and
other pollutants that result from daily
activities.
Increase economic benefits. This can be
seen in the view that market development
and the investment in on-site RE generation can help job creation and large-scale
economies. This is because the on-site RE
generation systems require a considerable
amount of raw materials, and purchasing these materials from local businesses.
Moreover, the demand for construction, installation, and maintenance of on-site RE
generation systems can lead to significant
job creation and market development for
these technologies.
133
Improved power quality and supply

reliability. Since on-site RE generation
systems have fewer interconnections and
hence less power quality as compared to
fossil fuel-based facilities. By installing
RE generation systems on-site, local governments can improve energy supply reliability and protect against grid-based electricity shortages or blackouts
In this era of power reliability problems and

national security concerns, domestic, on-site renewable generation offers important advantages
over central-station and fossil-fueled power plants.
Moreover, on-site generation can be designed to
provide backup power for critical loads when
power from the grid is interrupted, as well as when
the renewable resource is not available. This ability to operate independently of the power grid is a
great advantage, particularly at remote facilities.
Because renewable generation technologies can
be modular and used on a small scale, the on-site
generation system can be designed to enhance the
redundancy and diversity of a facilitys energy
supply. On-site renewable generation typically
has higher capital costs and lower operating costs
compared with installing fossil-fueled generation. Although these costs can make the initial
investment in on-site generation more difficult
to justify, once that investment has been made,
the annual budgets for maintaining the system are
much easier to justify (compared with purchasing
renewable electricity), which makes sustaining
RE PRICING
Most renewable electricity products (i.e., green
pricing or green marketing products) are one of
three types (Fulton & Parker, 2009):

134
Fixed energy quantity block: A block is

a quantity of 100 percent renewable elec-
tricity, often 100 kilowatt-hours (kWh), offered for a fixed monthly price. The price is
often expressed as a price premium above
the price of conventional power. Customers
usually may sign up for as many blocks as
they wish, with the monthly cost of these
products based on how many blocks they
buy. This type of product is available in
some competitive markets but is more often found in regulated utility green-pricing
programs.
Percentage of monthly use: Customers
may choose green power to supply a fixed
percentage of their monthly electricity use.
In practice, this usually results in the purchase of blended green and conventional
power. This is typically priced as a premium on a cents per kWh basis over the
standard rate or as a fixed charge per kWh.
The monthly cost for these products varies
with use and the percentage of green power
chosen.
Long-term fixed price contracts: This
model represents a long-term contract that
will enable a project developer to secure
financing and mean while providing the
end-user with a stable electricity contract.
The model was adopted and used by several government and academic institutions.
Figure 5 illustrates the role of green power
and its relationship with the power system
participants.
It can be seen from this figure that a RE Certificate (REC) (also known as green tags, or green
certificates or RE credits) represent tradable instruments that can be used to meet voluntary RE
targets as well as to meet compliance requirements
for RE policies (DOE, 2010). Any REC represents
the generation of one megawatt-hour (MWh) of
electricity from an eligible source of RE.
RECs are equivalent to green power purchases
from a local utility, no matter where the REC may
Figure 5. Green power role in electricity industry
be sourced. Each REC denotes: a) the underlying

generation energy source, b) location of the generation, c) year of generation, d) environmental
emissions, and e) other characteristics associated
with the generator.
Moreover, there are several alternatives to
purchase RECs, including:

Bundled, i.e. paired by the electric service

provider with grid electricity delivered to
the buyer
Unbundled, from electricity as a standalone product and paired by the buyer with
its grid electricity purchase.
Subscription, or future RECs, which involves an up-front purchase of RECs to
be generated in the future by a new or
soon-to-be-built renewable electricity facility. The advantage of this approach is
that it promotes new renewable facilities
by providing up-front financial assistance

for their development and construction. In
return, the purchaser receives the RECs as
they are generated over an extended period
of years.
The previous discussion shows that: 1) RECs
have no geographic constraints and therefore
can provide access to the least expensive renewable resources; 2) the supplier does not have to
deliver the power to the REC purchaser with the
associated transmission and distribution costs;
3) the supplier is not responsible for meeting the
purchasers electricity needs on a real-time basis.;
and 4) REC prices reflect greater competition.
Customers do not need to switch from their
current electricity supplier to purchase RECs, and
they can buy RECs based on a fixed amount of
electricity rather than on their daily or monthly
load profile.
135
PRODUCTION ECONOMICS
RES are available in nature. Many investors
are developing RE plants and facilities. This
development must be based on many factors,
and the economic and financial factors must be
considered in order to evaluate the actual cost of
the several renewable and non RES. There are a
variety of cost factors that should be taken into
consideration in price comparisons. These include
the costs of: engineering/planning, mechanism
components, mechanism assembly, marketing,
issuing of permits, installation, distance to grid,
security, maintenance, fuel, disposal of hazardous
waste, general impact on the environment, and
decommissioning. Referring to Table 3, we can
see that the capital cost required for electricity
generation using RE is in general large, while the
operating and maintenance costs are moderate
to low. This is reflected as a high cost per KWh.
Nevertheless, it can be said that some of these
resources will contribute in lowering electricity
prices at the current time. It is expected that the
technology advancement will contribute in lowering the prices of the electricity produced by other
renewable sources. It is believed, in the academic
and industrial fields, that the next coming decades
will be the RE era.
ENVIRONMENTAL IMPACT
When the effect of RES on the environment is
discussed, it is meant the effect of large scale applications. The adoption and promotion of a green
energy plan will lead to many benefits that are
in favor with the Kyoto Protocol, which finds
an international agreement, and aims to serve to
control greenhouse gas emissions in the globe.
Green power sources produce electricity with an
environmental profile superior to conventional
power technologies and produce no anthropogenic
greenhouse gas emissions. This motivates differ-
136
ent countries to require that green power sources

to be built to support new RE development.
There are environmental benefits from renewables other than reduction of greenhouse gas and
other air emissions. For example, hydroelectric
schemes can improve water supplies and facilitate
reclamation of degraded land and habitat (IPCC,
2007; REN21, 2010).
Table 4 shows a comparison of the CO2 emission for RES and conventional energy resources.
Naturally, there are some negative effects of
RE on the environment, that are seen in: a) making large tracts of land unusable for competing
uses, b) disrupt marine life, c) disrupt bird life
and flora/fauna, and d) produce visual and noise
pollution. Such effects are tolerable and represent
a minimal effect on environment when compared
to the effect of conventional energy resources.
Moreover, the environmental impacts of RE are
site specific, and these impacts are usually more
environmentally friendly than alternative energy
sources, especially with regard to air emissions.
The life-cycle emissions from RE use are small
compared with those from fossil fuel plants (see
Table 4) and nuclear energy (these also release
little amounts of carbon dioxide [CO2]).
There are a number of other entailed potential
environmental impacts including (REN21, 2010):
1. Bio-energy: The use of bioenergy can have
many environmental benefits if the resource
is produced and used in a sustainable way. If
the land from which bioenergy is produced
is replanted, bioenergy is used sustainably
and the carbon released will be recycled
into the next generation of growing plants.
The extent to which bioenergy can displace
net emissions of CO2 will depend on the efficiency with which it can be produced and
used. Bioenergy plants have lower emissions
of SO2 than do coal and oil plants, but they
may produce more particulate matter. These
emissions are controllable but they increase
generating costs.
Table 4. Comparison of the effect of energy technology on global warming

Energy resource
Renewable
Energy Tech.
Energy Payback
ratio
Global warming
potential (Tons of CO2/
GWh)
Hydro with reservoir
48-260
4-18
Hydro run of river
30-267
9-18
6-9
44-217
PV
Wind power on shore
34
9.7
Wind power off shore
18
16.5
Bio-mass direct wood fired
27
400
Integrated Bio-mass gasification combined cycle

Non-Renewable
(conventional)
15
50
Oil fired plants
0.7- 2.9
937
Coal fired plants
2.5 5.1
1001-1154
Coal gasification combined cycle
3.5 7.0
1.6-3.3
340
2.5
440
Conventional boiler with carbon capture and geosequestration

Natural gas fired combined cycle
2. Hydropower: The environmental and social

effects of large-scale hydropower are site
specific and are the subject of much controversy. Large-scale projects may disturb local
ecosystems, reduce biological diversity or
modify water quality. They may also cause
socio-economic damage by displacing local populations. A number of projects in
developing countries have been stalled or
scaled down for these reasons; obtaining
loans from international lending institutions
and banks for major projects has become
more difficult. Although these ill effects can
be managed and mitigated to some degree,
they may affect the future of hydropower
in general. Mini- and micro-hydro systems
have relatively modest and localized effects
on the environment, but their kWh cost is
generally higher. Hydropower emits some
greenhouse gases on a life-cycle basis (especially methane generated by decaying
bioenergy in reservoirs), but in most cases
far less than the burning of fossil fuels.
3. Geothermal: Plants may release gaseous

emissions into the atmosphere during theiroperation. These gases are mainly carbon
dioxide and hydrogen sulphide with traces
of ammonia, hydrogen, nitrogen, methane,
radon, and the volatile species of boron,
arsenic and mercury. This could slow the
future development of geothermal resources.
Emissions can be managed through strict
regulations and by control methods used
by the geothermal industry to meet these
regulatory requirements. Hydrogen sulphide
abatement systems reduce environmental
damage but are costly to install.
4. Wind-power: generation has very low emissions on a life cycle basis, but has a number
of environmental effects that may limit its
potential (WEA, 2001). The most important
effects on the environment are:
Visual effects: Wind turbines must

be in exposed areas and are therefore
highly visible. They are considered
unsightly by some people, and con-
137
cerns have increased with the larger

size of new generation turbines.
Noise: Wind turbines produce aerodynamic noise, from air passing over
the blades and mechanical noise from
the moving parts of the turbine, especially the gearbox. Better designs
have reduced noise, and research
continues. Wind farms developed far
from highly populated areas are, by
definition, less offensive.
Electromagnetic interference: Wind
turbines may scatter electromagnetic
signals causing interference to communication systems. Appropriate siting (avoiding military zones or airports) can minimize this impact.
Bird safety: Birds get killed when
they collide with the rotating blades
of a turbine. Migratory species are
at higher risk than resident species.
Siting the turbines away from migratory routes reduces the impact.
PROMOTING OF RE
RE can be promoted through adopting regulations and policies that will serve in the reduction
of the costs associated with this energy. These
cost minimizing features are usually developed
by Independent Power Producers (IPP) rather
than traditional electric utility companies. This
is good in a sense of increasing the competition
in the field. Costs can be reduced by:

138
Increasing manufacturing output and hence

efficiency
Development of industrial infrastructure
by supporting businesses and venders of
various materials/renewable technology
components thereby reducing actual project costs

Development of project
Creation of multiple project development
opportunities
Several criteria will affect the success of any

RE policy. These factors include: Minimizing cost
of generation, maximizing competition, meeting and maintaining firm development targets,
maintaining and creation of sustainable purchase
market, encouraging diversity, enhance political
support, develop local industrial infrastructure,
compatibility of electricity sector standards, regulatory structure, stability of the renewable policies
over time, and competitive parity that allows fair
spreading of costs over stakeholders, reduction of
industrial barriers that will enable the integration
of RE with other electricity sectors, and finally
the simplicity of the design and administration of
the energy policy (IEA, 2008).
The policy must include features that eliminate
risk for potential renewable investors. This can
be seen as long-term contracts (15-20 years), or
through guaranteed buyers, and reasonable price
rates for the producer. Moreover, the policy must
allow for the variety of renewable resource generation types with low administrative, in addition to
allowing of the integration of renewable sources
into long-term planning with other policy options.
This may cover special tax treatment, or prices
intensives which will contribute in creating a table
environment for a renewable industry to flourish.
The following incentives and promotion of
RES can be enhanced through special mechanism
such as (IEA, 2007):
1. Mandatory purchase at preferential prices
of the electricity generated by RES
2. Subsidy for the purchase of instruments
3. Feed-in tariffs set Regulatory party
4. Connection to the electricity grid
5. Certificates of origin
6. Investment promotion Incentives
7. Tax incentives: accelerated percentage
depreciation of equipment, excise duty
exemption, sales tax exemption, customs
duty concessions on imported materials,
equipment, and components
8. Soft loans and interest incentives
9. Capital subsidy
SUMMARY
The different types of RE sources were discussed
in this chapter. These sources can be used in many
real life applications. Electricity production using
RES is now possible, but costs are still high. As
the prices of traditional energy resources escalates,
then RES becomes more attractive. Advanced
technologies still need to be developed, and the
increase acceptance of these technologies will
serve in making electricity prices from RES go
lower and become more compatible. The beauty of
RES technologies is that they are environmentally
friendly, and their impacts on the environment are
limited. However, their inherent weakness is that
they are site specific, and their output is variable
preventing them from being potential candidates
of replacing base load power. Fortunately, the earth
is huge and places are not similar, and different
countries possess different and unique sites that
suit various RES applications. Moreover, the technology advent is in favor of RE implementation.
It is a fact that generation planning is now
centered on using net load as a basis for capacity planning. This created a new dimension seen
in the need for explicit evaluation of generation
flexibility relative to the variability of net load.
Furthermore, the escalating penetration of RES
based generation means that the operational
flexibility of the balance of generation portfolio
will become strategically important, and makes
reliance on RES based generation inevitable. This
encourages R&D investments, and the integration
of renewable-resource data into generation planning. On the other hand, transmission planning
practices can accommodate for the inclusion of
renewable generation with an extra effort to be
dedicated to develop accurate and standard models and software. Finally, the available distribution planning and engineering practices already
incorporate processes that allow connection of
distributed generation, such as co-generation. The
inclusion of RES needs also extra effort, dedication, comprehension, and coordination that lead
to eliminating technical and engineering hurdles.
Model guidelines, in addition to test cases development serves in benchmarking the software
and the models. As the RES role increases in the
electricity generation field, then this must be supported by necessary infrastructure in the electric
power network. Regulations, pricing and legislations should also follow. At the end this is a very
large project that requires all stakeholders be in
synchronism and talk the same language. These
objectives are possible when enough funding is
allocated for such development, so governments
and private sectors must look seriously at allocating the necessary funds required.
The good news is that during 2010 the RES
based global power generation investment totals
about 47% of the overall generation based on
different energy resources. This implies that the
trend worldwide is towards RES utilization. This
is a win-win situation that, as stated previously
leads to better technological development, safer
environment, and lower electricity prices.
There is a need to have close interaction
between industrial, governmental, research institutes, and consumers in the context of RES.
Moreover, the adoption of an incentive based
strategies and programs for the producers and
consumers of electricity will definitely serve in
promoting RES utilization to the benefit of the
world as a whole.
139
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143
Chapter 9
System Expansion Studies

ABSTRACT
Expansion studies in generation and transmission are discussed. These are needed to match future demand with future available capacity. Several issues are to be considered including costs, site location,
technology used, plant size, etc.
The cost factors governing these expansions are presented, while taking into consideration the environmental and legal impacts. In some situations governmental intervention is needed to encourage expansions. This is usually associated with the provision of regulatory incentives that support investment in
the recommended fields of expansion. Some systems may require expansion in the generation side, while
transmission expansion is inevitable for other systems. In some cases expansion is to be made in both
generation and transmission.
The current situation becomes more complicated as the de-regulated models are adopted. So, the power
system utility responsibility is split among several companies, and each of them is responsible to plan
the expansion of its component or subcomponent. Furthermore, strong coordination and continuous
dialogue among all parties is needed.
A case study serves in making the picture clearer to the reader. This case study covers an expansion in
the generation area of a real life electric power system.
INTRODUCTION
Power system planning is one of the elements of the
overall energy and economic planning process. It
involves the assessment of several possible future
actions that will provide a match between supply
and demand. However, any such plan should be
within the wider energy context and should also
meet certain economic criteria. Therefore, the

objective of the system expansion study is to
determine a least-cost strategy for the long-term
expansion of the generation, transmission, and
distribution components of the power system. The
expansion of the power system should enable it to
adequately meet the future predicted load subject
to a set of technical, economic, environmental,
and socio-political constraints.
DOI: 10.4018/978-1-4666-0173-4.ch009
In this chapter, we are concerned with planning power system expansion with long-term time
frame. The outcome of the expansion plan is usually an investment plan for future plant additions
which will enable the system to meet the growing
demand. The input to such a process is the long
term demand forecast. The process is, however,
governed by certain constraints and planning
criteria. The constraints cover broad categories
including: the condition of existing plants, fuel
prices, regulatory issues, environmental concerns,
and commercial terms of power exchange with
other systems, macro economic conditions, and
financial status of the power company.
Historically, planning of power system expansion was a centralized process, and was the
responsibility of one department in the power
utility. The resulting expansion plan used to
cover the generation, transmission, and distribution components of the power system. This was
possible and acceptable at the time because the
power utility was a vertical entity covering all
power system components. Moreover, this planning model left the responsibility of setting the
electricity tariff with the same utility that planned
the power system expansion. Therefore, expansion
decisions were somehow justified or supported
by appropriate tariff decisions.
Currently, however, the situation is more complicated as the de-regulated models are adopted.
So, the power system utility responsibility is split
among several companies and each of them is responsible to plan the expansion of its component or
subcomponent. Furthermore, strong coordination
and continuous dialogue among power companies
are prerequisites for proper planning in order to
guarantee that there will be a match among all
component plans. After all consumers satisfaction and meeting their demand is a collective
responsibility of the generation, transmission,
and distribution companies.
144
GENERATION EXPANSION
Power system expansion plans are determined
through studies, which are basically analyses of
future plant additions required to meet expected
demand. The output of such studies is an investment plan detailing the size, type, location, and
capital as well as O&M costs of generation and
T&D plants (Dhadbanjan & Chintamani, 2009;
Kamyab, Fotuhi-Friuzabad, & Rashidinejad,
2008).
Expansion plans are usually carried out for 20+
years. They may be updated ever year to reflect
any changes or modifications on demand forecast
due to unforeseen changes in the driving forces
for electricity demand. In developing countries,
such unforeseen changes may be the norm. This
is due to the fact that demand is still evolving
and has not yet reached a case of saturation or
maturity like in developed countries. Therefore,
in developing countries expansion studies are
repeated more often and in some countries they
are carried out every year. Fortunately there are
software packages which make life easier. It is only
natural that planning criteria are revised whenever
a new expansion study is needed.
Expansion studies, therefore, are simply an
attempt to match future electricity supply to
future demand with certain constraints imposed
by the status of the power system, and financial
and other considerations. Planning criteria on the
other hand are self-imposed conditions to narrow
the selection process (Park, et al., 2000)
The expansion study is somewhat a search
for an optimum least-cost investment program,
which satisfies the future demand, any specified
constraints and falls within the defined planning
criteria.
The objective function of the expansion problem is therefore (IAEA, 1984):
min C jv X jv + FjvtU jvt t

j v
j
v
t
(9.1)
Where:
Cjv: Capital cost per unit of capacity of plant j
vintage v.
Xjv: Power capacity of plant j vintage v.
Fjvt: Discounted O&M costs of plant j vintage v
for the year t.
Ujvt: Power output of plant j vintage v for the year t.
t: Width of time in year t.
The generation expansion planning problem is
defined as determining which, where, and when
new power plants should be constructed to satisfy
the expected demand. The input data to the multiperiod multi-objective method includes existing
network configuration and its transmission capacity limits, technology costs for new equipment,
investment constraints, generation capacity and
investment/production costs of generating units,
future demand, and economic factors. In this
model, the objectives are to minimize investment,
operation and transmission costs, environmental
impact, imports of fuel and fuel prices risks for
the whole system (IAEA, 1984).
Another multi-objective method used in the
power system expansion planning is the nondominated sorting genetic algorithm. In this model
two different problem formulations are considered.
The first formulation has two objectives; namely,
to minimize cost, and to minimize sum of normalized constraint violations. In the other formulation
the first objective is to minimize investment cost,
while the second objective is to minimize outage
cost (enhance reliability). In essence this method
makes the generation expansion planning problem
equivalent to finding a set of best decision vectors over a planning horizon that minimizes the
investment and operating costs under relevant

constraints (Meza, Yildirim, & Masud, 2007).
In competitive markets, the main objective
of any generation company in exercising investment planning is to maximize its profit (IAEA
Bulletin, 1978). On the other hand the objective
of the regulatory body is to provide electricity
to consumers at reasonable reliability level and
affordable price. A combination of the two rather
opposing objectives in a framework that combines
electricity market competition and transmission
network models in an iterative process is another
method of dealing with the expansion planning
problem (Turvy & Anderson, 1997).
Since power generation investments are no longer centrally planned in many electricity markets,
investments are market or profit-driven. Current
and future electricity prices become investment
signals for private investors. In generation expansion planning, studies use long-term electricity
price profiles extending over many years to model
investors decisions. Price profiles are determined
through market simulations. The resulting method
is a hybrid between decentralized investor plans
stemming from market signals and technological
preferences, and centralized resource planning
concepts to decide optimal time-ordered investment decisions (Fonseka, Saha, & Dong, 2008).
TRANSMISSION AND
DISTRIBUTION EXPANSION
It must be emphasized that with the introduction
of market conditions and de-regulation of the
electricity markets the power system expansion
planning has become more complex. Moreover,
the generation planning, which used to suffix
was routinely followed by T&D planning to
complete the planning process. Presently transmission network expansion planning should
be treated as a process by itself. The same also
145
applies to the distribution networks. However,

since transmission network expansion planning
requires different methodologies than generation
expansion planning, researchers have focused on
transmission planning in the recent past. Transmission network expansion planning in essence must
specify transmission lines, transformers, reactive
power compensators, tie-lines and other major
equipment that should be constructed to guarantee
that the power system will operate reliability with
minimum cost to consumers within the specified
planning horizon (Choi, et al., 2005).
One transmission network expansion solution
method finds the optimal transmission network
expansion plan that allows the whole power system to operate adequately in an environment with
uncertainty in demand. The method proposes a
solution using a specialized Genetic Algorithm
(GA).
Another approach considers transmission
network planning in unbundled power systems.
The approach takes into account the requirements
of customers, power producers, system operator,
network owner(s), and regulator. Factors such as
competition, reliability, flexibility of operation,
transmission network expansion cost, and environmental impacts are taken as planning criteria.
COST CONSIDERATIONS AND

EXPANSION OBLIGATIONS
In expansion studies the cost is a major determinant
of any algorithm. In addition to cost the reliability
of the power system is another factor. Both factors are actually inter-related as higher reliability
always means higher cost and vice versa. However,
there is a minimum level of reliability that the
power company is obliged to adhere to. If this
obligation was not enforced then power companies
might attempt to neglect to expand the system in
order to meet the growing demand with the same
generation and T&D capacities. This would result
146
in lower power quality delivered to consumers in

addition to possible system breakdowns.
To alleviate this problem and at the same
time enable the power companies to making
a reasonable return on their investments a set
of performance indicators are enforced by the
regulatory body. These include an agreed upon
reliability criterion and an obligation to expand
the power system in order to meet the growing
demand (Metaxiotis, 2010).
There should be a balance between the investment required for added capacity and the level
of reliability required meeting the performance
indicators criteria. The way to achieve this balance
is by incorporating both in the tariff formula to be
used for the power company. In other words all
investments required for system expansion must
be approved and included in the tariff calculation
(IAEA, 1984; Turvy & Anderson, 1997). On the
other hand the level of reliability is also included
as positive or negative according to actual system
performance.
This way the regulator guarantees that the consumers will be served by the power companies and
at the same time the power company may have a
reasonable return on their investments needed for
expansion activities. This applies to generation,
transmission, and distribution companies.
REGULATORY INCENTIVES
It quite often said that for any regulation to be
enforced properly there should be some incentives
provided. This applies also to incentives related to
power system expansion. If power companies did
not get any incentives from the regulatory body
then they will attempt to postpone any investments
for expanding the power system. In doing so they
may rely on two things: 1) load forecast may not
be as high as expected and the existing system
may suffices to meet the demand, and 2) they
could get away with meeting demand with lower
reliability or with some outages and brownouts.
In reality the best way to identify any incentives is to reach a mutual agreement between
the regulatory body and the power companies
(Metaxiotis, 2010). In doing so the power companies must submit an expansion plan to cover
two requirements as follows:

Improving level of reliability of supply of

exiting system
Meeting future expected demand.
The plan includes detailed information regarding the investment costs of the expansion. The
role of the regulatory body is to review the plan
and approve the investments related to the expansion. Any additional costs not related to the core
business of the power company and specifically
to cover expansion will be rejected. This way the
regulator guarantees that the consumers will only
pay for the service they will get from their power
company. Moreover, the power companies will
be satisfied that they can return their investments
through the tariff.
CASE STUDY
This case study presents the implementation of
generation expansion of the Jordanian power
system using the WASP program. This is a wellknown analysis tool used extensively worldwide
in generation planning analysis. This cases study
represents a long-term planning case where different criteria are taken into consideration that may
affect various expansion decisions. A base case
plays a major role in directing the way of such
studies. A considerable effort is to be excelled to
establish this reference case on WASP. This is
followed by implementing different scenarios that
are variations of the reference base case. Results
obtained have potential indications in terms of
the expansion required, the size and type of units
needed for the appropriate needed expansion that
will meet the anticipated load and energy demands.
WASP Program
The main steps in power system planning (IAEA
Bulletin, 1978; IAEA, 2001) may be summarized
as follows:
a. Study of the electric load forecast 5 to 30
years into the future, based on the most reliable information.
b. Evaluation of the energy resources available in the future for electricity generation
and the foreseeable trends in technical and
economic developments.
c. Evaluation of the economic and technical
characteristics of the existing system of
generating units and of the plants that are
considered as potential units for system
expansion. These characteristics include
capital investment cost, fuel cost, operation and maintenance costs, efficiencies,
construction times, etc.
d. Determination of technical and cost characteristics of the plants available for expansion.
e. Determination of the economic and technical parameters affecting decisions such as
discount rate, level or reliability required
from the generating system, etc.
f. Choice of a procedure to determine the optimal expansion strategy within the imposed
constraints.
g. Qualitative review of the results to estimate
the viability of the proposed solution.
The determination of most of these data must
take into account the present and future economic
and technical environment within which the electric sector is expected to operate.
Thus, available resources and fuel prices
are related to the energy policy of the country;
economic development policies, existing and
foreseeable, should be considered in the demand
forecast, interest, and escalation rates are also
dependent on the economy; acceptable system
reliability should be future-oriented.
147
Because of the many variables involved in

electric system expansion problems, many mathematical models have been developed by planners
in order to tackle the problem in a systematic way.
During the past several years, the IAEA has
assisted numerous developing Member States in
carrying out electric power system planning studies using a computer program called WASP (Wien
Automatic System Planning Package) (IAEA,
2001). This program provides a way of estimating the most economic schedule for adding new
generating capacity to an electric power system
over the medium and long term. The package is
designed to find the optimum power system
expansion plan within established constraints.
Optimum means that the discounted cash flow
(capital and operating expenses) is minimized over
a given period with provision made to reduce the
effects of uncertainties beyond that period. This is
carried out using the dynamic programming approach. Dynamic programming, in its most general
sense, is an ideal method for solving the system
planning problem. However, even with a limited
range of possible expansion plans, this approach
is impractical without the aid of a computer. With
the additional range of generating units now available, the number of possible expansion plans is so
large that even with the aid of computers general
dynamic programming is impractical.
The WASP package represents a compromise.
The system planner can direct the area of study to
configurations which he believes most economic,
but the program will tell him if his restrictions are a
constraint on the solution. WASP then permits him
to modify his constraints and, without repeating
all the previous computational effort, to determine
the effect of the modification. This process can be
repeated until an optimum path conforming to the
user-imposed constraints is determined.
The WASP package consists of the following
seven modular programs:
148
a. A program to describe the forecast peak

loads and load duration curves for the system
(LOADSY).
b. A program to describe the existing power
system and all future additions and retirements which are firmly scheduled (FIXSYS).
c. A program to describe the candidate plants
which might be used to expand the power
system (VARSYS).
d. A program to generate alternative expansion
configurations (CONGEN).
e. A program to determine whether a particular
configuration has been simulated and, if not,
to simulate operation with that configuration
(MERSIM).
f. A program to determine the optimum schedule for adding new units to the system over
the time period of interest (DYNPRO).
g. A program to summarize the input data,
results of the study and the cash flow
requirements of the optimum solution
(REPROBAT).
Each of the first three programs creates data
files which are used in the calculations. Additional
files are created by the fourth and fifth program
and are used in the sixth. Each program produces
a printed summary. The seventh program provides
a report of the study.
An immediate advantage of the modular program approach is that the first three programs
can be run separately to eliminate the bulk of the
data errors. These programs are very fast to run,
thus avoiding extensive long runs with incorrect
data. The separation of the program generating
expansion configurations from that doing the
simulation produces further savings in computer
time since those expansion configurations that
may have involved data errors in the generating
program can be eliminated from the simulation.
The ability to save simulation results on a data file
is the major timesaving feature of the program.
When searching through a successive re-run of
the last three programs for the unconstrained
optimum only those simulations which have not

been performed are executed. Since simulation
is the most time-consuming part of examining an
expansion configuration, the computation time
saved can be very large.
A second advantage of the modular concept is
that the amount of memory required at any time
can be minimized, allowing the use of relatively
small computers. This is of particular importance
when considering that the IAEA assistance to its
Member States contemplates the transfer of the
WASP methodology. An interesting feature of the
program is that reliability and generating costs of
the systems annual configurations are estimated
using probabilistic methods. Hence, stochastic
variables such as the availability of water for
hydroelectric generation and unavailability,
planned or unplanned, of thermal generating plants
receive a probabilistic treatment. The results of the
program have thus removed uncertainties about
the influence of these stochastic variables on the
optimal expansion plan.
Expansion Study for Jordan

WASP is a computer program designed to find
the economically optimal generation expansion
policy for an electric utility system with certain
constraints set by the user. It utilizes probabilistic
assessment of system production costs, un-served
energy cost, and reliability. It also utilizes linear
programming technique for determining optimal
dispatch policy satisfying exogenous constraints
on environmental emissions, fuel availability and
electricity generation by some plants. Moreover
it employs a dynamic method of optimization for
comparing the costs of alternative system expansion policies (IAEA, 2001).
Each possible sequence of power units added
to the system (expansion plan or expansion policy)
meeting the constraint is evaluated by means of the
following cost (objective) function (IAEA, 2001):
Bj =
I
t =1
j ,t
S j ,t + Fj ,t + Lj ,t + M j ,t + O j ,t
(9.2)
Where:
Bj is the objective function attached to the expansion plan j,
I is the capital investment costs
S is the salvage value of investment costs
F is the fuel costs
L is the fuel inventory costs
M is the non-fuel operation and maintenance costs
O is the cost of the energy not served
t is the time in years (1, 2, ..., T),
T is the length of the study period (total number
of years), and the bar over the symbols has
the meaning of discounted values.
i is the discount rate.
The problem as stated here corresponds to finding the capacity, type, etc. of the plants required
to meet the expansion criteria over the period
of study which satisfy all constraints. This will
be the best system expansion plan within the
constraints given by the user. The WASP code
finds this best expansion plan using the dynamic
programming technique which represents optimum expansion plan for the system.
Jordanian power system has undergone several
phases of development in terms of capacity requirements and generation/transmission technologies. The main driving force for such expansions
was the high growth rate of demand which is
associated with socio-economic development of
the country. Geopolitical situations represented
a major contributing factor for the need for such
an expansion. This required the use of reliable
technical and economical methods to develop
evolving expansion plans. During the period
1985-now the National Electric Power Company
(NEPCO) adopted the use of WASP program for
conducting the expansion studies for the system.
149
The relevant characteristics of the power plants

existing in the Jordanian system during the year
2009 as well as those envisaged to be added during
the study period 2009-2037, fuel types used, and
the load and energy forecasts used in the expansion study are detailed in the following discussion.
Expansion studies performed within NEPCO
evolves around a base case which is used to further assess other cases that are derived by varying
different parameters (Elkarmi, Abu-Shikhah, &
Abu-Zarour, 2010). The underlying expansion
planning criteria of this base case study are:
1. The base year for the study is 2009, with peak

load = 2.23 GW and load duration curve as
shown in Figure 2.
2. Loss of Load Expectation (LOLE) = 40 hrs/
yr which is equivalent to 0.456621%
3. The Spinning Reserve (SR) is = 2.3%
4. The cost of Energy Not Supplied (ENS) is
$1/kWh
5. The expansion candidate plants intended to
be installed in the system are versatile, and
include:
a. Gas Turbines that can burn Diesel Oil
(DO) or Natural Gas (NG).
b. Steam turbine that operate on Heavy
Fuel Oil (HFO).
Table 1. Existing plants of the Jordanian system during 2009
150
NO.
NAME
NO. OF
SETS
MIN.
LOAD
MW
CAPACITY
MW
FUEL
TYPE
FOR
%
ST33
12
24
15
ST66
24
53
RISH
23
23
C130
80
130
R300
210
300
4.5
SCC
210
300
4.5
GT1
10
15
GT2
12
12
15
MRKA
12
16
15
10
GT7
12
16
15
11
G8&9
25
25
15
12
GT10
27
27
10
13
GT11
27
27
10
14
IND
20
42
15
INT
50
100
16
INTS
20
50
17
RISD
27
27
18
G130
90
124
4.5
19
C390
300
380
4.5
20
G100
70
100
4.5
21
AQFO
80
130
22
RNEW
20
30
15
Figure 1. Load and energy forecasts of the Jordanian system for 2009-2037
c. Plants using Renewable Energy technologies (RENE).

d. Nuclear plants using Nuclear Fuel (NF),
and
e. Plants burning Oil Shale (OS).
It should be noted that WASP uses the Spinning
Reserve (SR) as an availability criterion instead of
the RM. This is a built in shortcoming of WASP.
Table 1 lists the existing power plants which
were operational during the study. The table includes the capacity in MW of each unit, the fuel
type and forced outage rate.
Table 2. Fuel types used

Fuel
Type
Fuel
Symbol
Description
HFO
Heavy Fuel Oil
DO
Diesel Oil used in GAS TURBINE UNITS
NG
Local Natural GAS
NG1
IMPORTED N.GAS/AQABA
NG2
IMPORTED N.GAS/AMMAN
INT
INTERCONNECTION LINK
Nuc
Nuclear Energy
OilS
Oil Shale
RENE
Renewable
Table 2 lists the fuel types used in the study.

These types include heavy fuel oil, diesel, local
natural gas, imported natural gas, oil shale, nuclear, renewable energy, and interconnection.
The demand (MW) and energy (GWh) forecasts
for the period (2009-2037) are shown in Figure
1. These values are shown, as well, in Table 3.
The types, capacities (MW), expected construction periods, expected life times, Forced
Outage Rates (FOR), and fuel types of the generating plants to be used in the expansion studies
are shown in Table 4.
The existence of large amounts of Oil Shale
in Jordan is behind the decision of selecting to
expand using OSPP. Nuclear plants are good
choice as the peak load increases; as such plants
will serve to supply the base load due to their low
operational costs.
Figure 2 is the load duration curve of the power
system during 2009. This information is used
by the WASP program in selecting the required
power plants to meet the expected demand. In this
method the selected plants are placed in the load
duration curve either as peaking, intermediate,
or base load unit.
Different variations were proposed in the
analysis of the expansion studies applied to the
base case. These variations were applied to the
151
Table 3. Load (MW) and energy (GWh) forecasts of the Jordanian system
Year
Load
(MW)
Energy
(GWh)
Year
Load
(MW)
Energy
(GWh)
Year
Load
(MW)
Energy
(GWh)
2009
2230
13943
2019
4244
26535
2029
7374
46104
2010
2407
15049
2020
4488
28060
2030
7777
48624
2011
2571
16075
2021
4743
29654
2031
8220
51394
2012
2743
17150
2022
5016
31361
2032
8682
54282
2013
2947
18425
2023
5307
33181
2033
9171
57339
2014
3135
19601
2024
5616
35113
2034
9691
60591
2015
3338
20870
2025
5945
37170
2035
10244
64049
2016
3560
22258
2026
6295
39358
2036
10830
67712
2037
11440
71526
2017
3797
23740
2027
6634
41477
2018
4014
25097
2028
6993
43722
Table 4. Characteristics of generating plants used in the expansion study

GT60
G100
S300
C400
NUP
OSPP
Capacity (MW)
60
100
300
380
1000
300
Construction period (yrs)
1.5
1.5
2.5
Life time (yrs)
25
25
30
25
60
30
Fuel Type
FOR (%)
4.5
4.5
4.5
Figure 2. Load duration curve
152
Table 5. WASP results of the base case

YEAR
GT60
G100
S300
C400
NUPP
OSPP
Total Added
Capacity (MW)
Total System
Cost ($US 103)
2009
564,409
2010
561,531
2011
567,240
2012
462,181
2013
120
491,557
2014
300
769,913
2015
280
589,965
2016
60
508,178
2017
600
1,428,273
2018
100
479,413
2019
300
835,406
2020
300
776,333
2021
360
742,085
2022
300
685,052
2023
300
634,030
2024
300
595,595
2025
600
758,634
2026
300
518,875
2027
300
420,720
2028
300
419,294
2029
600
575,292
2030
300
440,931
2031
600
494,994
2032
900
526,662
2033
1000
489,783
2034
600
374,385
2035
600
332,451
2036
1120
349,825
2037
660
294,407
Sum
10
23
11,200
16,687,414
expansion criteria including LOLE (30 to 80 hr/

year), SR (3% to 6%), FOR (-2% to +2%), ENS
($0.5 to $3/kWh), and peak load (-2% to +2%).
The period of the study covered the years 2009
to 2037. Latest NEPCO load forecast were used,
and the discount rate was set equals to 8%.
The expansion studies metric was the overall

Cumulative Expansion Cost (CEC) for the whole
period of study (2009-2037) discounted to the
year 2009 (as per WASP).
Results of WASP show expansion plan requirements over the study period (2009-2037)
153
as presented in Table 5. This table includes the

cost of introducing new plants over the years of
study. The Cumulative Expansion Costs (CEC)
of the base case (i.e. by fixing the values of the
parameters of the base case) discounted for the
year 2009 is about US$ Billion 16.69.
The CEC comprises different cost elements
including: a) capital cost, b) salvage value, c)
operational cost, and d) cost of un-served energy.
The solution for this base case states that during
the period 2009-2037 a total of ten GT 60 units,
two G100 units, five S300 units, two NUP units,
and twenty three OSPP units will be added to the
system.
SUMMARY
The generation expansion and the transmission
expansion studies are vital for any expansion
planning study. These studies may be needed
individually for some systems, or a combination of both of them may be required for other
systems. Hence, close cooperation of planning
engineers in the areas of generation and transmission is required. Expansion planning is usually
governed by the amount of required investment,
the regulations, and the offered incentives. A
tradeoff between these factors may be required
to make the expansion happen. The role of the
stakeholders is crucial in adopting an optimum
compromise resulting in an all win situation. It
is very important to perform expansion studies
taking into account many scenarios. The proper
selection of the application software plays a vital role in this process. Regulatory acts may be
needed to be passed through political institutes.
In addition, the investors may be attracted, as
we talk about huge amounts of capital, by offering attractive incentives. The real life case study
presented was dedicated to performing generation
expansion study to the Jordanian power system
using the WASP package. Results of the expansion
requirements based on a reference case (base-case)
154
were presented. These results indicated that it is

necessary to install generating units of various
sizes operating on different energy sources (fuels)
to meet the expected demand for the study period
(2009-2037).
REFERENCES
Choi, J., Tran, T., El-Keib, A., Thomas, R., Oh, H.,
& Billinton, R. (2005). A method for transmission
system expansion planning considering probabilistic reliability criteria. IEEE Transactions on
TPWRS.2005.852142
Dhadbanjan, T., & Chintamani, V. (2009). Identification of generation and network expansion
locations to meet growing loads using relative
electrical distance approach. International Journal of Emerging Electric Power Systems, 10(5).
doi:10.2202/1553-779X.2345
Elkarmi, F., Abu-Shikhah, N., & Abu-Zarour, M.
(2010). An investigation of the effect of changes
of planning criteria on power system expansion
planning with a case study of the Jordanian
power system. Energy Policy, 38, 63206329.
doi:10.1016/j.enpol.2010.06.023
Fonseka, P., Saha, T., & Dong, Z. (2008). A pricebased approach to generation investment planning
in electricity markets. IEEE Transactions on
TPWRS.2008.2002287
IAEA. (1978). Expansion planning for electric
power systems. International Atomic Energy
Agency Bulletin, 21(2/3), 55.
Reports Series No. 241. Vienna, Austria: IAEA.
IAEA. (2001). WASP-IV manual. Vienna, Austria:
IAEA.
Kamyab, G. R., Fotuhi-Friuzabad, M., & Rashidinejad, M. (2008). Transmission expansion planning in restructured power systems considering
investment cost and n-1 reliability. Journal of
Applied Sciences, 8, 43124320. doi:10.3923/
jas.2008.4312.4320
IGI Global.
Meza, J., Yildirim, M., & Masud, A. (2007). A

model for the multiperiod multi-objective power
generation expansion problem. IEEE Transactions
on Power Systems, 22(2), 871878. doi:10.1109/
TPWRS.2007.895178
Park, J., Park, Y., Won, J., & Lee, K. (2000). An
improved genetic algorithm for generation expansion planning. IEEE Transactions on Power
Systems, 15(3), 916922. doi:10.1109/59.871713
Turvy, R., & Anderson, D. (1997). Electricity
economics- Essays and case studies. Baltimore,
MD: Johns Hopkins University Press.
155
156
Chapter 10
Integrated Resource Planning
ABSTRACT
Integrated Resource Planning (IRP) is an economic planning process which, if implemented correctly,
selects a plan with the lowest practical cost at which a utility can deliver reliable energy services to its
customers. The ultimate objective of this planning process is to formulate a plan having a mix of energy
resources, but at the same time minimizing the total financial outlays spent in order to maximize the energy service benefits gained. IRP can be described as an approach through which the future demand for
electricity services, during any given planning period, is met with a combination of least-cost of supply
and demand side efficiency options, while incorporating issues such as security of supply, environmental
protection, national economy, and other country-specific goals.
IRP can provide a vehicle to test and put into force regulatory policies and actions. Environmental externalities, risk reduction, improving continuity of service, market distortions, and lack of inexpensive
financing are all included in the IRP process. Policies are usually translated to fiscal or monetary measures through licensing procedures, tariff design, environmental penalties, renewable energy encouragement acts, and additional taxes or levies. This would certainly provide demand side options with some
advantage over the conventional ones.
INTRODUCTION
IRP is a process of planning to meet electricity
consumers requirements in a manner that meets
more than one objective simultaneously. These
objectives are: 1) maintain high level of reliability
and continuity of supply, 2) match national macroeconomic objectives, 3) reach all current and
future consumers and provide reliable service, 4)
make sure that supply of electricity is at the minimum possible cost, 5) minimize environmental
impacts of power supply, 6) reduce dependence

on imported energy, 7) attempt to achieve positive attitudes related to consumption and energy
efficiency, 8) incorporate new and renewable
resources in future supply options, and 9) create
new jobs and participate in economic development.
As such IRP is applied at a national level to
meet the set objectives. Each country sets its own
objectives, in spite the fact that these objectives
may conflict with one another to a certain degree.
This requires that a tradeoff must be adopted be-
DOI: 10.4018/978-1-4666-0173-4.ch010
tween conflicting objectives to arrive to a final

set of objectives. These final objectives must
be decided upon after an intensive analysis and
processing phase, leading to better judgment of
stakeholders in the process of developing plans.
It should be stressed that IRP introduces both
supply and demand sides in the formulation of long
term expansion plans. It is built as a comprehensive
process based on holistic analysis. It differs from
traditional planning, which focuses on supply
side options only, by incorporating demand side
options as well. Therefore, in addition to looking
at options to expand generation, transmission, and
distribution facilities, IRP involves programs that
affect consumption habits and levels. In other
words IRP increases the efficiency with which
electricity is used by the different consumers.
This results in savings in electricity use which is
equivalent to adding new capacity.
It is usually said that a MW saved is a MW
added. If this one MW was saved from some existing consumer by altering consumption habits,
levels, duration, or type of equipment used it will
be supplied to another new consumer or any additional demand of the same existing consumer.
Moreover, IRP is carried out to reduce the overall
cost of expanding the power system. The expansion cost, as outlined in chapter 9, is very high and
as resources become scarcer, and environmental
impacts become more pronounced, this cost will
further increase. Therefore, IRP is an attempt to
reduce this cost and at the same time reduce environmental and land occupation issues.
Bauer and Eto quote: IRP is the process of
integrating supply and demand side resources to
provide energy services at a cost that balances
the interests of all stakeholders. The goals of
IRP have evolved from least cost planning and
encouragement of demand side management to
broader, more complex issues including core
competitive business activity, risk management
and sharing, accounting for externalities, and fuel
switching(Bauer & Eto, 1992, p. 8).
IRP is an economic planning process which,

if implemented correctly, selects a plan with
the lowest practical cost at which a utility can
deliver reliable energy services to its customers.
The ultimate objective of this planning process
is to formulate a plan having a mix of energy
resources, but at the same time it minimizes the
total financial outlays spent in order to maximize
the energy service benefits gained (Harrington, et
al., 1994, p. 7).
Reddy and Sumithra quote: Integrated resource planning is an energy planning approach
to identify the mix of clean and centralized/decentralized renewables and efficiency improvements
that will meet the demand for increasing energy
services for instance at least cost or least environmental impact (Reddy & Sumithra, 1997, p. 14).
Antonette quotes: IRP can be described as an
approach through which the estimated requirement
for electricity services during the planning period
is met with a least-cost combination of supply and
end-use efficiency measures, while incorporating
concerns such as equity, environmental protection, reliability and other country-specific goals
(Antonette, 2005, p. 1272).
CONCEPT AND RATIONALE

The most important objective of IRP is to ensure
the long-term supply of adequate and reliable
electricity service to consumers at the lowest
reasonable cost and in a manner consistent with
national interests including public welfare. The
underlying role of IRP is to chart future action
related to determining and implementing the longrange supply and demand side resource utilization
strategy in order to fulfill future demand.
IRP includes some societal costs such as environmental impact mitigation in the assessment
of certain alternatives (Hu, et al., 2010). This
distinguishes it from the classical supply planning.
IRP is also technologically neutral with respect to
157
supply or demand side options. Therefore, the deferred or avoided end-use demand is equivalent to
new supply. It is intended to perform an integrated
assessment of supply and demand alternatives to
meet future demand, thus creating a flexible plan
that allows for uncertainty and modifications for
changing conditions and at the same time attempting to minimize costs.
Figure 1 shows the IRP process flow chart. It
can be seen from the chart that the process combines both supply and demand side options in the
evaluation of most feasible and desired expansion
plan. It is essentially the same as the traditional
expansion study but with the difference of adding
the demand side options to the analysis.
The assessment of IRP plans is carried out
with the use of some selection criteria, based on
Best Practice Guide: Integrated Resource Planning for Electricity (USAID, 2010), as follows:
1. Financial criteria, including: Plan capital
costs; Plan operating costs; Plan foreign
exchange requirements; Interest during
construction and interest during operation
charges; Return on equity of power utility;
Utility net income; and Internal capability
to generate funds (self-financing ratios)
2. Economic criteria, including: Macroeconomic issues; Competition for energy
consumption among economic sectors;
Interaction between energy sector and other
non-energy sectors; and Socio-economic
development status
3. Performance criteria, that takes into account: Reliability indexes (LOLP, reserve
margin, CAIDI, SAIDI, etc.); Customers
base served; and Efficiency of energy use.
4. Energy security criteria, including:
Diversity of supply; Use of domestic resources; and Use of renewable resources
5. Environmental criteria, which caters for:
CO2 produced; Other air pollutants; Land
used for energy facilities; Liquid waste
158
production; Solid waste production; and

Impacts on biodiversity.
6. Other criteria, including: Aesthetic issues;
Employment impacts; Impacts on other
economic sectors; Political acceptability/
feasibility of plans; Social implications; and
Cultural and heritage impacts.
SUPPLY AND DEMAND

SIDE INTERACTION
The ultimate goal of expansion planning, as
discussed in Chapter 9, is to come up with an
investment plan for generation, transmission, and
distribution plants and equipment in order to meet
future demand with acceptable levels of reliability
at an affordable cost. This same objective also
holds true for IRP, but with the inclusion of demand
side alternatives. This interaction between supply
and demand side options is the essence of the IRP
approach. This interaction and interchangeability
among supply and demand options according to
certain planning criteria brings the cost of expansion to go down. Another benefit is the reduction
of environmental pollution. Furthermore, the competition between supply and demand alternatives
guarantees more efficient system.
Equating supply and demand side options
for the sake of expansion planning enforces the
energy efficiency culture. This enhances the
chances of success of DSM programs. In other
words, without IRP demand side alternatives are
nothing but theoretical ideas. On the other hand
if demand side options are given equal weight
as supply side options then this, by itself, is an
acknowledgement of demand side effectiveness.
Figure 2 is a depiction of the interaction between
supply and demand.
Figure 2 shows that supply and demand sides
interact with each other through several steps
within the IRP process. First of all the planning
criteria determines the limits and constraints
Figure 1. IRP process flow chart
159
Figure 2. Interaction between supply and demand within IRP
imposed on the power system and the conditions

desired to be achieved in the expansion process.
These planning criteria are discussed in detail in
Chapter 3. The issue here is that all these criteria
are imposed on both the supply and demand side
options such that any alternative that is considered
for competition must adhere to the different planning criteria.
Demand forecasting, however, looks as if it
affects demand side options only since reducing
demand will produce less future demand. This is
not entirely true as supply side is also affected by
the forecast. The effect comes from the fact that
supply side alternatives have a relatively large
capacity. When demand forecast changes for
any reason so will the capacity of the supply side
alternatives to be selected to meet the demand.
So both supply and demand sides are affected by
the demand forecast.
160
Cost considerations enter into play as a determinant in the final selection process. Therefore,
cost affects both supply and demand side options.
In other words if a given alternative fulfills all the
above factors but is not favored from cost point of
view it will not be selected and further iterations
are needed. This process holds true regardless if
this alternative is supply or demand side candidate.
Finally social impacts include environmental
pollution, demographic changes, economic development, employment etc. Naturally these factors
are important to both supply and demand side
options. Certain factors such as environmental
pollution could have a negative impact on supply side alternatives but, on the other hand, have
positive impact on demand side options. The first
would be looked at as if it was a penalty, while
the latter is treated as a bonus.
UNCERTAINTY AND COST

IMPLICATIONS
The issue of uncertainty in the expansion planning comes mainly from demand forecasting.
When forecast errors exceed 5% then large discrepancies in expected demand will occur. This
will result in either over or under-estimation of
future demand. In turn this situation could lead to
either over-expansion or under-expansion. Both
cases are not desirable and lead to bad results
in the operation and performance of the power
system. The over-estimation cases would result
in economic inefficiency of the power system
and could lead to losses due to the unnecessary
investment undertaken. On the other hand the
under-estimation cases may lead to power interruptions and macroeconomic inefficiency since
electricity is one of the most important inputs to
the national economy.
Sudden unexpected surge in demand is a clear
case of demand uncertainty. It could happen that
in one country demand exceeds all expectations
because more than one demand driver combine
to aggravate demand. Conversely a sudden drop
in demand due to the fact that certain demand
drivers did not materialize. Naturally these cases
will lead to a sub-optimal IRP plan.
Other issues such as technological uncertainty
could result in risks of having an inefficient expansion plan. This is explained by the following
example. If a certain supply or demand side
alternative was considered in the selection or
optimization process and if this alternative is
based on state-of-art technology that is not yet
fully proven. Then any reduction in the expected
output of such alternative would be reflected
negatively on the expansion plan. Sometimes
the technological uncertainty comes from site
conditions. In this case the technology is proven
in its original location, but when it was built in
the desired site it did not perform as expected. In
reality there are many cases of power plants that
were built but due to unforeseen site conditions
or sub-optimal construction standards ended up

with a lower than designed power output rating.
In certain instances when IRP is not geared to
match with macroeconomic policies of the country
or not in harmony with such policies, the result
will be a case of uncertainty. This would lead to
situations similar to the ones described above. The
end result would be an inefficient expansion plan.
Cost could be the cause of uncertainty. This
happens in volatile economic situations like what
happened recently in the world. Due to capital
scarcity costs have gone up and many projects
either did not materialize or were postponed. This
escalated and aggravated the situation even further
because the delay or cancellation of infrastructure
or business projects has a direct impact on electricity projects. This in turn has a direct impact on
the economic performance of the power system.
On the other hand escalation of costs of electric
plants affects the IRP process and possibly causes
a bias toward some alternatives over others. For
example, if cost of supply side options increases
then naturally demand side options will be favored
and vice versa.
In IRP studies the avoided cost metric is commonly used. It refers to the incremental savings
associated with not having to use existing or new
supply side plants to meet demand. This adopts a
concept related to marginal or incremental cost,
which is, in turn, defined as unit costs of production and capacity from supply side plants.
When demand side options are part of the future
expansion plans, as in the IRP process the concept
of avoided cost is very much relevant. Avoided
costs can be used as benefits of selecting demand
side options; whereby, if they are not selected then
the cost would be that of the supply side options
(Harrington, et al., 1994). Avoided costs can be
classified into the following segments:

Direct capital and operating costs

Indirect costs (corollaries and externalities) and
Opportunity costs
161
Direct capital and operating costs are those

costs associated with the costs of the supply side
options if there are no demand side options. They
represent the costs of cancelled or deferred capital
investments including financing charges as well
as their operating costs.
Indirect costs are those that accrue to other
entities within the electricity sector that have
working relationships with the electricity company. Corollary savings in the electricity sector
as a whole include capital and operating savings
associated with, for example equipment or appliance manufacturers. Contractors or consultants
working on electric projects are other examples
of indirect costs.
Indirect costs include, also, environmental
costs. Environmental externalities are essential
part of the indirect costs. These include resource
depletion or health effects as a result of environmental pollution. Moreover, causing harm to
nature even in the form of affecting the aesthetics
of the surroundings is another indirect cost.
Environmental externalities are responsible for
guaranteeing an equitable comparison between renewables and conventional power plants. Without
the externalities, which include the possible risks
of environmental harm, any cost-benefit analysis
would favor conventional power. Therefore, the
IRP process includes these types of indirect costs.
These externalities include long-term costs of environmental degradation, environmental clean-up
due to any accidents, and health risks associated
with power delivery.
Opportunity cost is related to the concept of not
being able to use any committed resource or plant
in any other way. Opportunity cost of capital, for
example, means that if capital is used to invest in
one project it cannot be used in another project.
In other words it is the cost of allocating funds to
one certain purpose.
Another important issue related to cost considerations of IRP is the presence of market distortion.
This usually is the case of developing countries
whereas; market is affected by certain policies
162
that cause the distortions. These distortions come

from custom duties that are placed higher than
normal just a fiscal policy to finance government
spending. Subsidies and government grants are
other forms of market distortions. Wage fixing
and minimum wage policies could cause market
distortions. Favoring national or local products or
contractors are other forms of market distortions.
In short, any interference with market forces or
the natural balancing act between money supply
and demand would lead to market distortions.
These cases will have a bearing on the results of
the IRP process.
Geopolitical situations could pose as source
of uncertainty and at the same time cost escalator.
This is simply explained by the implications that
followed the Gulf war, for example. The price of
oil rose to unprecedented values. Oil shipments
were disrupted. Any future contracts were either
cancelled delayed or re-negotiated with much
higher prices. All these factors lead to certain
effects on the IRP process.
BENEFITS OF IRP
IRP process, in virtue of its nature, includes all
candidate options for power system expansion.
This assures the presence of equality among the
various generation, transmission and distribution
alternatives. This will provide a good opportunity
for some demand side options to compete with
other supply side options.
IRP could be used to address all critical and
important issues in power system planning. This
is achieved through focusing on near consumer
problems such as poor reliability of supply, insufficient financing sources, or inadequate public
awareness of environmental issues. With IRP some
demand side options are designed and included in
the analysis to attempt to solve these problems.
Traditional system expansion will take such issues into account but they will be common to all
options, while IRP will consider each of them in
its own and address its solution. The presence of

demand side options in combination with distributed generation or small scale renewable energy
will provide solutions to many near consumer
problems.
One of the side benefits of IRP is its assistance in meeting future demand requirements
efficiently. This is explained by considering the
energy intensity index. This index is a measure of
energy input per unit of output of any economic
activity, see Chapter 6. When IRP is used some
options related to lowering the energy intensity
are considered among the demand side options.
Lowering the intensity is equivalent to adding
additional supply capacity but in more efficient
manner. To achieve this lower intensity goal
requires consumers to look for means to reduce
unnecessary wasteful consumption, replace inefficient appliances with efficient ones, or simply
exercise some housekeeping measures to reduce
consumption.
IRP helps in providing for future power
requirements more effectively. This is the case
when sufficient generating capacity or T&D capabilities exist. IRP in this case helps in having
adequate lead time to order additional capacities
to avoid any sudden or unforeseen shortage. This
has happened in many countries where surges of
excessive demand for a combination of reasons
caused severe power shortages and forced utilities
to exercise load shedding. In many developing
countries demand for electricity does not grow
at a steady pace, rather it fluctuates from low to
medium to high without any particular order. This
situation can be addressed effectively with IRP.
IRP contributes to social and environmental
welfare. This is achieved by providing sustainable
electricity service to consumers with due consideration to minimizing cost and environmental pollution. This, in turn, will support the socio-economic
development of all consumers. At the same time it
will maintain acceptable levels of health status of
all consumers as a result of selecting environmentally benign sources of electricity service (Logan,
1994). IRP acts on this issue by including actual

environmental costs, such as pollution monitoring
and control, or proxy values, such as charges for
imputed negative impacts. The end result would
be cleaner and healthier options to be selected.
Another aspect of the benefits of IRP is that it
treats the environmental costs as embedded costs
in the options rather than the traditional methods
which treat them as taxes or penalties. In other
words IRP inserts these costs in the selection process thus avoiding political and regulatory debates.
At certain times a demand side option may not
have a lower equivalent generating cost compared
to a conventional alternative. However, the delivered power to consumers may be cheaper with
using the demand side option as the T&D losses
and associated operating costs are lower (Willis,
2000). Cost-effective efficiency improvement or
resource diversity options may be considered as
risk-reducing or reliability-improvement candidates. For example, by replacing or postponing
new conventional generating plant by a particular
DSM measure would decrease the volatility of
demand and hence lower the possibilities of power
outages. Moreover, since most demand side options have shorter completion times, their levelized costs would be lower or at least they provide
quicker solutions to power shortage problems.
The leveled cost would be lower for demand side
options if reasonable cost of un-served or un-met
energy is included.
IRP can provide a vehicle to test and put into
force regulatory policies and actions. Environmental externalities, risk reduction, improving
continuity of service, market distortions, and lack
of inexpensive financing are all included in the IRP
process. Policies are usually translated to fiscal or
monetary measures through licensing procedures,
tariff design, environmental penalties, renewable
energy encouragement acts, and additional taxes
or levies. This would certainly provide demand
side options with some advantage over the conventional ones.
163
Finally some local conditions or resources

can be used through the IRP process to produce
acceptable options for system expansion. For,
example if a local renewable energy resource is
available close to a load center, then it would be
an added advantage to use such an option with
lower T&D associated costs (Willis, 2000). Other
issues like employment opportunities or investment opportunities lead to favoring demand side
or renewable options. All that is needed is to
monetize such policies and include them in the financial comparison among alternatives. Again this
monetization is also governed by other fiscal and
monetary policies in place. The end result would
be to have the demand side options with good
competitive edge over the conventional options.
system operator), and international and local

consultants. The following brief description outlines the general framework and input variables
considered in the study. The outcome of the study
is also mentioned briefly at the end. Moreover,
the study proved very valuable in establishing a
baseline estimation of electricity consumption
and demand by sector and end-use.
The objectives of this IRP study were as follows:
CASE STUDY
IRP is a planning tool used by planners responsible

for the development of the electricity sector. It
integrates both supply and demand side options.
Moreover, it includes all possible supply options
including conventional, renewable, and interconnections. On the demand side it includes energy
efficiency, conservation, and rationalization of
consumption.
IRP has an added feature of including other
national objectives or directives into the planning
of the electricity sector. The other objectives or
driving factors are usually called externalities.
Externalities may include promotion of renewable energy or green energy, more reliance on
indigenous resources, reduction of environmental
impact, enhancing economic activities, attracting
investments, and increasing employment. Each
externality is assigned a monetary or financial
value which is used in evaluating and comparing
the planning alternatives.
An IRP study for Jordan was performed in
2000 for the period 2000-2010. This study was
the product of joint efforts from the governmentowned transmission company (independent
164
Providing electricity service at best cost

and value to customers.
Diversification of energy sources.
Enhancing the utilization of indigenous
resources.
Reduction of environmental impacts due to
energy sources.
Increasing social and economic benefits in
Jordan.
Each objective was, in turn, qualified in terms

of its sub-objectives and appropriate evaluation
criteria. The details of this process are as follows.
1. Providing electricity service at best cost and
value to customers
This objective aims at supplying consumers
with affordable electricity that is characterized by
high quality and reliability. The sub-objectives are:

Minimizing short and long term electricity

production and delivery costs.
Avoidance of power outages and supply
curtailment.
Maximizing efficiency of energy use.
Ensuring high power quality.
Minimizing the use of other infrastructure.
The Long Run Marginal Cost (LRMC) was

used as a quantitative indicator of the supply
alternatives. In reality there are two LRMCs; one
for capital cost and the other represents operational
cost. On the other hand the cost of demand side

options are usually measured as avoided supply
cost. In other words, a demand side option can
be looked at as an opportunity to avoid investing in supply side. The cost of implementing the
demand side option must be included to get the
complete representation of the demand side option cost. The cost of having energy not served
or power outages is treated by considering cost
of energy not served estimated by the electricity
sector decision makers.
Other sub-objectives were evaluated qualitatively. For example, power quality is related
to efficiency of energy use. At the same time it
may have some effect on reliability or continuity
of supply. Therefore, an added cost is included
to cover such effect. Moreover, water scarcity in
Jordan is treated qualitatively such as to penalize
any option that uses more water. The same applies
to all other infrastructural assets.
2. Diversification of energy sources
The sub-objectives of this objective were:

Optimum utilization of interconnections.

Developing other fossil fuel resources.
Introducing renewable energy.
Preference is given to increasing the utilization

of local resources. Interconnecting lines are to be
used to the limit based on financial benefits. As
a matter of fact, they were originally built based
on their feasibility. On the other hand, fuels from
the local refinery must also be maximized since
they are considered local resources. As for renewable energy, it must be treated with utmost care.
Since the overall cost of production of electricity
from renewables is still higher than conventional
plants, there must be some added externalities to
be taken into account.
3. Enhancing the utilization of indigenous

resources
The sub-objectives include the following:

Encouraging natural gas and oil shale

options.
Enhancing the chances of using renewable
energy.
In the case that the resource is tradable such

as shale oil, which is derived from oil shale, the
opportunity cost is considered. In other words,
if the resource could be sold internationally at a
higher price then it would be better to sell rather
than use it. However, joint exploration agreements could have provisions for both exporting
the product and at the same time using it locally.
If the resource is not tradable, as in the case of
natural gas or bulk shale oil, an in-between cost
having two limits can be used. The upper limit
would be the international price and the lower
limit the extraction and distribution cost.
4. Reduction of environmental impacts due to
energy sources
a.
b.
c.
d.
e.
f.
Improve environmental performance.

Ensure public safety and health.
Comply with international treaties.
Promote renewables.
More efficient use of resources.
Minimize water usage.
The evaluation criteria for these sub-objectives

include the following:

Production of green house gases and associated monetary equivalents.

Energy efficiency improvement.
165
Public health hazard and consequences.

Balancing financial benefits and technical
risks.
Availability of water resources.
Each of the criterion mentioned above were

assigned some monetary value in the comparison
of IRP options.
5. Increasing social and economic benefits in
Jordan

Contribution to the national economy.

Contribution to employment.
Increasing foreign and local investments.
Each sub-objective is evaluated qualitatively

such as to capture the benefit gained from it. This
added bonus is subtracted form the cost of the
option that will cause its generation. For example,
if one option will benefit the national economy
by x% this must be factored in the cost of that
option by subtracting an equal x% from it. The
same logic also applies to the other sub-objectives
in a similar manner.
On top of the abovementioned framework of
the IRP methodology used for Jordan there were
some strategic guidelines provided by the decision makers. These guidelines represent essential
elements in the planning of the electricity sector
in Jordan. The guidelines included the following:
a.
b.
c.
d.
e.
f.
g.
h.
166
Give high priority to natural gas option.

Energy rates and economic pricing.
Introducing energy efficiency
Improving existing plant efficiency
Independent Power Producer (IPP) projects.
Reduction of T&D losses.
Encourage renewables.
Electricity sector reform.
The first strategic guideline was factored-in in

the IRP analyses. It first involved looking into gas
exploration option in Jordan as well as importing
it from Egypt. The second is mainly concerned
with eliminating subsidies and reaching economic
rates. It is a wider scope than that of IRP but some
focus was placed on rate issues in the process of
the study. Some DSM measures, which were previously studied by local Jordanian experts, were
taken into consideration. Other studies looked
into existing plants improvements and such cases
were also included in the IRP. An IPP was already
in the tendering process. It was also considered.
Renewables were again emphasized. The sector
reform issue is a broad issue, however, it was
already undergoing during the IRP study. Therefore, due attention was paid to the unbundling of
assets, privatization of utility companies and tax
issues, and finally the revenue and rate structures.
The IRP study considered the following portfolio of options:
1. Demand side options:
a. DSM programs including: compact
fluorescent light bulbs for the domestic
sector; lighting program for the commercial, services, and industrial sectors; street lighting program; efficient
motors program; variable speed drive
program; water pumping program;
efficient appliance labeling program;
and air-conditioning program.
b. Reduction of T&D losses.
2. Supply side options:
a. Traditional generation options including: energy efficiency improvement
of existing plants, piggybacking of
combined cycle to single cycle stage
turbine burning natural gas, decommissioning of old plants, pre-cooling
of gas turbine inlet temperature.
b. Utilize interconnection lines to import
power.
c. Cogeneration plants.
d. New and renewable energy including:
wind energy, photovoltaic plant, solar
thermal plant, pumped storage hydro
plant, mini hydro plant.
The various demand and supply side options
were combined to cover the demand for the period
2000-2010 in six scenarios as follows:

Scenario 1: Supply side, with no

interconnection.
Scenario
2:
Supply
side,
with
interconnection.
Scenario 3: Supply side, with interconnection, and delayed IPP project.
Scenario 4: Supply side, with interconnection, 2 DSM programs, and 1 wind plant.
Scenario 5: Supply side, with interconnection, 4 DSM programs, and 3 wind plants.
Scenario 6: Supply side, with interconnection, 5 DSM programs, and 3 wind plants.
Table 1 summarizes the outcome of the assessment and evaluation of the six scenarios. It is
evident that scenario 5 is the best followed very
closely by scenario 6. The combination of supply
side, interconnection, DSM, and wind plants is
the best combination. It seems that the extra DSM
program in scenario 6 was not very cost effective.
The best scenario is detailed as shown in Table
2.
SUMMARY
Basically, IRP is a planning process performed
at the national level of the country. IRP aims to
meet the users needs for electricity services while
satisfying the multiple objectives for resource use.
These objectives may include: reliable electric
service, minimization of environmental impacts,
electrification, security of supply, use of local
resources diversity of supply, cost minimization
(short and/or long term economic cost, and/or
foreign exchange costs), local employment provision, social benefits provision, acquire technology,
acquire expertise, retain flexibility.
IRP is an economic planning process which,
if implemented correctly, selects a plan with
the lowest practical cost at which a utility can
deliver reliable energy services to its customers.
The ultimate objective of this planning process
is to formulate a plan having a mix of energy
resources, but at the same time it minimizes the
total financial outlays spent in order to maximize
the energy service benefits gained.
The assessment of IRP plans is carried out
with the use of some selection criteria as follows:
1) Financial criteria, 2) Economic criteria, 3)
Performance criteria, 4) Energy security criteria,
5) Environmental criteria, and 6) Other criteria.
The ultimate goal of expansion planning, as
discussed in Chapter 9, is to come up with an
investment plan for generation, transmission, and
distribution plants and equipment in order to meet
Table 1. Summary of scenario results

Scenario
Installed Capacity (MW)
Discounted Cost (106 JD)
Environment equivalent cost

(106 JD)
1004
547
27.3
679
475
24.6
679
499
24.1
705
447
22.3
559
355
16.0
559
358
16.0
167
Table 2. Best IRP scenario

Description
Plant
type
Power
(MW)
Horizon
(Year)
Interconnection
Phase 1 with Egypt
50
2002
Decommissioning
Diesel plants
-30
2003
Interconnection
Phase 1 with Egypt
100
2003
IPP plant phase1
Combined cycle burning N.G.
225
2004
Upgrade turbine
Gas turbine
2003
IPP plant phase2
Combined cycle burning N.G.
225
2005
Decommissioning
Diesel plants
-5
2005
Wind energy
Wind plant site 1
35
2008
Wind energy
Wind plant site 2
35
2008
Decommissioning
Diesel plants
-22
2008
Interconnection
Phase 1 with Egypt
30
2008
Wind energy
Wind plant site 3
35
2009
Interconnection
Phase 1 with Egypt
70
2009
Street lighting
Program (for 7 years)
11
Start in 2001
Water pumping
Load shifting program (for 5 years)
74
Start in 2003
Compact Fluorescent Lamp
Program for domestic, commercial and industrial consumers (7 years)
36
Start in 2001
Variable Speed Drive
Program for industrial consumers

(7 years)
30
Start in 2001
Total Installed Capacity
559
Total net capacity added
502
future demand with acceptable levels of reliability

at an affordable cost. This same objective also
holds true for IRP, but with the inclusion of demand
side alternatives. This interaction between supply
and demand side options is the essence of the IRP
approach. This interaction and interchangeability
among supply and demand options according to
certain planning criteria brings the cost of expansion to go down. Another benefit is the reduction
of environmental pollution. Furthermore, the competition between supply and demand alternatives
guarantees more efficient system.
The issue of uncertainty in the expansion
planning comes mainly from demand forecasting. When forecast errors exceed 5% then large
discrepancies in expected demand will occur. This
168
will result in either over or under-estimation of

future demand. In turn this situation could lead to
either over-expansion or under-expansion. Both
cases are not desirable and lead to bad results
in the operation and performance of the power
system. The over-estimation cases would result
in economic inefficiency of the power system
and could lead to losses due to the unnecessary
investment undertaken. On the other hand the
under-estimation cases may lead to power interruptions and macroeconomic inefficiency since
electricity is one of the most important inputs to
the national economy.
When demand side options are part of the
future expansion plans, as in the IRP process the
concept of avoided cost is very much relevant.
Avoided costs can be used as benefits of selecting demand side options; whereby, if they are not
selected then the cost would be that of the supply
side options. Avoided costs can be classified into
the following segments:
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Bauer, D. C., & Eto, J. H. (1992). Future directions: Integrated resource planning. In Proceedings of the ACEEE 1992 Summer Study on Energy
Efficiency in Buildings, (pp. 1-16). Washington,
DC: American Council for an Energy-Efficient
Economy.
Direct capital and operating costs

Indirect costs (corollaries and externalities) and
Opportunity costs
The IRP process, in virtue of its nature, includes

all candidate options for power system expansion.
This assures the presence of equality among the
various generation, transmission, and distribution
alternatives. This will provide a good opportunity
for some demand side options to compete with
other supply side options.
IRP could be used to address all critical and
important issues in power system planning. This
is achieved through focusing on near consumer
problems such as poor reliability of supply, insufficient financing sources, or inadequate public
awareness of environmental issues. With IRP some
demand side options are designed and included in
the analysis to attempt to solve these problems.
Traditional system expansion will take such issues into account but they will be common to all
options, while IRP will consider each of them in
its own and address its solution. The presence of
demand side options in combination with distributed generation or small scale renewable energy
will provide solutions to many near consumer
problems.
Antonette, D. (2005). Integrated resource planning (IRP) and power sector reform in developing
countries. Energy Policy, 33(10), 12711285.
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Logan, D., Neil, C., & Taylor, A. (1994). Modeling
renewable energy resources in integrated resource
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Willis, H. L., & Scott, W. (2000). Distributed
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ADDITIONAL READING
Fang, Z., Yong, T., & Dongxia, Z. (2004). Study on
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171
Chapter 11
Interconnected Systems
ABSTRACT
In power system industry the aim is to provide the customers with secure, reliable, and low cost electric
power. For isolated systems these objectives may be difficult to achieve. If two power systems are kept
isolated (not interconnected), then the reserve margin of each system will be high in order to cater for
probable outages. This implies that electricity cost will be higher for each individual system. In contrast,
the interconnection of power systems will serve in reducing reserve margin and reduce electricity costs
in both systems. Practically, obstacles do exist and hinder the implementation of interconnection.
Power systems operate on either AC (50 Hz), or AC (60 Hz). Interconnection can be implemented based
on an AC/AC or AC/DC basis. Technical, economical, and environmental considerations must be investigated to establish the best interconnection configuration. Moreover, the social, legal, and political
impacts are of potential importance and must be considered.
INTRODUCTION
The scarcity of energy resources, in addition to
their increasingly higher costs has led to serious
thinking about reducing operational costs in the
power industry. One of the options that is considered win-win is the interconnection of power
system grids of different utilities or even countries. Power grid interconnections provide links
between the electricity transmission systems of
two or more linked utilities/companies/countries
for the purpose of sharing electric power resources.
As bulk electricity is not available for storage,
it must be transferred by power lines. This will
enable energy trade and help the importing side

increase its energy supply, meanwhile increasing
the income of exporting side.
Grid interconnections can range from a oneway transfer of a small amount to a full integration of the power systems and markets of several
regional countries. This will contribute to several
benefits including: Enhancing sustainable development, increasing the quality and reliability of
electricity, the formation of competitive markets
for electricity, and reducing the cost of electricity.
However, such benefits are not gained easily, since
the power grid interconnections are extremely
complex as related to the following issues: tech-
DOI: 10.4018/978-1-4666-0173-4.ch011
nical, economical, legal, political, social, and

environmental.
Grid interconnection decision is usually controlled by many factors that represent different
view points. All of these points must be tackled
and must converge for adopting the interconnection option. These aspects include: Technical,
economical, financial, environmental, legal, and
political factors. During the planning stage, stakeholders of interconnected grid must communicate
transparently and build the mutual trust in order
to make the best of the interconnection for both
sides. This will lead to defining and setting the
operational instructions, pricing, operation and
power transfer limits and other important related
issues (Fink & Beaty, 2006; Von Meier, 2006).
When technical issues are agreed upon, economical and financial aspects represent a crucial
factor to operate the interconnected grid. The
formula for reserve capacity must be agreed upon
and implemented. This will lead to positive impacts and serve in reducing the overall capacity
and related costs, and provide electricity supply
from the larger interconnected party at acceptable
levels of reliability with a lower reserve margin,
i.e. the ratio between overall peak demand and
total available generating capacity. Having a
lower reserve margin implies lower investments
in capacity, and specifically in peaking capacity
(Billinton & Allan, 1996).
The incurred reduction in overall capacity
costs is due to: a) flattening of the load curve; b)
complementarities of peak times or seasons; c)
reserve margin impacts in particular; d) economies
of scale impacts; and e) having enough capacity
in the interconnection.
Several technical issues must be addressed
early in the planning process for a grid interconnection. Will the interconnected systems operate
synchronously or asynchronously? What are the
magnitudes and directions of the anticipated power
flows? What physical distance and terrain will the
interconnection span? What are the key technical
172
and operating differences among the systems to

be interconnected?
For AC interconnections, key design and
operating issues relate to the constraints on transmission capacity, which include thermal limits,
stability limits, and voltage regulation. Where
there are liberalized electricity markets, these
constraints become more severe as systems are
operated closer to capacity. FACTS and HVDC
options should be considered as alternatives or
complements to traditional transmission upgrades
(Hammons, et al., 2000). Simulation software is
an essential tool for planning and operating an
interconnection.
For modeling to be effective, however, extensive technical data must first be gathered and
shared between systems, and personnel must be
trained. Grid interconnections require a careful
calculation of costs, benefits, and risks. Technical planning of a grid interconnection should be
coordinated with economic, organizational, legal,
and political aspects of a potential interconnection
project from the outset of project consideration.
In the following sections the issues related
to grid interconnection are discussed further. All
issues affecting the interconnected grid must be
fully recognized in order to lead to maximizing
benefits, subject to the condition that there is
sufficient internal transmission capacity in the interconnected countries especially at peak demand
periods. If this is not the case, then interconnection
must not be adopted as an option.
AC AND HVDC INTERCONNECTION

Background
Grid interconnection can be done by connecting
isolated power systems (islands) within a country,
or by connecting several regions or countries
together. This can be done synchronously (if the
frequency is the same) or asynchronously (when
the frequencies differ in the different grids). The

first one uses AC interconnection, while the second
requires AC/DC and/or DC/AC interconnection.
Grid interconnection is usually implemented at
high voltages because of financial considerations.
Historically, the first power pool in the USA
was formed in the Connecticut Valley in 1925. On
the other hand, the first international interconnections in Europe came in 1906, when Switzerland
built transmission links to France and Italy.
The evolution of large synchronous Alternating
Current (AC) power grids enabled meeting the
ever growing demand at efficient and lower costs.
This required the transmission of electric power
at high voltages while maintaining the same precise electrical frequency over the interconnected
system (Fink & Beaty, 2006). AC interconnection
results in the following advantages:
1. Ability to combine different types of power
stations on the same grid.
2. Meeting the daily, weekly, and seasonally
varying demand at lowest cost.
3. Power system efficiency improvement, considering the fact that the reserve is common
and available for mutual assistance. This
will contribute in remarkable lowering of
the system redundancy and thus increasing
the efficiency.
4. Minimizing disturbance effect where the
disturbance effect is spread over the whole
interconnected system.
Item 2 above is usually achieved through selecting cheap stations to supply the base load (usually
nuclear, coal fired, oil fired) and committing units
based on their incremental marginal cost to meet
load changes, and other units to meet the daily
peak loads (mainly gas turbines).
On the other hand, the advances and technical
development in HVDC has contributed to interconnection of grids at the single- and multi- country
scales. (Sood, 2004, p. 1) mentioned that The first
25 years of HVDC transmission were sustained
by converters having mercury arc valves till the

mid-1970s. The next 25 years till the year 2000
were sustained by line-commutated converters
using thyristor valves. It is predicted that the next
25 years will be dominated by force-commutated
converters. Initially, this new force-commutated
era has commenced with Capacitor Commutated
Converters (CCC) eventually to be replaced by
self-commutated converters due to the economic
availability of high power switching devices with
their superior characteristics.
In a single country, utilities responsible for
power generation and transmission will provide
customers with their needs of power. As this need
for electric power increases, the system expands
through the interconnection of its different isolated
parts to form a large interconnected system. Of
course, some of the issues mentioned above must
be resolved. The next step would be to connect this
single country with another neighboring country or
several regional countries; hence all of the above
mentioned issues are to be considered. Noting that,
transmission technologies improvement serves
in supporting the development of long distance
interconnections; which in turn lead to developing crossing national borders of single countries
(Hammons, et al., 2000).
HVDC must be considered as an option for
many interconnection projects due to the fact that
the costs of converter stations have been steadily
falling, leading to the decrease of the overall
costs of the HVDC interconnection. The HVDC
transmission systems are of clear significance
when they are used to: a) economically transmit
electrical energy over long distances via overhead
lines or cable, and b) connect asynchronous grids
or grids with different frequencies.
Technical Aspects
As mentioned earlier, interconnection can be
achieved through AC or HVDC schemes. Several factors are to be considered when choosing
the interconnection scheme. The AC scheme has
173
reached the continental scale while the HVDC

interconnections are rapidly expanding as a result of recent technical progress (Fink & Beaty,
2006). AC allows for synchronous interconnection
between systems, while HVDC allows for asynchronous interconnection of networks. This type
of interconnection can rise due to the fact that the
two systems operate at different frequencies, or
are incompatible. HVDC serves in enabling the
systems to exchange power without requiring the
tight coordination of a synchronous network. The
length of the interconnection link can be economically critical in selecting either the AC or HVDC
scheme. HVDC usually has the advantages when
very long distances are involved.
Basically, the design of interconnection must
consider the following elements:

AC or DC
Single-pole or double-pole (+/-) for DC
connection
Transmission capacity (in MVA)
Transmission voltage (in kV)
Overall design and system components
Agreements for operation and limits, sales,
maintenance, etc.
Key technical and operating differences among

the systems to be interconnected must be well
defined as they will be related to the differences
in hardware, control systems, and procedures used
for frequency regulation, voltage regulation, and
fault protection.
Figure 1 illustrates the break-even distance
that determines the preference of either scheme
(AC/HVDC), as related to the length of interconnection line between any two systems. For
example, a 2000 MW line, AC is less expensive
below 700 kilometers, and DC is less expensive
above 700 km.
It is clearly seen from Figure 1 that the DC
terminal costs are much greater than that of the
AC terminal costs, while the AC line costs are
greater than that of the DC line costs. This will
174
lead to preferring HVDC for distances greater

that 600-800 km.
These HVDC transmission systems are specifically used to:

Economically transmit electrical energy

over long distances via overhead lines or
cable.
Connect asynchronous grids or grids with
different frequencies.
HVDC can offer various advantages over the

AC interconnection. These include:
1. HVDC carries more power for a given
conductor size. This makes HVDC a better
alternative when existing AC transmission
capacity is constrained.
2. HVDC lines, towers, and rights-of-way can
be smaller than a comparable AC system,
reducing the lines environmental footprint.
3. The solid-state controls of HVDC systems
offer complete control over the direction
of power flow, without unpredictable loop
flows. The direction of flow can be reversed,
and operating voltages can be reduced if
necessary.
4. The track record of HVDC indicates high
reliability and availability, and the advantage
that in a bipolar system one pole can operate
one pole if the other pole is not operational
due to maintenance or an outage.
5. HVDC does not increase fault currents in
the network it is connected to, so new circuit breakers not required in the rest of the
system.
HVDC systems, however, are difficult to operate with more than two, or at most three, terminal
connections to AC transmission systems, so that
HVDC systems are not an optimal choice if power
is to be supplied to several intermediate locations
along a power line route.
Figure 1. AC vs. HVDC break-even distance
Components of AC or
HVDC Systems
When AC interconnection is the choice, then the
transmission voltage is selected (400 KV and
above is preferred), the power flow limits in the
interconnection link is defined, the operation
procedures must be agreed upon especially in
regard of voltage and stability constraints and the
prices of sales must be specified. This will serve
in defining the specifications of the components
of the substation (transformers, circuit breakers,
isolators, etc.), the power system elements and
protections that will support this interconnection
(Grigsby, 2001; Grainger & Stevenson, 1994).
On the other hand, HVDC asynchronous interconnection requires the choice and design of
the converter stations. These stations are complex
electrical systems which require the incorporation
of extra elements and controls. Practically, there
are two general types of asynchronous interconnection:
1. HVDC transmission over some distance,

between two converter stations connected
at either end to an AC system (Seimens,
2011). Figure 2 shows a bipolar system
(AC/DC DC/AC), where two converter
stations connected at either end to an AC
system. The main components including of
this configuration are:
a. AC Switchyard
b. AC Filters, Capacitor Banks
c. Converter Transformers
d. Converters
e. Smoothing Reactors and DC Filters
f. DC Switchyard
2. HVDC back-to-back interconnection to AC
systems on either side, without any intervening transmission. Back-to-back connections
have sometimes served as a stepping stone
to a later full synchronous interconnection.
A typical back-to-back (AC/DC/AC) system
displayed in Figure 3 (Siemens, 2011), the
components of which include:
175
Figure 2. Bipolar system
a.
b.
c.
d.
e.
AC Switchyard
AC Filters, Capacitor Banks
Converter Transformers
Converters
Smoothing Reactors
Under steady state conditions, the inverter will

control the dc voltage and keep it at a constant
value. However, if the inverter runs at a constant
extinction angle then the dc voltage shall droop
with increasing DC current. HVDC offers powerful alternative to increase stability of a power
system as well as to improve system operating
flexibility and loss reduction. When an AC-line
is in parallel with an HVDC line, the AC-line can
transfer more power as far as the damping control
is applied which will serve in increasing the AC
line transfer power.
176
HVDC Systems Applications

HVDC is used in interconnection projects in three
principal applications:
1. Transmitting large amounts of power over
very long distances: HVDC transmission
over long distances has no inherent stability
limit, unlike long-distance AC transmission.
Also, even within AC stability limits (which
can be extended through the use of FACTS
or other reactive compensation), HVDC can
overtake AC on cost grounds alone. This is
because HVDC carries more power for a
given conductor size, and only requires two
conductors while AC transmission requires
three. Thus even though converter stations
are very expensive, the cost per kilometer of
DC transmission lines is lower. Generally,
for distances above about 600 km, HVDC
transmission is less expensive to build and
operate than AC, see Figure 1.
Figure 3. Back-to-back system
2. Transmitting power under water. HVDC

is preferred for undersea transmission:
Undersea cables have a coaxial structure
in order to minimize space requirements,
but coaxial cables have a high capacitance.
This presents a high reactive impedance to
AC transmission, but DC is unaffected by
capacitance, and can therefore be used for
high capacity, long-distance undersea cables.
3. Asynchronous interconnections: HVDC
is a viable alternative when synchronous
AC connections are difficult or impossible
due to different the use of different system
frequencies in the systems to be interconnected or other important system differences.
As one expert has remarked, the advent of
DC connections has reduced the number
of islands that must consider themselves
electrically isolated. DC ties between different AC systems deliver some of the benefits
of interconnection while avoiding many
of the technical problems of synchronous
operation.
DC links with different AC systems deliver

some of the benefits of interconnection while
avoiding many of the technical problems of
synchronous operation. These benefits include:
1. For transmission capacity constrain, HVDC
is an alternative to an AC transmission
upgrade.
2. HVDC lines, towers, and rights-of-way
are usually smaller than a comparable AC
system, reducing the lines environmental
footprint.
3. Solid-state controls of HVDC systems offer
complete control over the direction of power
flow, without unpredictable loop flows. The
direction of flow can be reversed, and operating voltages can be reduced if necessary.
4. Increased overall system reliability and
availability when HVDC is used (especially
when bipolar system is used) as compared
with AC interconnection.
5. Maintaining a low value of fault currents in
the HVDC connected network, and hence,
new circuit breakers are not required in the
rest of the system.
177
Advantages and
Disadvantages of HVDC
In this section we shall discuss the advantages of
using HVDC over the AC link usage. This will
show the limitations of each system and give the
reader a broad idea as when any of the two alternatives (HVDC or AC) is preferred (Woodford,
1998; Fink & Beaty, 2006).
The HVDC is favorable to AC transmission
for the following reasons: a) ability to connect
asynchronous systems; b) not sensitive to fluctuations in frequency, voltage impedance, or phase
angle; c) does not interfere with frequency and
generator control; d) does not increase the short
circuit capacity imposed on AC switchgear; e) no
constraints on the length of a submarine cable;
and f) it improves AC systems stability.
The advantages of using HVDC Transmission:
1. Cost is lower than 3 phase AC system as
two conductors are necessary for DC line.
2. Simpler tower designs.
3. High dielectric strength of the cable.
4. Low dielectric losses.
5. No limitations on length of HVDC overhead
transmission lines.
6. Higher power transmission capacity as that
of AC system.
7. Lower corona and radio frequency interference losses.
8. Ability to accurately control the power
amount and direction in the HVDC link.
However, the limitations of HVDC transmission include:
1. Unavailability of voltage step up-step down
transformer.
2. High costs of terminal equipment.
3. Unavailability of reliable HVDC circuit
breakers with high ratings.
4. Possible side effects of earth current.
178
5. Unavailability of transferring reactive power

over a HVDC link.
6. The AC output of the inverters is not an exact
sinusoid as it contains harmonic distortion.
As mentioned earlier (see Figure 1), HVDC
will be economically preferred option for long
distance AC transmission.
Finally, we must note that a considerable
amount of research and development is still
needed to improve bulk power transfer using
HVDC transmission.
BENEFITS OF INTERCONNECTION
Whatever the choice is, AC or a DC interconnection, the two electrical systems to be interconnected based on a serious and objective study
will gain. This is a win-win case where benefits
are gained by all parties. It can be confidentially
stated that there are a number of multi-disciplinary
justifications for grid interconnections (Fink &
Beaty, 2006; Saadat, 1999). These include:
a. Increased reserve margin shared by all
parties.
b. Reducing investment in generating capacity, as the need to add new capacity can be
delayed to a later time.
c. Increasing load diversity due to the fact that
different sources and technologies exist in
different systems. These recourses are also
shared, thus contributing in enhancing supply
security and availability.
d. Improving load factor, especially when systems with different types of loads, or loads
with different daily or seasonal patterns are
connected. This will make the load factor
more flat, since there is a time discrepancy
in load peaks of the systems.
e. Enhancing system reliability related to the
increased reserve margin, in addition to the
diversity of generation mix and increased
supply security. This implies more diversity

in the types of forced outages and hence
improves reliability.
f. Reduce the cost of new constructions. The
size of the interconnected system allows the
construction of larger facilities with lower
unit costs.
g. More optimization of unit economic dispatching. The dispatch of the least costly
generator within the interconnected area is
performed, leading to an overall cost savings.
Moreover, interconnection allows selling
inexpensive power from one system to the
more expensive one.
h. Catering for environmental impacts. Here it
is possible to select better sites that allow for
lower environmental impacts, and minimize
using units with higher impacts. If the power
plant sites are subject to environmental and
land use constraints limits, interconnection
allows for new plant construction in less
sensitive areas.
i. Increasing the flexibility of coordination of
planned outages of power system elements.
This helps in better maintenance scheduling
and contributes in optimizing the overall cost
of maintenance considerably.
j. Increased competition in electricity
generation.
k. Benefits to the economy:
Simulation of national and local

economies through employment of
labor needed for construction of the
interconnection power line and the
power plants that will feed it.
Improved power supplies in promoting the development of local industry.
Improvements in education and

health care.
Effect
on
re-spending.
Interconnection reduces household
energy prices, leaving more disposable income available for other usage.
Although it is difficult to quantify some of the

benefits of interconnection, a rough figure of merit
was estimated to give an overall annual cost of
savings of $20 billion in the USA in the 1990s.
Meanwhile, the Western European interconnection resulted in reduced capacity requirements
between 7-10% (UN, 2006).
INTERCONNECTION:
TECHNICAL FACTORS
Basic technical issues addressed at early planning stages for a grid interconnection are: a)
synchronous or asynchronously operation, b)
magnitudes and directions of anticipated power
flows, c) the physical distance and terrain covered
by the interconnection, and d) key technical and
operating differences are among the systems to
be interconnected.
For AC interconnections, key design and operating issues relate to the constraints on transmission capacity, both of the interconnection and of
the grids that it connects, which include thermal
limits, stability limits, and voltage regulation.
Where there are liberalized electricity markets,
these constraints may become more severe as
systems are operated closer to their capacity in
order to maximize net revenues (Grainger &
Stevenson, 1994).
HVDC and other transmission options may be
considered as an upgrade alternative or complements to the traditional transmission upgrades in
interconnections. The choice of bipolar or back-toback system must be technically and economically
justified. So, simulation software is an essential
tool for planning, testing, and operating an interconnection. For modeling to be effective, however,
extensive technical data must first be gathered and
shared between systems, and personnel must be
trained. Grid interconnections require a careful
calculation of costs, benefits, and risks. Technical planning of a grid interconnection should be
179
coordinated with economic, organizational, legal,

and political aspects of a potential interconnection
project from the outset of project consideration.
Load Frequency Control

This applies mainly for an AC interconnected
system. In these systems, the imbalance between
active power generation and consumption will
affect the system or grid frequency. If the load
increases, then a deficit in active power exists
leading to lowering the frequency. In response to
that generators will respond by increasing their
output power and serve in restoring the system
frequency. This means that the operational plan
must put into consideration to have sufficient
power reserves to cater for such situations.
When there is a sudden increase in system loads
generators slow down slightly (so the frequency is
becomes less than the nominal system frequency),
and give up part of their energy to supply the additional electrical energy required. Conversely,
as loads decrease suddenly, generators speed up
(and the frequency increases as well). Now, the
synchronism between generators is maintained
through the feedback among different generators in the system (Grigsby, 2001; Grainger &
Stevenson, 1994).
This slight frequency deviation is detected
by the control center computers and the Automatic Generator Controls interfere to correct the
frequency. AGC precisely controls the real and
reactive power output of certain generators that
are able to respond rapidly to changes in load such
as gas turbines and hydroelectric units.
Electric utilities are obliged to keep a small
tolerance range of frequency (e.g., the nominal 50
Hz must be exceeded or be under-run for about
1% for 99% of the year, or the synchronous time
and the astronomical time deviation must be less
than 30 sec.
Such conditions impose automatically initiated
procedures the can be:
180
To alert the operators when grid frequency

< 49.8 Hz,
Instantaneous load shedding of (up to)
15% of system load when grid frequency
< 49.0Hz,
Instantaneous load shedding of additional
(up to)15% of system load when grid frequency < 48.7 Hz,
Instantaneous load shedding of additional
(up to) 20% of system load when grid frequency < 48.4Hz,
Separate power system from the grid when
grid frequency < 47.5 Hz.
It is a common practice that the system operators usually have a variety of off-line reserves
which may be needed to assist in frequency
regulation and maintain a reliable operation of
the system.
Grid Stability
The existing broad range of grid stability increases
the challenges to control the interconnected power
grid. This range includes voltage stability, transient stability analysis and small signal stability.
Stability problems are theoretically understood,
however, the challenges remain in devising the
best ways to manage the power grid such that
the events causing instability are prevented (Von
Meier, 2006; Kundur, 1994; De La Ree, et al.,
2005). This can be done by:
a. Using the proper software that will accommodate different types of power system
elements, models, and techniques used to
analyze the interconnected grid in an efficient
and fact manner.
b. Train the operators responsible for the stability concerns to conduct various simulation
scenarios using the real system data, and arrive at a recommended preventive procedure
to be applied when needed.
c. Develop corrective actions tools to the grid

operators should an instability exist.
d. Perform system identification analysis on
a regular basis using incoming phasor data.
This will define the characteristics of the
power grid system from moment to moment.
e. Train and teach operators to understand the
small signal stability which represent the
most complex areas of electric power grid
stability, as this type often occur without
the knowledge of grid operators. So, minor
disturbances in the grid can grow into very
large grid events.
Reactive Power
Compensation and FACT
The current situation of power industry is affected
by many factors such as: a) growing demands,
b) limited resources, c) challenges on operation involving voltage and frequency control, d)
deregulated electricity industry, e) competitive
markets due to policy of open access to transmission systems, and f) huge increase in energy
demand. These factors had led to the existence of
major problems on the power transfer capability
of transmission systems over the past two decades
(Hingorani & Gyugyi, 1999). Moreover, in a
modern power system, under these conditions,
major operating problems arise, such as voltage
regulation, power flow control, transient stability,
and damping of power oscillations, etc.
From another perspective, reactive power compensation is usually required for power systems
operation and control. This can be during to steady
state operation or transient situations. The need
rises when there is excess of VARs in the system
due to capacitive effect of long transmission lines,
which can cause over voltages at the far ends
(during low-demand periods), or due to excessive
VAR absorption, and hence inductive loads are
required. Moreover, the existence of harmonics
within the power system requires installation of
static filters which contribute to VAR excess/

deficit. The traditional alternative is to use a shunt
capacitor or a series reactor at the substations that
are prone to VAR problems. Another important
source of VAR generation/absorption is the power
generator itself. During normal operation, there
would be no problems presented by the generator.
However, during transient periods, the generator
may generate/absorb VARS in a way that will
contribute to increasing the problem. So certain
VAR compensation is also required, that would
be put on standby to cater for such rare cases
(Hingorani & Gyugyi, 1999).
Traditionally static capacitance/inductors were
used and were directly connected to the grid;
however, due to the advances in power electronics
the Flexible AC Transmission System (FACTS)
become more common. FACTS are an integrated
concept that covers a number of technologies
used to enhance the security, capacity and flexibility of power transmission. FACTS solutions
enable power grid owners to increase existing
transmission network capacity while maintaining
or improving the operating margins necessary for
grid stability.
As a result, more power can reach consumers
with a minimum impact on the environment, after
substantially shorter project implementation times,
and at lower investment costsall compared to
the alternative of building new transmission lines
or power generation facilities. FACTS systems
use power electronic switching converters and
dynamic controllers to enhance the system utilization and power transfer capacity as well as the
stability, security, reliability, and power quality of
interconnected grid (Zhang, Rehtanz, & Pal, 2006).
They can be applied during steady state operation
of the power system, or intervene during power
system transients (i.e. dynamic state). As such, it
can be easily recognized that the main reasons for
incorporating FACTS devices in electric power
systems are:
181
Provide better power flow control

Raising dynamic stability limits
Fringe benefits of FACTS that make them more

attractive can be seen in their ability to improve
frequency and voltage stability, decrease transmission losses and voltage drops, and improve
power quality.
In spite of their associated high costs, two main
points must be considered: a) It is anticipated that
FACTS costs will reduce as time passes, making
FACTS more economically viable, and b) FACTS
equipment can pay for itself by means of precise
directing power flows, elimination of loop flows,
and savings in the choosing the no investment
option of building new transmission lines.
The main three categories of FACTS controllers
are: a) series controllers; b) shunt controllers; and
c) combined series-shunt controllers. Examples of
FACTS include Static Compensators Synchronous
(STATCOM), Static VAR Compensators (SVAR),
Thyristor-Controlled Series Capacitors (TCSC),
Phase-Shifting Transformers (PST), Inter-Phase
Power Controllers (IPC), Universal Power Flow
Controllers(UPFC), Dynamic Voltage Restorers
(DVR), and Static Synchronous Series Compensators (SSSC) (Song & Johns, 1999; IEEE, 1995).
Table 1 illustrates the field of application of
some FACTS equipment.
ECONOMIC AND FINANCIAL

IMPACTS
Grid interconnection will give both direct and
indirect economic and financial effects (costs and
benefits) to its stakeholders and customers. These
effects are seen in the reduction of the overall cost
and in avoiding costs that may be incurred without
interconnection. These impacts are reflected on
the prices and tariffs of electricity sales. Generally
speaking, the overall effect of grid interconnection
will be positive in terms of lowering both tariffs
and prices of electricity. Positive impacts are as-
182
sumed to touch the economy of the interconnected

countries in terms of delayed investments, and
lowering the debt and increasing the income resulting from power sales. An indirect impact may be
realized in the improvement of power quality, and
increased reliability of supply. These in turn will
encourage new industries to be established and
act in prospering the economy. In interconnected
grids prices can be specified based on production
costs or avoided costs or through negotiation, with
market-based pricing a possibility where enough
buyers and sellers exist to provide for structured,
fair competition. More detailed discussion of the
economic and financial effects of interconnection is presented in the following sections (Von
Meier, 2006).
Impact on Incurred Costs

Several costs are related to the operation, transmission, and distribution of powers systems. When
interconnected grid is the potential option, it will
have an impact of different types of costs as explained hereafter (Yescombe, 2002; IAEA, 1986):
a. Costs of fuel used to generate exported
electricity: For interconnections built in
large part to provide a means of exporting
power, the costs of the fuel used to generate
power for export must be considered. Fuel
costs for hydroelectric, solar, geothermal,
wind, or (to a lesser extent) nuclear power
plants may be negligible, but the costs for
any additional coal, oil products, or gas
used to generate export power for export
must be counted against fuel costs avoided
in the importing nation. Fuel costs should
be calculated so as to include any fuel-chain
costs related to fuel provision. These will
include, for example, costs for developing
coal mines and for mining itself, costs for
gas extraction or for gas import facilities,
and other similar costs. In instances where
an open market exists for the fuels used for
Table 1. FACTS applications

Status
Steady -State
Dynamic
Issue
Device
Voltage Control
SC
SVC
Load Sharing Improvement
PST
IPC
SC
PQ improvement
SVC
STATCOM
DVR
Voltage Support
STATCOM
SVC
Post-Contingency
Load Sharing
PST
TCSC
Transient Stability Improvement
SVC
TCSC
Power Oscillation Damping
SC
SSSC
SVC
STATCOM
electricity generation, a market price may

be a suitable substitute for a full accounting
of fuel-chain costs of providing fuels, but
in many countries, where subsidies, often
hidden, obscure the true costs of fuel provision, a more detailed approach to the costing
of fuel inputs to power generation may be
required (Kirschen & Strbac, 2004).
b. Costs for power plants used to generate
exported electricity: When new power
plants are constructed to generate electricity
for exports as a part of the interconnection
project, the capital and operating costs of
those projects represent a net cost to the
interconnected system. This additional
cost of new generation usually represents
a significant financial cost to the exporting
utility/country, in spite of the reduction on
a per-unit basis due to economies of scale
(Schlabbach & Rofalski, 2008).
c. Costs of interconnection infrastructure:
The most obvious direct costs of grid interconnection are the power line costs which
include (Nevitt & Fabozzi, 2000; Kirschen
& Strbac, 2004):
Costs of electrical conductors and

insulators.
Costs of purchasing and erecting

transmission towers, and of clearing
rights-of-way.
Costs of substations and transformers

to connect grids to the power line.
Costs of power line control hardware

and software.
Costs of any special interconnection

hardware, such as AC to DC and/or
DC to AC converters.
d. Costs of operation of interconnection
infrastructure: An additional element of
the total accounting of direct costs and
benefits of a grid interconnection is the costs
of operating the grid interconnection itself.
Operations costs include the costs of labor
and supplies to maintain the power line, the
rights-of-way, and the substations and other
infrastructure, as well as the costs of running
control centers that dispatch power to and
from the interconnection. In practice, these
costs are small relative to the other incurred
costs (Schlabbach & Rofalski, 2008).
183
e. Costs of power system upgrades: In some

cases, a country participating in interconnection projects will find that upgrades to
their national power systems is required to
accommodate the interconnection. These
imply additional costs that can be justified
by the improved reliability and availability in
addition to both direct and indirect economic
benefits.
f. Costs of power purchases: For a power
importing utility/country, costs of power
purchased from the interconnection represent a direct cost to the power system that
must be balanced against the types of direct
savings described above, and the indirect net
benefits described below. In many cases,
power purchases from an interconnection
will need to be made in (or partially in) hard
currencies; this could represent a significant
financial burden to an importing developing country, potentially exerting a drag on
a countrys balance of payments (Kirschen
& Strbac, 2004).
The above mentioned cost types may vary
substantially from project to project. This depends
on whether the interconnection links must provide
a degree of isolation between two systems with
very different operational parameters, or when a
long-distance DC power line is part of the interconnection. Economies of scale in power transmission
are significant because higher-voltage power lines
costing less, per MW of power transferred, than
lower-voltage lines, and in addition to the possibility of carrying more than one set of conductors on
a single set of towers and in a single right-of-way
for further cost reduction.
Finally, the cost of the interconnection depends
on arrangements for financing, and arrangements
are for repaying the debt. See Chapter 12 for more
details on financing subject.
184
Impact on Avoided Costs

These costs are important to identify and avoid.
They represent a long-term investment plan, or in
other words long-term savings. They are applicable
to the parties of the interconnection and can be
considered as to provide a win-win case (Nevitt
& Fabozzi, 2000; IAEA, 1993). These costs are:

Avoided fuel costs: Interconnected grid

will give higher priority to low fuel cost
connected plants to deliver power. This
will lead to reducing generation fuel costs
per unit of electricity delivered. As for
international interconnections between
countries with varied resources, interconnection will serve in transporting power
from those areas to load centers effectively.
Interconnection will contribute to a flattening of the load curve and reduction in
the ratio of annual peak hours to non-peak
hours. This is attributed to the fact that load
of areas joined may be different enough in
the mixes of consumers served and/or the
timing of high and peak electricity demand. If the peak power demands of countries (or areas) to be interconnected have
at different times of the day, or in different
seasons, the result is that the base load generation plants, typically those units with
lower fuel and other running costs, can run
a larger fraction of the time (at a higher
capacity factor), thus allowing plants with
higher fuel costs to run less (IAEA, 1993).
Further fuel savings can accrue because
power plants are often more efficient when
run at or near full capacity for more hours
at a time, and, possibly, when having an
interconnection allows the construction of
larger power plant units, which may (up
to a point) have higher efficiencies than
smaller units.
Avoided generation capacity costs: This

is particularly valid with countries interconnection where generation capital costs
can be avoided by: a) the replacement of
domestic capacity with capacity from power imports, and b) the reduction in power
plant sitting costs.
For the importing country, the capital investment in new domestic power plants must be
compared to costs related to interconnection and
its infrastructure. This will show demonstrate how
the importing country may be spared, or able to
defer any expansion. Savings through economies
of scale in power generation capital costs come
into play in a grid interconnection if the latter
allows the development of larger power plants.
Moreover, capacity costs are also reduced by
means of flattening of the load curve and related
capacity trade-offs between countries, and through
reduction in required reserve margin (Nevitt &
Fabozzi, 2000; Kirschen & Strbac, 2004).
The installation of new generating resources
is favored when countries are interconnected
with sufficient transmission capacity which will
attract international investment funds for building
new power plants. It should be noted that capacity cost reduction from the interconnection will
reduce when transmission restrictions (physical
or regulatory) exist.

Avoided operations costs: Savings in operating costs comprises savings in fixed

and variable costs, and results from the
need to change of mode of operation of
the interconnected system. Savings in operations cost are likely to accompany interconnection between two countries (or
areas). Fixed operating costs including:
maintenance costs, plant labor costs, and
other costs, are avoided primarily in the
interconnected system since capacity is
reduced. On the other hand, variable cost
savings due to interconnection include:
savings on chemicals for pollution control

equipment, reduction in spinning reserves
costs, and savings on waste disposal costs
(e.g. in a coal-fired power plant).
Avoided costs for transmission system
improvements: In some cases national
investments in transmission system improvements can be avoided when interconnecting with other countries. A good
example would be serving with electricity customers living in remote areas near
international borders. Similarly, the interconnection may serve in transmission reinforcement. In both cases, the calculation of
the net cost of providing electricity service
must be computed for the existence or not
of the interconnection.
Income from power sales: This applies
for power exporting countries where a key
economic advantage of power grid interconnections is the income incurred from
power sales usually paid in hard currencies ($ or ). Such sales provide foreign
exchange benefits which are useful for
national accounts, particularly in developing nations when investments are financed
by a third party (e.g. a private company)
rather than by the government itself.
Impact on Electricity Pricing

Electricity pricing involves several items that need
to be investigated, these are:

Elements to be priced: These include the

elements that contribute to the services
sold over an interconnection including:
a. Transmission capacity sold to bulk
purchasers of power.
b. Electrical energy sold by generators to
purchasers.
c. Delivered power sold by generators to
purchasers.
185
d. Ancillary services that enhance power

quality which are sold by generators
and/or operators to the power grid(s)
(e.g. spinning reserve).
Pricing bases: Pricing can be based
on the production cost, which is
feasible for the pricing of energy,
capacity, and power delivered,
and is defined by the average
tariffs. On the other hand, services
provided by the interconnection
can also be determined by consideration of avoided costs.
These costs assess the long-term costs incurred
in the presence and absence of interconnection
provided that both situations provide the same energy services. The total costs avoided by using the
interconnection are used to calculate a unit price.
Negotiation of the prices to be paid for electricity services is another basis for the pricing. It
requires that each party to the negotiation have
an understanding of its own costs of providing
electricity services. Negotiated prices can be
agreed upon through a long-term contract, or can
be re-negotiated periodically.

Price updating: This step is required after

base prices for the services of the interconnection have been agreed to. Automatic
adjustment of prices must be done based
on an agreed formula and in response to
potential market changes (e.g. fuel prices
increased drastically).
ENVIRONMENTAL CONCERNS
A wide range of environmental benefits can be
obtained from interconnection, especially if it is
international, which include reduction and minimization of: a) emissions of air pollutant at the local,
regional and global levels, b) water pollution, c)
wastes (solid and hazardous), d) land-use impacts,
186
e) wildlife impacts, f) biodiversity impacts, and

g) impacts on human health.
The net environmental impact in each of
these categories is reduced in general, and the
environmental benefits of one or several types
in some locations are increased, resulting in net
environmental costs of one or several types in
other locations. A grid interconnection may, for
example, reduce carbon dioxide and other emissions in the power importing party by reducing
the use of coal-fired generating stations in that
country; however, if hydroelectric dams are built
to supply electricity, it will have environmental
impacts on the exporting party (Roebuck, 2011).
SOCIAL IMPACTS
Grid interconnection may yield significant social
benefits to some or many participating groups in
the nations (Energypedia, 2011; Roebuck, 2011).
Among these benefits:
a. Providing better power quality, more reliable
power, and more widespread availability of
electricity to communities.
b. Providing greater availability of affordable
electricity which results in more opportunities for education, improvements in health
care, development of employment opportunities, and reduction of difficult and laborintensive tasks, all of which can contribute
to sustainable development.
c. If carefully and equitably distributed, and
particularly when spent toward social development goals such as education, health
care, housing, agricultural improvement, and
creation of employment opportunities, the
income to power-exporting countries from
an interconnection project may have many
positive social impacts.
d. Embarking on cooperative activities between
the countries which may include cultural
exchanges and additional trade. This will

lead to improved inter-relations.
e. Provision of experience and incentive for
interconnected countries when successful operation of a grid interconnection is
achieved.
However, one should note that there are some
potential social costs and/or liabilities of grid
interconnection which include:
a. Physical separation (total or partial) of local
groups from the water, land, forest, agricultural, social and economic (local towns and
markets), and other resources that they use
regularly due to the presence of a power line
or other types of infrastructure.
b. The process of construction of interconnection infrastructure may bring in unwanted
outside influences, causing social problems
in formerly isolated local populations ranging from alcoholism to violence.
c. For electricity exporting countries, the construction and operation of power plants built
to feed an interconnection, and of the fuel
supply infrastructure that feeds the power
plants, may have significant social impacts.
d. Displacement of populations by new facilities (particularly hydro facilities) can be
considerable (e.g. out-migration to cities and
underemployment).
e. Reduction in incentives of using local
resources. This may occur for electricity
importing countries where it may be better
to use electricity provided via an interconnection from a neighboring country. This in
turn may result in shortages of electric power
seen in long-term. Consequently, this will
increase the vulnerability of communities to
cuts in power supply that are outside of the
control of the community and the nation.
LEGAL ASPECTS
This is a very complex issue involving a variety
of national, sub-national, and even international
parties to the agreements required for planning,
building, and operating power lines used to buy
and sell electricity across borders. As such, binding legal agreements between countries (and
between the countries and the outside lenders, if
any, providing project financing), as well as the
negotiation processes that produce the agreements,
must be transparent and enforceable (Momoh, et
al., 1995).
A national legal capacity is therefore required
to draft, review, enforce, adhere to, and in the
event of a disagreement, adjudicate contract issues (Roebuck, 2011). Some of the key issues
that must be addressed during the sett up of a
legal framework for international electricity grid
interconnections are:
a. Power purchase and pricing agreements,
including agreements on the currency of
payment, the escalation and/or indexing of
prices to prices of other energy commodities
over time, and penalties if sales or purchase
minimums are not met.
b. Agreements on sitting of power lines and
related infrastructure, such as routes between
generating plants and consuming grids, and
placement of substations and converter (for
AC-DC-AC systems) stations.
c. Agreements on power line operation, including deciding upon or constituting a joint
authority to operate the interconnection, and
agreeing on how the power line operator will
be governed or overseen by both parties.
Agreements on power line operation will
also include agreements on how the interconnection right-of-way is to be maintained.
d. Agreements on power line security, including
agreements on which parties will be liable
in the event of different types of incidents
resulting in power line damage.
187
e. Agreements on the environmental performance of the interconnection, potentially

including environmental standards to be
met during construction of the line, and environmental and safety (including fire safety)
standards to be met during line operation.
f. Agreements on liability for power line
failure, including damages to third parties
caused by power line failure.
g. Agreements for the orderly, fair, and open
selection of contractors to build and/or finance and/or operate and maintain interconnection infrastructure, including agreements
on how such contractors are to be overseen
by parties to the project.
POLITICAL ASPECT
Politics can affect and be affected by grid interconnection in its phases from design stages to
operation. This comes from the way that politics
view such interconnection. Different views can
be cited which can be:
a. Positive consequences: Here, grid interconnections may bring political benefits to
both interconnected countries in terms of
international cooperation, avoiding conflicts,
political comfort, increased democratization,
and stability.
b. Negative consequences: In some situations,
grid interconnection can be a way to political
intervening, may be used to practice internal
political oppression, or may lead to entangling countries in each others internal affairs,
may give one of the interconnected countries
more political and economic leverage over
another, and may entail significant political
costs for power line protection.
However, political cooperation between and
within countries is required in many aspects
if the project is to succeed. These can be done
through various agreements that cover all possible
188
aspects of the project (Roebuck, 2011). The grid

interconnection governments must be prepared to
preparing, setting, approving, and signing agreements to cover different phases and aspects of the
interconnection project. These agreements can
cover different scopes such as:
a. Sharing resources.
b. Achieving with success the interconnection
project.
c. Selection of contractor, power line routing,
and other major decisions.
d. Payments and payee of the project.
e. Sharing the benefits and costs of the project
between and within nations.
f. Operating and securing the interconnection
infrastructure.
g. Governance of the interconnection operator.
h. Sharing of necessary information needed to
plan, operate, and protect the interconnection.
SUMMARY
This chapter investigates different issues related to
the interconnection of isolated or separated power
systems. Such interconnection can be done using
AC/AC or AC/DC links. The technical specifications of the systems to be connected determine
the type of this link. The various impacts of
technical issues must be thoroughly investigated
and defined. Moreover, other factors affecting
the advent in establishing the interconnection
must be accounted for. These include economic,
environmental, social, legal, and political factors.
The previous factors will lead to terms that must
be covered by the final agreement.
In general, the interconnection between isolated power-systems will lead to a win-win situation
for all parties, where the costs are reduced, excess
generation in one system is exported, the marginal
cost of the interconnected system is enhanced, the
generators are better maintained and utilized, the
environment becomes safer, and last but not least
the overall security and reliability improved.
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191
Chapter 12
Financing of Power Projects
ABSTRACT
Economy and finance represent major factors in the planning process. For power system planning, the
investments are very huge in amount (billions of dollars). In this free market era, almost all governments
are trying to reduce budgetary expenses. This results in governments divorcing themselves from being
involved in such huge investments. The economy of scale forces governments to rely on the private sector. However, as the profit is the driving force for the private sector, incentives must be set clear, and
regulations must be flexible enough to encourage the Public-Private Partnership (PPP), which comprises
many financing schemes. These may be attractive to the private sector and, hence, enable the financing
of such projects. This chapter discusses issues related to economic feasibility and financing factors that
govern investment in the power industry. Different PPP schemes are discussed in further details and
their potential contribution and roles in the future of the power industry are pinpointed.
INTRODUCTION
Power related projects are generally characterized by large capital requirements, uncertainty
over costs and schedules, and most probably
long construction periods. A major requirement
is the availability of financial resources for the
huge capital requirements needed on reasonable
terms at the right time. In fact, financing of such
projects presents a critical problem, especially
for developing countries, not only because of the
very large amount of financing needed, but also
because of the low creditworthiness of some of
these countries as perceived by various lending
organizations (Schlabbach & Rofalski, 2008). This

can be associated with other problems such as the
difficulties in servicing debts, and the reluctance
of commercial banks as well as governmental
organizations of exporting countries to lend additional funds.
Although the process of financial planning is
complex with many intervening variables, it can be
viewed as a cyclic process as illustrated in Figure
1. This figure illustrates the main blocks related
to financial planning process of any project. The
process comprises 6 main building blocks, and it
is repeated and updated periodically to arrive at
the best results.
DOI: 10.4018/978-1-4666-0173-4.ch012
Figure 1. The financial planning process
The process main blocks are:

1. Determine, understand, and assess the present situation, through gathering relevant
pieces of data.
2. Develop and set financial goals and
objectives.
3. Propose, set, and develop appropriate alternatives for courses of action.
4. Evaluate alternatives from the points of view
of life span, values, economic factors, risk
assessment, mitigation, and opportunity
costs.
5. Create and implement the optimum action
plan.
6. Monitor, review, revise, and update the plan.
The importance of each block varies from one
project to another; however, it is vital to note that
in the planning process, all of the above steps must
be documented throughout all the project phases
(Greenwood, 2002).
In general, financial and economic analyses
provide the relevant evidence within the frameworks of discounted cash flows and Cost/Benefit
(C/B) analysis. These represent decision tools that
192
combine between the quality of the proposed assumptions and the project outcomes. Core issues
that must be taken into consideration which aid
quality enhancement include: (a) accurate estimation of financial cost, (b) accurate estimation of
financial benefits, (c) demonstration of financial
viability and sustainability, and (d) assessment
of social and environmental costs and benefits.
Conventional sources for financing power
related projects include: (a) financing through utilitys own resources, (b) national budgets, (c) local
commercial banks, and (d) foreign multilateral and
bilateral sources. However, the problem becomes
serious when there is a lack of foreign exchange
and/or when the ability to mobilize resources in
the domestic capital markets is present (IAEA,
1993; IAEA, 1986; Kayaloff, 1998).
Industrialized countries that have the ability
and willingness to finance projects, controlled by
the latter issue, have developed certain arrangements and measures to exporting components and
services to developing countries.
More approaches and complementary mechanisms are explored and investigated that take into
account the need for more foreign exchange in
most developing countries. These measures take
into account the high costs of power elements,

the risk adverse situation existing currently in the
international financing market, and the environment for lending to developing countries.
Innovative financing approaches have been
considered and implemented, in industrial and
developing countries, which make electricity
power projects attractive for investors and utilities.
This category represents a Public-Private Partnership (PPP) project model and includes various
schemes which are discussed in further details in
a subsequent section of this chapter.
In this chapter, general ideas involved in the
economic and financial analysis that are applied to
any project are investigated. The presented types
of analyses can be generalized and projected to
the power system industry where special considerations are required.
ECONOMIC FEASIBILITY
OF PROJECTS
Any project must be subject to economical
analysis in its planning phase. Here, traditional
techniques using specialized or general purpose
software packages. These can be commercial or
in-house developed.
Different tools can be implemented to facilitate the feasibility of any given project from the
economical point of view. The main idea behind
all tools is the time varying value of money that
is dependent on the interest rate, the inflation,
and the life time span of the project (usually in
years). A brief summary of the most known tools
is outlined (Sullivan, Wicks, & Koelling, 2011;
Blank, & Tarquin, 2005) as follows:
1. Net Present Value (NPV) or Present Worth
(PW) analysis: This will assess the total
gain over the whole life of the project; The
general equation representing the benefits
(B) and costs (C) values for a given interest
rate i%, and a time span of the project of N

years is given as:
N
NPV =
k =0
N
N
Bk C k
Bk
Ck
=
k
k
k
(1 + i )
k =0 (1 + i )
k =0 (1 + i )
(12.1)
The project will be accepted from economical point of view if NPV > 0.
2. The Annual Worth (AW) analysis: in this type
of analysis, the project costs and benefits are
distributed equally over the time span of the
project. The project is acceptable if AW > 0.
This method is preferred to compare projects
with different time spans.
3. The Internal Rate of Return (IRR): In this
analysis, the computed rate indicates the
realized benefits resulting from the initial
investment. The IRR is computed by finding
i* that makes NPV=0, i.e. solve for i* such
that:
N
Bk C k
(1 + i*)
k =0
N
Bk
Ck
=0
k
k
k =0 (1 + i *)
k =0 (1 + i *)
N
(12.2)
The Minimum Accepted Rate of Return

(MARR) is defined beforehand by the management. So the project will be economically considered if IRR MARR.
NPV or IRR are usually used to compare alternative solutions, and the one with larger NPV or
IRR will be selected. Alternatively, incremental
analysis can be used to assess the value for money
offered by more expensive alternatives.
The timing of a project is important and need
to be analyzed. If the benefits of the project exceed
the costs it does not imply an immediate start. In
some situations, and in economic terms, it would
be better to postpone the implementation of that
project to a later date. Postponing a project may
affect the project cash flows, and in such cases
the NPV can be used to test for the optimality of
investment timing.
The sensitivity analysis is an important economic analysis tool that must be undertaken to
help identify the key variables that can influence
193
the project cost and benefit streams. This type of

analysis tests the effect of varying the major variables one at a time and it recalculates the project
results for different scenarios. Combinations of
changes in values can also be investigated. The
sensitivity analysis comprises:

Defining major variables to which the project decision may be sensitive;

Define a base case;
Determining the upper and lower limits of
each major variable;
Assess the effect of the variations of the
major variables on the project NPV and
IRR;
Perform necessary improvement actions.
In the context of power systems, the improvement actions can be done at the project, sector, or
national level. To elaborate more:

194
At project level: it may be necessary to

change the long-term agreement of supply
contracts at specified quality and prices to
reduce uncertainty over operating costs;
incorporate external effects into project
costs through regulation or taxation; or
implement a pilot project to test its technical drawbacks and the customers reaction.
At sector level: There may be a need to adjust tariffs and prices, offer incentives for
producers, and train the people to develop
operational management skills.
At national level: There may be a need
to simplify the credit policy and tax procedure, or modify legislations and regulations that can lead to more productive activities, or provide better stability in prices
and costs through exchange rate and fiscal
management.
FACTORS INFLUENCING
INVESTMENT IN POWER SYSTEMS
The investments in power systems must be subject
to financial viability and sustainability, as well as
a demonstration of the value of the project to the
economy in general. Such type of investment is
multi-disciplined that can be applied to the areas
of generation, transmission, and distribution. Each
of these areas has its own specificity and specialty
and hence different considerations must be taken
into account for each (IAEA, 1993; Valdma, Tammoja, & Keel, 2009).
Starting with investment in generation; the
main factors influencing the investment are:
a. Investment Costs (IC): These are affected
by generation capacity requirements, available technology, improvement in technology, subsidies offered by the government.
Figure 2 shows the components of this cost
in general. IC is given by:
IC=P-TI+GC-S,
(12.3)
where:
P = Principal Investment
GC = Generation Capacity
TI = Technology Improvement
S = Subsidies
b. Operation and Maintenance Costs
(OMC):The components of this item include
fuel cost, maintenance cost, taxes, subsidies
offered. This can be expressed as shown in
Figure 3. The OMC formula is given as:
OMC=FC+MC+T-S,
where:
FC = Fuel Cost
MC= Maintenance Cost
T = taxes
S = Subsidies
(12.4)
Figure 2. Components of IC
Figure 3. Components of OMC
c. The Total Cost (TC): TC is the sum of (a)

and (b) above, and plays the main role in
the decisions related to expansion and the
future prices of electricity. TC is given as:
TC=IC+OMC.
(12.5)
The above mentioned costs are interrelated

(Schlabbach & Rofalski, 2008). For example, the
195
Figure 4. Feedback process
increase in electric demand may result in expansion decisions in flavor of building new generating plants, this means that the future price of
electricity will rise, and can lead to less demand
or switching to other energy sources that will
reduce the customer electricity bill (e.g. use solar
energy for heating). The generation expansion
decision will affect the TC and the generation
capacity, as well. Moreover, the generation capacity selected will affect the current and expected
future electricity prices and in turn affect the
expansion decision.
This represents a feedback process that evolves
over time and contributes in creating the dynamic
nature of expansion decision and resulting electricity prices. A schematic of this feedback process
is shown in Figure 4.
On the other hand, the investment schematic
model for the Transmission and Distribution
(T&D) investment may be represented as shown
in Figure 5.
The investment in generation and T&D
complement each other. So when strategic investment from the generation side is to be made,
196
forecasters must know the policy that the transmission planners are following. Generation investors in turn will react to this policy, and leads to
making good forecasts (IAEA, 1986). On the
other hand, transmission system planners cannot
simply build the best lines for the predicted generation. The investment policy that induces good
generation investment must be selected. This
implies that they must understand how generation
investment will respond to their policy.
As ideal planning is very difficult to achieve,
the previous argument suggests that planners must
estimate future load growth and then plan both
generation and transmission simultaneously to
minimize the total expected present cost of delivered power. Coordination between generation and
T&D planners is one of the major factors in the
process of expansion planning of power systems.
Finally, the issues related to avoided costs due
to the planning process must be incorporated in
any investment study. These costs were discussed
in separate chapters of this book, and may include
avoided costs related to fuel, generation capacity,
and transmission system improvements.
Figure 5. T&D investment
ECONOMIC VS. FINANCIAL

ANALYSES
Both economic and financial analysis of a project
appraises the profit of an investment. The two
types of analysis are conducted in monetary terms;
however, financial analysis of a project estimates
the profit accruing to the project-operating entity
or to the project participants, whereas economic
analysis measures the effect of the project on
the national economy. A project is economically
feasible means that it must be economically efficient as well as being financially sustainable. If
a project is not financially sustainable, economic
benefits will not be realized. Financial analysis
and economic analysis complete one another, with
a major difference lying in the definition of costs
and benefits. Their differences are related to: 1)
the breadth of the identification and evaluation of
inputs and outputs, and 2) the measure of benefits
and costs (Kayaloff, 1998; US EXIM Bank, 1999).
Both economic and financial analyses allow

for the evaluation of the indices that the utility
has obligations to support. These analyses lead
to specifying the main factors affecting the successful achievement of the objectives of the utility
in terms of improving the plan for the sustained
development both accurately and reliably.
Economic Analysis
Economic analysis includes all members of
society, and measures the projects positive and
negative impacts in terms of willingness to pay
for units of increased consumption, and to accept
compensation for unavoidable units of consumption. Economic analysis of projects seeks better
allocation of resources, leading to enhanced incomes for investment or consumption. This implies
that economic analysis is used to define the means
and to select projects that lead to optimal utilization of the available resources (Sullivan, Wicks,
197
& Koelling, 2011; Blank & Tarquin, 2005). Two

types of projects exist, namely:

Directly productive project, where the

output is sold in a relatively competitive
environment, choices are made within the
economy to ensure that projects selected
for investment meet a minimum standard
for resource generation and to weed out
those projects that do not.
Indirectly productive project, where the
output is not sold in a competitive environment, choices are made within the project
between different means of achieving the
same objectives.
Sustainable projects (i.e. net benefits spans

over the life of the project) define their economic
feasibility, and it is of great importance to enhance
sustainability through budget control and pricing.
Meanwhile, the assessment of the capacity of the
project to cope with an uncertain future is another
important factor that should also be accompanied
with applying sensitivity analysis to define the
project productivity and efficiency.
Economic analysis is applied in a sequence of
interrelated steps:
a.
b.
c.
d.
Define Objectives
Define Economic Justification
Forecast demand
Select the cost-effective design that meets
demand and desired objectives
e. Check for benefit/cost viability
f. Check for benefit sustainability
g. Perform risk assessment associated with the
project
h. Check effects of the project on the
environment.
i. Define and quantify factors that may influence project design and the investment
decision.
198
In general, economic analysis results in finding

out the overall impact of a project on improving
the economic welfare of the citizens of the country concerned; this assessment must, therefore,
be done in the context of the national economy.
The scope of economic analysis must be tailored to the particular project, and several factors
must be addressed including: forecasting demand
(which depend on project charges and affordability), choosing least-cost options, calculating
the economic internal rate of return, determining
of the project optimal timing, and incorporating
environmental effects.
Financial Analysis
Financial analysis takes into consideration all
expenditures incurred under the project and revenues gained (Greenwood, 2002). This form of
analysis is necessary to:
a. Determine how successful the project in
generating revenues sufficient to meet its
financial obligations,
b. Define incentives for producers, and
c. Ensure the consistency between demand
or output forecasts on which the economic
analysis is based, and the financial charges
or available budget resources.
For any particular project, financial analysis
will tackle the following items:
a. Assessing outflow of money.
b. Identifying the business opportunities of a
project
c. Identifying waste and increase productivity
during operation
d. Help in identifying new business
opportunities.
It must be stressed that a strategic macro
overview must be investigated when fundamental
framework within which financial, technical, and
investment analysis are applied. The following

steps are recommended to be implemented:

Use historical data to find trends, and to arrive at a synopsis of market conditions and
the suitable alternative.
Implement the fundamental investment research such that due diligence is performed.
Perform a management character analysis
in order to define and assess the utilitys or
companys commitment, integrity, level of
competence, experience.
Define the rate of return on the project
to enable selecting the best alternative
(MARR).
The above mixture of management traits and

financial analysis serves in giving the objectives
their exertion power which allows seeing where
the money has been going on a historical basis
and where it may go (or need to go) in the future.
Basically, this will contribute in improving the
performance and increasing the efficiency of the
underlying project.
There are many factors influencing the financial consideration of the project as related to
power systems; these are discussed in details in
a subsequent section. Their inter-relationship is
complex in nature. Detailed studies and scenarios
must be taken into account when these factors are
analyzed. The company/utility must conduct a set
of actions that have an impact on the operation
environment based on its experience in recent
years and continued expansion of its activities
and a growth in turnover (Greenwood, 2002).
This implies that the company/utility must be
prepared to fight for its share in the market, and
by adopting the necessary financial resources and
a timely and dynamic management.
Financial management is largely important
in the market economy as the functioning of the
enterprise is based on the availability of monetary
resources which covers the majority of areas of
the company. These pieces of information play a

key role in the financial evaluation of the utility.
The financial analysis leads to the calculation of
reasons to evaluate the performance past, present,
or future entity.
FINANCIAL ANALYSIS TOOLS

Financial analysis tools are used to perform
monitoring and control on the flow of money in a
project. It guides the top management in knowing
where and why to spend the money at different
stages (Groppelli & Nikbakht, 2000; Weston,
1990). In general, these tools are used to:

Quantify where money is going and to

whom.
Identify trends for a particular business
(i.e. seasonal trends).
Have the potential to identify waste.
Identifying new opportunities.
The ratio analysis is the most common form

of financial analysis and provides measures for
the operation of the company through the use of
the information contained in financial statements.
This will assess the efficiency of a company
through measuring the level of equipping of the
financial resources of the company, e.g. compute
the liquidity ratios and other financial reasons.
The management usually focuses on monitoring: a) the profit margin which shows the financial
position presented by the utility or company, b)
the return on investment: for a given period, c) the
sources receivable during the period under review,
d) the accounts payable that occur within shortterm obligations, and e) the turnover during the
review. These will be tested against a benchmark
adopted by the utility which indicates its success
or not during that period of time. Countermeasures and actions must be imposed to correct
discovered pitfalls.
199
In general, financial analysis covers the following:

1. Net Working Capital (NWC): Capital
management is very important element that
enables the utility to maintain a satisfactory
level of working capital and avoid bankruptcy. The NWC is the difference between
the assets and liabilities. This defines the
availability of resources to carry out its
operations in the following time span and
the ability to meet current liabilities.
2. Financial Ratios: These represent financial
indicators that call for the reasons of profitability and assets utilization. The major
ones are:
a. Liquidity (Groppelli & Nikbakht,
2000; Houston & Brigham, 2009)
Measures the ability of the entity to pay its obligations in the

short term. A ratio value above
one is satisfactory; however, a
value between 1 and 2 is acceptable, with optimum value of 2.
Measure the immediate ability of the company to meet its

short-term obligations.
Measures the degree to which

the company is able to meet all
its payment obligations.
3. Profitability ratio (Groppelli & Nikbakht,
2000; Williams, et al., 2008)
Measures the ability of the company

to generate profits needed for its development and represent the success
or failure of the Company.
Measures the effective capacity of the

entity to make a profit with the available assets and represents the proportion of profits that will recover the
resources invested.
Usually calculated from profits after

tax over the total assets.
200
4. Activity (efficiency) ratios (Groppelli &

Nikbakht, 2000; Weygandt, Kieso, & Kell,
1996)
Measure the efficiency in using assets

of the company.
Measure the period that runs from

product delivery to service until its
recovery.
Represents every few days on average pays the entity.
Represents the sales achieved by the

weight of assets invested.
Represents the time they turn the inventory of goods for sale.
5. Analysis of debt ratios (Groppelli &
Nikbakht, 2000; Bodie, Kane, & Marcus,
2004)
Indicates the amount of non-monetary

resources used to generate profits, the
higher financial leverage (debt level)
the greater the risk and performance.
Measures the proportion of debt financing over total assets. This relationship must be in an environment
of (0.5).
The financial assessment indicates whether the
company has the financial balance and enough
capacity that enables to cover its debts and obligations in the short and long-term. The result of
implementing the economic and financial analysis
will show if the Company has an observed financial
and economic situation that places the organization in a favorable economic position. Otherwise,
feedback measures must be undertaken to correct
the position of the company.
MAJOR FACTORS
INFLUENCING FINANCING
It is essential that every effort be made by all
parties involved to reduce the uncertainties and
risks associated with the specific characteristics
of electric power projects. To this end, it is necessary to improve the overall climate for financing
and carefully considering the following important
factors (Yescombe, 2002):
Capital Requirements
The primary difficulty in financing a costly power
project is its high capital intensity. As the project
cost can vary, depending on its size, construction
time, financing terms, interest rates and other
varying factors. For example, the initial investment cost of a 1000 MW(e) electric power project
plant ranges from US$1-3 billion, or even higher
for projects that have encountered long delays
during construction.
Such large capital requirement may approach
or even exceed the overall available credit limits
specified by lenders especially for a developing
country. Also, lenders may be reluctant to concentrate their financial risk in a single project of
this magnitude.
Long Construction Period

Power projects may require construction periods
between 7 to 10 years. This is due to constraints
related to infrastructure (the construction of roads
or harbors for the transport of heavy equipment,
housing for workers, communications system,
etc.). In such situations the following related issues must be considered: a) lack of revenue from
the project, as the plant under construction is
not yet delivering electricity and b) the financial
requirement to pay interest during construction.
Any delay in bringing the project on-line will have
major implications for its economic feasibility.
Uncertainty over Costs and Schedule

Long term power projects are associated with
uncertainties that may lead to longer than expected
construction and installation times. This may
result in a large cost overruns and thus higher,

protracted, financing requirements, as well as
large debt servicing payments.
Delays can be related to many factors, a few
to list include:
1. Regulatory intervention,
2. Inadequate financing,
3. Local protests against political or environmental issues,
4. Unpredictable additional costs due to escalation and high inflation rates.
Financial Risk
This is due to the risk associated with different
potential elements that contributes in some way or
another to the financing of the project (Yescombe,
2002; Fight, 2006) and includes:
1. Foreign currency risk: This is related to
loans that are borrowed in foreign hard
currencies. The risk can be controlled and
reduced by following a hedging policy, e.g.
define a percentage of interest rate exposure
of long-term financing and specify the years
in advance.
2. Fuel prices risk: This is obvious as fuel
prices have periodic cycles and its development was characterized by a steep upward
trend, generated by excessive world demand.
This risk can be controlled by also adopting
a hedging policy involving a reasonable
hedging ratio over a specified period of
time in advance, and try to keep this ratio
to close to the lower, boundaries to benefit
from lower prices.
3. Liquidity risk: This is controlled by following a policy to keep the equivalent of
20-25%, say, of estimated annual fixed costs
in the form of liquid assets.
4. Credit risk: This type of risk is linked to
investments of liquid assets. So it is necessary
201
to monitor and control those assets and make

agreements with financial institutions related
to financial operations, e.g. hedging. The risk
involved is directly related to the fulfillment
of outstanding which may result in potential
losses related to credit risk exposure.
Public Acceptance
In addition to the previously mentioned costrelated considerations, public acceptance is a
very important issue for certain power projects,
e.g. nuclear power. Attitudes vary from country to
country, and can be cited as a major obstacle. The
preparatory work prior to the decision-making to
start a power project may require the obtainment
of public acceptance for the project in addition to
safety and environmental considerations (Gatti,
2007).
Commitment of Government
The commitment of the government to an electric
power project program, together with strong policy
support is needed to reduce the uncertainties and
associated risks and improve the overall climate
for financing. The government should prepare
long-term plans for electric power project development, clearly describing the role of electric
power project in the national energy plan and, if
necessary, by appropriating the required funds and
by approving guarantees and borrowing foreign
exchange. The government should also ensure that
the necessary infrastructure is developed to support the introduction of a power plant. This must
be associated with a pre-prepared and reasonably
well-established regulatory system that governs
licensing of electric power project plants (Gatti,
2007; Fight, 2006).
202
Investment Climates
Given the complexities of financing an electric
power project, it is of critical importance that the
climate surrounding the project be favorable, in
addition to maintaining the schedule and keeping
the project within budget constraints (monitoring and control). The investment climate can be
enhanced if the government and the owner organization (which may be located in a host country)
maintain consistent and fair dealing with lenders
and investors. If an electricity tariff structure is
developed, then it must be consistent with the
financial strength of the utility.
Financing Plan
The utility and government together should
prepare a financing plan to finance the project
cost from the initial stage to develop the electric
power project program. A financing plan must
be designed to accommodate the special characteristics of electric power projects such as long
construction times, large capital requirements,
and the likelihood of cost overruns and delays.
The financing plan should be made to achieve
the following objectives (Gatti, 2007; Fight, 2006):
(a) securing sufficient financing resources to
complete the project; (b) securing the necessary
funds at the lowest practicable cost; (c) optimizing the financing mix; (d) maximizing the value
of the tax benefits of ownership.
Export Credits
The present schemes of export credits and commercial financing do not adequately meet the
needs of financing electric power projects in
most developing countries in terms of the repayment periods or profiles, nor do they provide the
flexibility necessary to deal with delays and cost
overruns. In particular, the profile of the required
repayment schedule (equal installments of princi-
pal plus interest payments) imposes a high annual

capital charge requirement, especially during the
first year after starting operation (OECD, 1998).
Furthermore, some of the conditions attached to
the interest rates and the exclusion of aid credits
tend not to favor electric power projects in comparison with conventional projects. Moreover, the
problems of export credits can be alleviated by
taking specific steps as counter measure.
Creditworthiness
Doubts regarding the creditworthiness of the host
country can preclude the financing of an electric
power project. Only countries with acceptable
credit ratings can qualify for bank loans and other
credits for financing such a project. The development of sound economic policies, good debt
management, and project risk sharing contribute
to this end.
Financing Electric Power Projects

The financing of power projects in developed
countries face fewer problems than developing
countries do. The magnitude of the required investment and the financing constraints underlines the
need for a greater effort to mobilize power sector
financing from all possible sources both at home
and abroad. Power sector projects require for
their realization both a financing component in
national currency for the investment activities to
be paid for locally and a financing component in
foreign currency for payments abroad for imported
goods and services. The main issues encountered
are (Nevitt, & Fabozzi, 2000):
Local Financing Sources

The major sources for electric power project financing categorized into local currency portions
are as follows:
1. Investors own resources. This includes: a)

equity capital (at least 15%, and the more,
the better) from the utility itself and the
government, b)utilitys internal cash flow,
c) contributions in aid of construction, and
d) free donation from government or other
government agencies.
2. Debt capital. The main items are: a) domestic
bonds, b) local bank credits from commercial
sources, c) development banks credit from
public entities, d) stand-by facilities for cost
increases, and e) long-term payables for
goods and services of the project.
Sound sources of local currency funding for
investment in a public utility power project are
funds of the owner/operator, either from equity or
from accumulated earnings set aside especially for
such a planned investment, government budget,
and privatization. These sources can be supplemented by credits raised in the domestic capital
market. Difficulties in financing local costs arise
from shortages of utility and government funds
and constraints in local capital markets. A well
functioning domestic capital market is particularly
important for organizing local financing.
Adequate local financing must be arranged in
good times and, in the case of loans, for a reasonable credit period. Electricity tariffs are of special
importance in arranging for and repaying loans
for electric power projects. An inadequate tariff
system, which widens the gap between electricity
rate structures and real investment and operating
costs, will severely exhaust power sector finances
(Yescombe, 2002; Nevitt & Fabozzi, 2000). Tariffs
vary between countries, but should reflect costs
which are essential for the economic strength
and internal financing capabilities of the utility.
Power utilities must maintain a good financial
performance to obtain support from financial
institutions.
203
As foreign currency financing of local costs

increases the foreign debt burden and carries a
significant foreign exchange risk, it is vital for
successful project implementation to secure sufficient local financing. Some countries do not
allow foreign currency sources to be used for the
purpose of local payment.
International Financing Sources

Major international financing sources for electric
power projects are export credits from exporting
countries with lending policies that vary from
country to country.
The export credit schemes mainly consist of: a)
direct loans, b) insurance as a security for exporting goods and services, and c) commercial loans
guaranteed by Export Credit Agencies (ECAs),
which play a significant and growing role in financing energy projects in developing countries.
Another important issue is that when financing
is needed with foreign currency than its approval
for high cost project is subject to:
1. The proposed project has a solid foundation,
and
2. The credit ratings of the borrower and the
given country are acceptable.
A relatively large proportion of the total investment cost of electric power project is usually
required in foreign currency because most of the
major equipment and services must be imported.
However, as the project operates, it will contribute
to the process of electricity generation. This energy,
in turn, is sold to the local economy and will yield
its earnings in local currency only (Williams, et
al., 2008; Weston, 1990). In such a case, both
lenders and equity investors who have invested
in the project in foreign currency will require firm
assurances in the form of a guarantee transfer by
the host government that their original investment,
together with interest or dividends be recovered.
Based on the above considerations, it would
appear to be most advisable for project owners to
204
make every effort to become and remain reliable

borrowers on the international capital markets,
both by careful study of the lenders loan conditions and by developing in their countries the
managerial framework and expertise to put these
loans to the best use.
Export Insurance
To obtain official support for export credits, it is
necessary to have the approval of the exporting
government (export license) and to apply for export
insurance. Exporter would not be willing to incur
the expenses of making a tender for a project in
a developing country unless its national export
credit insurer has shown a preliminary willingness to support it.
Export insurance risks fall mainly into two
categories: Political risks, such as the outbreak
of war, or a prohibition on the remittance of
foreign exchange; and commercial risks, such
as the non-fulfillment of a contract by any other
party, or insolvency. Credit insurance premiums
charged by various official credit insurers and
credit exposures for individual countries might
be fixed depending on the credit rating of the
countries concerned.
Commercial Sources
Normally, the balance of the imported costs not
covered by export credit facility as set out above
can be financed through commercially syndicated
loans. In order to obtain the most competitive
terms from the commercial banking market, the
funding of the export credit facility should be
directly linked to the proposed commercial loan
facility. The final terms and conditions relating
to the commercial loan facility are dependent on
financial market conditions prevailing at the time
of syndication. Financial institutions envision that
such loans have a life of up to ten years, but shorter
in most developing countries, and be based on
the same security package as that provided under
the export credit facilities. All costs related to the
arrangement of the loans are for the account of

the borrower.
The evaluation of the financing proposals involves

both a qualitative and quantitative analysis. The
quantitative analysis of financial offers is very
explicit, and a method of analysis can be developed (Greenwood, 2002). Important aspects of the
qualitative and quantitative analyses are discussed
in the following section.
financing and ensuring the availability of adequate

financing for the project. The borrower must check
and double-check his cash generation ability to
meet the requirement of repayment, including
principal and interest.
The indicators mostly used are Debt Service
Coverage Ratio (DSCR) and Interest Coverage
Ratio (ICR). Normally in power utility, these
ratios require over 120% of the utilitys net cash
flow generation. Accurate preformed financial
statements such as balance sheets, loss and profit
statements, and cash flow statements are needed
for the life of the project.
Qualitative Analysis
Quantitative Analysis
Qualitative analysis of financial offers is potentially as important as quantitative analysis. The

qualitative analysis considers such items as the
firmness, and completeness of the financial offers,
the security structure, the ability of the bidders
banker to give assurance for the finance, and the
attractiveness of the finance.
In some situations, refinancing may be required
and the country/utility will have to approach the
financial markets again. This implies a certain
risk because the financial markets may have deteriorated in the interim, for a variety of reasons,
so that less favorable terms are offered, or, in an
extreme case, the borrower might be unable to
obtain further funding. The effect of this on the
project would at best increase the overall costs or
at worst bring plant construction to a halt.
The question of security requirements should
be considered with respect to what the borrower
is able to offer and what has been required of him.
Other areas also need attention; however, they
vary and are dependent upon the financial package
offered. Generally speaking, it is worthwhile to
appoint a financial advisor having the responsibility for coordinating the different elements of
The possibility of quoting here the terms and

conditions of actual and recent financial offers
made in support of electric power project bids is
precluded by the requirement of confidentiality;
therefore, real bid situations cannot be analyzed
here. However, a discussion of the salient elements
of financial offers that directly affect the overall
bid costs should be useful. The most obvious
elements of a financing proposal which influence the overall bid costs are currency, the fees
(including management fee, commitment fee, and
any guarantee fee), the repayment period, and the
interest rates. Less obvious perhaps are factors
such as the frequency of interest payments (at
annual or semi-annual intervals), the frequency
of repayments (either semi-annually or annually),
and the total period of the loan, in addition to
other factors that are project specific (Denzin &
Lincoln, 2005; Creswell, 2003).
Normally, a discount cash flow model is used
for the evaluation of financing terms and conditions. Methods of making forecasts in connection
with sensitivity analyses are important to measure
financial risks exposed to fluctuation of interest
and foreign currency against local currency.
FINANCING REQUIREMENTS
205
Currently, most companies use derivatives such

as options, futures and swaps to avoid financial
risks such as interest and currency. However, they
do not cover all financial risks and have intrinsic
risks to borrower.
On completion of the preliminary bid evaluation work, including the qualitative and quantitative review of the financing offers; a list of the
bids should be made and the terms of the bids
should be negotiated with a view to modifying
and improving them. At this stage the financing
should again be reviewed. Consideration should be
given to alternative sources of financing (if any)
which could be utilized for the project (Creswell,
2003). In light of the needs of the project and the
terms available from the markets, modifications
and improvements of the financial offers should
be requested.
PUBLIC-PRIVATE
PARTNERSHIP (PPP)
Public-Private Partnership (PPP), sometimes
referred to as P3 or P3, is a funding model for
a public infrastructure project such as a new
telecommunications system, airport or power
plant. The public partner is represented by the
government at a local, state and/or national level.
The private partner, i.e. the developer, can be a
privately-owned business, public corporation or
consortium of businesses with a specific area of
expertise. PPP is applied to simple management
contract or contacts including funding, planning,
building, operation, maintenance, and divestiture
(Moszoro & Gasiorowski, 2008; Quiggin, 1996).
PPP arrangements are useful for large projects
that require highly-skilled workers and a significant cash outlay to get started. They are also useful
in countries that require the legal ownership of
any infrastructure that serves the public.
206
PPP result in transferring the recourse and the

risk of funding to the private sector. From the
government point of view, this is considered as
an opportunity to overcome the privatization of
existing owned assets, and meanwhile to have no
commitment of in capital expenditure (Strauch,
2009; Venkat & Bjorkman, 2009).
As a result, the PPP process leads to expanding
private sector involvement in public sector works
and allows private sector businesses to pursue
potentially profitable contracts. Moreover, PPPs
contribute in creating good opportunities for private sector to handle projects where governments
are reluctant to run (British Colombia Partnerships,
2003). This usually occurs in infrastructure projects needing high capital funds that are difficult
to secure due to strained financial circumstances.
In general, the PPP scheme will pass through
the life cycle illustrated in Figure 6 starting with
the project proposal and terminated by the declaration of the transfer of the ownership of the project
(Yescombe, 2005).
The PPP schemes were proposed in conjunction with the open market era, where deregulation
of the power system industry in addition to other
sectors was the main focus for most of the governments in the globe targeting to reduce the public
spending. The experience of some countries with
PPPs showed that correct implementation and
government commitment leads to their positive
contribution to the development and success of
public sector works.
Benefits of PPP Schemes

Apparently, PPP schemes when applied to different
categories of projects may lead to various benefits
including: Improved and expanded infrastructure
services, increased investment in public infrastructure, better utilization of asset, technology
transfer, training of local personal, development of
Figure 6. The PPP project evolution
national capital markets, stimulation to economic

growth, competition and innovation, faster implementation of projects, faster delivery of projects
capital, improving overall efficiency, providing a
benchmark for public sectors performance evaluation, reducing public sector risk, re-allocation
of risk between the public and private sectors,
supporting cost-effectiveness, relieving the government budget and borrowing burden, improving
budget certainty, participation of private sector
thus the provision of more commercial support to
infrastructure and reducing political intervention
divestiture (Strauch, 2009; Venkat & Bjorkman,
2009; Burnett, 2007).
Types of PPP Schemes

for Power Systems
The PPP schemes can be divided into the following categories: a) Operate and Maintain (O-M),
b) Build-Finance (B-F), c) Design-Build-FinanceMaintain (D-B-F-M); d) Design-Build-FinanceMaintain-Operate (D-B-F-M-O); and e) concession schemes.
In the context of power system financing,
different models of PPP funding schemes exist;
some of which are presented as follows (Venkat
& Bjorkman, 2009; British Colombia Partnerships, 2003):

1. Design-Build (DB): The developer (usually
a private-sector partner) designs and builds
the infrastructure to meet the public-sector
partners specifications, often for a fixed
price. The developer assumes all risk.
2. Operation and Maintenance contract (O
& M): The developer operates a publiclyowned asset for a specific period of time.
The public partner retains ownership of the
assets.
3. Design-Build-Finance-Operate (DBFO):
The developer designs, finances and constructs a new infrastructure component and
operates/maintains it under a long-term lease.
The developer transfers the infrastructure
component to the public-sector partner when
the lease is up.
4. Build-Own-Operate (BOO): The developer finances, builds, owns and operates
the infrastructure component in perpetuity.
The public-sector partners constraints are
stated in the original agreement and through
on-going regulatory authority.
207
5. Build-Own-Operate-Transfer (BOOT):
BOOT schemes involve long-term contract
that may extend to typically 40 or more
years. BOOT is sometimes known as BOT
(Build, Own, Transfer). In this model, the
private developer is granted authorization
from the public-sector partner (government)
to: a) design and build a complete project
or facility (such as an airport, power plant,
seaport) at little or no cost to the government or a joint venture partner; b) own
and operate the facility as a business for a
specified period; after which, c) transfer it
to the government or partner at a previously
agreed-upon or market-price.
The public-sector partner may provide limited
funding or some other benefit (such as tax exempt
status) but the private-sector partner assumes
the risks associated with planning, constructing,
operating and maintaining the project for a specified time period. During that time, the developer
charges customers who use the infrastructure
thats been built to realize a profit. At the end of
the specified period, the private-sector partner
transfers ownership to the funding organization,
either freely or for an amount stipulated in the
original contract.
Figure 7 illustrates a typical players or stakeholders of the BOT project. It can be seen that
there is a need for agreements to be made at all
levels. This adds to the complexity of such to the
PPP schemes in general and the BOT scheme in
particular.
6. Buy-Build-Operate (BBO): The government sells the facility to the private business.
The private business refurbishes and operates
the facility.
7. Build-Lease-Operate-Transfer (BLOT):
The developer designs, finances and builds a
facility on leased public land. The developer
208
operates the facility for the duration of the

land lease. When the lease expires, assets
are transferred to the public-sector partner
or organization.
8. Build-Lease-Transfer (BLT): The developer: (1) designs and builds a complete
project or facility (such as an airport, power
plant, seaport), (2) sells it to the government
or a joint venture partner, (3) simultaneously
leases it back (usually for 10 to 30 years) to
operate it as a business and, after the expiry
of the lease, (3) transfers it to the government or partner at a previously agreed upon
or market price.
9. Design-Build-Operate-Maintain
(DBOM): The developer has the responsibility for designing and constructing a facility,
as well of operating and maintaining it for
a specified period prior to handing it over
to the client or principal.
Risk in PPP Schemes

When a PPP scheme is to be adopted by a private
investor, a careful study must be conducted with
many scenarios. Different kinds of uncertainties
must be included which will contribute to the various risks assessments of the project under search.
In other words the various types of risk that are
potentially associated with the PPP schemes must
be considered thoroughly.
The risk level endured by the private sector is
related to the degree of control of the project taken.
Figure 8 shows the level of transfer of risk from the
public to the private sector based on different PPP
categories defined in the previous section. It can
be seen that for the PPP design and build scheme
the level of risk involved is low as the public sector assumes the financing and operations of the
infrastructure. Concession scheme tends to be the
privileged form of PPP for many infrastructure
projects, where the public sector simply becomes
Figure 7. The BOT scheme
a landlord while the private sector assumes most

of the risks, however, and is rewarded in the case
that the investment is profitable (Yescombe, 2005;
Burnett, 2007).
In general, risks associated with PPP schemes
are classified into two main categories: General
risks, and project associated risks (Moszoro &
Gasiorowski, 2008; Quiggin, 1996; Strauch,
2009).
These are further sub classified as:
1. General risk which includes political, commercial, and legal risks.
a. Political risk components are: tax
risk, confiscation/nationalization/
expropriation risk, and forced risk
b. Commercial or financial: This is
linked to the variability of interest or
exchange rates and to all factors that
can influence the cost of financing a
project. The factors to be considered
are: Currency inconvertibility, devaluation, inflation, and interest

c. Legal: This is an important aspect that
must be considered in all types of projects, with the following important risk
factors: change in laws, law enforcement, and delays in compensation.
2. Project related risk
a. Development: This risk is related to
the delivery/availability of the asset
against contractual specification, i.e.
the failure to meet quality standards
or to ensure the continuity of service
provision; the risk factors can be seen
in: bidding, planning delay, approval,
and trans-national risks.
b. Construction: This is directly related
to the design and construction phase
that includes the following risk factors:
delay, cost over-run, re-performance,
completion, force majeure, loss or
damage to work, and liability.
209
Figure 8. Level of transfer of risk
c. Operational: This type of risk may

be a result of two main categories: a)
the risk that the overall demand for the
service/asset concerned turns out being lower than initially expected, and
b) the future market price of the asset,
when the property of the asset must be
transferred back to the public entity at
the end of the contract. Different risk
factors exist that include: associated infrastructure, technical issues, demand,
cost escalation, management, force
majeure, loss or damage of facilities,
and liability.
SUMMARY
The planning process of any project must include
the economic analysis function through the use
of traditional analysis techniques and appropriate
210
software. As the project proves to be economically viable, financing is the next step in the row.
Several factors play critical roles in this phase
including political, environmental, and legal issues. Even when these many hurdles are overcome
it seems that the current economic situation for
most of the governments is shaky due to many
known factors that stem from the global economic
crisis. This fact urges governments to move in
the direction of making partnerships with the
private sector, resulting in governments relying
on the private sector to invest in power industry.
Meanwhile, governments must guarantee clearly
defined incentives for the investor.
The private sector finds it attractive to select
a suitable PPP model that will maximizes its
profit, and meanwhile lifts the burden from the
government. Many agreements must be made
between different stakeholders of the approved
PPP selected model. At the end of the agreement
all stakeholders will be winners.
The chapter has discussed the issues related to

the economy and finance of the power industry
components and the impact of different factors
associated with financing in the areas of generation, transmission, and distribution. The chapter
also investigated and discussed the different issues
that play a major role with potential effect on the
economy and finance functions within the power
planning process. The main costs of generation,
transmission, and distribution projects were analyzed. The trends towards the deregulated power
industry, in addition to the expected long-term
economic crisis impose themselves on governments. As such, the chapter gives special focus to
the PPP models, and their evolution. In addition,
the risk assessment issues related to the important
PPP schemes were also investigated.
REFERENCES
Blank, L., & Tarquin, A. (2005). Engineering
economy (6th ed.). New York, NY: McGraw Hill.
Bodie, Z., Kane, A., & Marcus, A. (2004). Essentials of investments (5th ed.). New York, NY:
McGraw-Hill Irwin.
British Colombia Partnerships. (2003). An introduction to public private partnerships. Retrieved
from http://www.partnershipsbc.ca.
Burnett, M. (2007). PPP - A decision makers
guide. Paris, France: European Institute of Public
Administration.
Colman, J. (2002). Mumbo jumboand other
pitfalls: Evaluating PFI/PPP projects. Paper
presented at the National Audit Office PFI / PPP
Conference Bringing about Beneficial Change.
London, UK.
Creswell, J. W. (2003). Research design: Qualitative, quantitative, and mixed method approaches.
Thousand Oaks, CA: Sage Publications.
Denzin, N. K., & Lincoln, Y. S. (Eds.). (2005).

The Sage handbook of qualitative research (3rd
ed.). Thousand Oaks, CA: Sage.
Fight, A. (2006). Introduction to project finance.
London, UK: Butterworth-Heinemann.
Gatti, S. (2007). Project finance in theory and
practice: Designing, structuring, and financing private and public projects. New York, NY:
Academic Press.
Greenwood, R. (2002). Handbook of financial
planning and control. New York, NY: Gower
Publishing Company.
Groppelli, A., & Nikbakht, E. (2000). Finance
(4th ed.). New York, NY: Barron.
Houston, J., & Brigham, E. (2009). Fundamentals
of financial management. Cincinnati, OH: SouthWestern College Pub.
IAEA. (1986). Economic evaluation of bids for
electric power project plants. Technical Report
Series 269. Vienna, Austria: IAEA.
IAEA. (1993). Financing arrangements for
electric power projects in development countries.
Technical Report Series 353. Vienna, Austria:
IAEA.
Kayaloff, I. J. (1998). Export and project finance.
London, UK: Euro-Money Publications.
Moszoro, M., & Gasiorowski, P. (2008). Optimal
capital structure of public-private partnerships.
IMF Working Paper 1/2008. Washington, DC:
IMF.
Nevitt, P., & Fabozzi, F. (2000). Project financing.
London, UK: Euromoney Institutional Investors
PLC.
OECD. (1998). The arrangement on guidelines
for officially supported export credits. Paris,
France: OECD.
211
Quiggin, J. (1996). Private sector involvement in

infrastructure projects. The Australian Economic
Review, 5164. doi:10.1111/j.1467-8462.1996.
tb00915.x
Schlabbach, J., & Rofalski, K. (2008). Power
system engineering. New York, NY: Wiley.
doi:10.1002/9783527622795
Strauch, L. (2009). Public private partnership in
European road infrastructure: PPP as investment
asset following the M6 road project in Hungary.
London, UK: VDM.
Sullivan, W., Wicks, E., & Koelling, C. (2011).
Engineering economy. Upper Saddle River, NJ:
Prentice Hall.
US EXIM Bank. (1999). Overview of the exportimport bank of the U.S. export credit insurance
program. Washington, DC: US EXIM Bank.
Valdma, M., Tammoja, H., & Keel, M. (2009).
Optimization of thermal power plants operation.
New York, NY: TUT Press.
Venkat, R. A., & Bjorkman, J. (2009). Public private partnerships in health care in India: Lessons
for developing countries. London, UK: Routledge.
Weston, J. (1990). Essentials of managerial finance. Hinsdale, IL: Dryden Press.
Weygandt, J., Kieso, D., & Kell, W. (1996). Accounting principles (4th ed.). New York, NY:
Wiley.
212
Williams, J. R., Haka, S., Bettner, M., & Carcello,

J. (2008). Financial & managerial accounting.
New York, NY: McGraw-Hill Irwin.
Yescombe, E. (2005). Publicprivate partnerships principles of policy and finance. London,
UK: Elsevier.
ADDITIONAL READING
Downes, J., & Goodsman, J. E. (2006). Dictionary
of finance and investment (7th ed.). New York,
NY: Barron.
EPAC. (1995). Final report of the private infrastructure task force. Canberra, Australia: Australian Government Publishing Service.
House of Representatives Standing Committee on
Communications Transport and Microeconomic
Reform. (1997). Planning not patching: An inquiry
into federal road funding. Canberra, Australia:
Australian Government Publishing Service.
Spackman, M. (2002). Public-private partnerships:
Lessons from the British approach. Economic
Systems, 26(3), 283301. doi:10.1016/S09393625(02)00048-1
213
Chapter 13
Tariff Studies
ABSTRACT
Electricity pricing is based on achieving a set of objectives defined as follows: 1) to guarantee efficient
allocation of national economic resources; 2) encouraging the adoption of certain EE measures; 3)
fair return on the utilitys investments; 4) fair allocation of costs among the various consumers; and 5)
simplicity and convenience in implementation.
Electricity tariff, in general, needs to reflect the true cost of supply in order to ensure maintaining an
adequate level of security of supply and the financial viability of the electricity sector including private
and public entities. The true cost of supply needs to be determined accurately by an independent body.
This is the role of the regulatory agency responsible for setting the tariff, taking into consideration the
welfare of all stakeholders.
INTRODUCTION
Economic theory states that any commodity or
service must be priced in accordance with the value
it has to the buyer. This price varies between two
upper and lower values. The lower value is the
actual cost of producing the commodity or delivering the service. On the other hand the upper value
is the maximum value that market conditions or
competition allows. In between these two values
is the right price.
Electricity tariff is similar to pricing any commodity or service but yet it is quite different. It is
similar in the sense that it is the source of the power
companys revenue, which generally includes a
certain return on investment plus a recovery of

operating costs. However, it is different than pricing any commodity or service in the sense that
in a regulated market tariff setting is subject to
regulatory concession. Moreover, it is reviewed
annually or every two years, and it is also subject
to public acceptance in one form or another. In
an open competition market, tariff is determined
largely by market forces and strong competition.
As power industry is investment-intensive, requiring large investments, competition will never
be absolute as in other sectors. In other words some
sub-sectors may be subject to complete competition but not all. Moreover, it is not fair to request a
distribution company to invest heavily in a distri-
DOI: 10.4018/978-1-4666-0173-4.ch013
Tariff Studies
bution network in a certain geographical area and

then allow another company to provide service
in the same area. The other distribution company
may be allowed to provide service in another area.
This situation is not open competition since the
two companies can not supply electricity to the
same consumers. Once a consumer selects to live
in a location he/she should deal with the company
working in his area. Usually the license agreement with the distribution company designates
the geographical area within which it will work.
In generation the competition is open due to the
different investment structure of each company.
Moreover, all produced power will be purchased
from the generating companies. The contracted
price for purchasing power is subject to long-term
conditions, including time of delivery, capacity,
power quality, and lead time to deliver additional
capacities.
Power exchange also plays a significant role
in determining power purchase prices. All these
factors of near open competition and legitimate monopolies indicate the complexity of the
electricity tariff. Furthermore, the issue of fuel
switching between electricity and other energy
forms complicate the issue even further. Sometimes macroeconomic policies or social issues
interfere in the electricity tariff setting procedure
(Train, 1991). In other instances emergency conditions and security issues have a say in setting
electricity tariff.
Electricity pricing is based on achieving certain
objectives as follows: (1) to guarantee efficient
allocation of national economic resources; (2)
encouraging the adoption of certain EE measures;
(3) fair return on the utilitys investments; (4) fair
allocation of costs among the various consumers;
(5) simplicity and convenience in implementation
(Yusta, 2005).
There should be clear distinction between
retail electricity tariff and bulk supply tariff.
The former is the tariff used for retail consumers
including households, commercial, offices, services, etc. Bulk consumers are mainly distribution
214
companies, which in turn sell electricity to retail

consumers. They are charged according to the
bulk tariff. In many countries large industrial or
commercial consumers are also charged at the
bulk tariff.
Electricity tariff, in general, needs to reflect the
true cost of supply in order to ensure maintaining
an adequate level of security of supply and the
financial viability of the electricity sector including private and public entities. The true cost of
supply needs to be determined accurately by an
independent body. This is the role of the regulatory agency responsible for setting the tariff taking
into consideration the welfare of all stakeholders.
It should be borne in mind that the electricity
tariff has a structure based on certain elements.
The fixed part of the tariff is related to the fixed
costs of the utility. Another part is related to the
energy consumption. A third part is related to
peak demand or capacity charge. Many countries
have selected to use combined tariff of energy and
capacity charges for industries, commercial, and
service sectors, but use only energy-based tariff
for households.
Tariffs may be different for different seasons
of the year. Or they may be different for different
geographical zones. They also could vary according to time of use, or voltage level. In some
countries special tariffs are granted as incentives
for some productive sectors.
Tariff studies are needed frequently to make
sure that the assumptions or basis of calculations
did not change with time or other macroeconomic
developments. Since electricity tariff should be
a true reflection of costs of supply it must be periodically reviewed. The review process and the
ensuing tariff adjustments will have implications
on demand. Not all demand is elastic or inelastic,
but that elastic demand will be affected by any tariff
adjustment. Therefore, demand forecast will be
affected. So will demand side options, and hence,
system expansion plans will also be affected.
It is a fact that electricity tariff varies from
country to country around the world due to various
Tariff Studies
reasons. The cost of power generation depends

largely on the type of fuel used, economies of
producing and delivering electricity, government
subsidies, and even the weather pattern. In 2007,
Italy was considered to have the highest electricity
tariff in the world, followed by Ireland, and then
Denmark. On the other hand the lowest tariff was
for South Africa, followed by Canada, Sweden,
and Finland.
Table 1 shows a comparison of electricity tariff
applied in various countries around the world.
TARIFF CALCULATION MODELS

In recent history, when electricity production and
delivery was the sole business of one utility, mainly
government owned tariff setting was one function
of the same utility. The utility was responsible for
planning and operation of the power system in its
entirety. It invested in new plants, operated the
system, and more importantly set the tariff that
could partake in financing the investment required
to own and operate the power system.
Today the situation is quite different whereas
the responsibility of investing and operating
the power system has been split among many
companies. At the same time tariff calculation
and setting is the responsibility of the regulatory
agency. The match between the cost of investment
and operation of the power system on one hand
and the tariff used on the other is not an easy task.
The calculation process is an intricate procedure
with proposals and counter proposals and lengthy
negotiations (Borenstein, 2005). Power companies have to convince the regulatory agency of
all expenditures and investments to be spent on
the power system.
The regulator takes into consideration the
investments undertaken to serve the consumers,
enhance reliability and extend the service to all
locations. Similar due diligence is also exercised
in recognizing operation and maintenance, and
administration costs. Penalties may be exerted on
Table 1. Tariffs charged in different countries

Country/Territory
US cents/1kWh
As of
Australia
7.11
2006-2007
Belgium
11.43
2006-2007
Canada
6.18
2006-2007
Croatia
17.55
2008-07-01
Denmark
22.89
2006-2007
Finland
6.95
2006-2007
France
8.54
2006-2007
Germany
13.16
2006-2007
Hong Kong (Kowloon/

NT)
10.90
2008-05-07
Hong Kong (HK Is.)
12.30
2008-05-07
Iceland
11.61
2008-07-07
Ireland
23.89
2006-2007
Italy
36.74
2006-2007
Netherlands
12.62
2006-2007
Singapore
15.31
2009-2009
Spain
10.35
2006-2007
South Africa
3.56
2006-2007
Sweden
6.60
2006-2007
UK
11.16
2006-2007
USA
9.28
2006-2007
Per
10.44
2006-2007
Portugal
16.62
2009
(http://en.wikipedia.org/wiki/Electricity_pricing)
bad performers and maybe bonus granted to good

performers. In other words the quality of power
delivered is one element of the tariff calculation
methodology.
The tariff system should be designed such that
it delivers a clear, powerful, and effective signal to
consumers, thus contributing to controlling their
consumption attitudes. Tariff structures have been
affected by many factors. Among these factors
are the following:

De-regulation and privatization of the electricity sector

Un-bundling of generation, transmission,
and distribution
215
Tariff Studies
Perfecting the regulatory role with

experience
Increased cost awareness as a result of
competition
Integration of demand side options within
the IRP process to meet future demand for
electricity
Focus on renewable energy resources
Huge developments in communications
and integrating such systems in metering
and billing
Increased attention for environmental
issues.
The electricity tariff used for a certain consumer

category is usually subject to some government
policy. For example, in households the use of
increasing or decreasing block tariff structures
depends on what is intended. Declining block
tariffs impose higher tariffs on those consumers
who consume less and lower tariffs on those who
consume more. On the other hand increasing block
tariffs works in the opposite direction of consumption. Figure 1 illustrates both the decreasing block
and increasing block type tariffs.
In reality, the Time-of-Use (TOU) tariff features prices that vary by time of the day (Cousins,
2011). The higher price is set for peak periods
and the lower for off-peak periods. The simplest
rate involves just two pricing periods, a peak
period and an off-peak period, as shown in Figure
2(a). A more complex scheme is shown in Figure
2(b) where three tariff rates are applied during

the day (24 hours). The off-peak period is between
hours at late night up to the mid-morning hours.
The peak period, in the figure, is from midday to
early afternoon. Finally the mid-peak, or the
standard, period is from early evening to early
night hours.
It should be noted that different tariff periods
can be implemented for different days of the week,
see Figure 3 as an example. It is to be noted that
Figure 3 refers to a country with Saturday and
Sunday as weekend.
The basic concept in the TOU tariff is to discourage consumption during peak periods and to
some extent during mid-peak period, while encouraging consumption during off-peak periods.
Several other variations of TOU tariff representing dynamic tariffs are also available. Such
tariff structures lead to lowering system costs
for utilities, thus resulting in lower customer
bills. This is done by lowering the prices during
off-peak and increasing the prices during peak
hours. The objective of the dynamic tariff is to
reduce peak loads and/or shift load from peak to
off-peak periods. There are four variations of the
TOU tariff structures as follows (Charles River
Associates, 2005, p. 21):
1. Critical Peak Pricing (CPP): This rate
design adds a much higher price on top of
TOU rates. This Critical Peak Pricing (CPP)
is used for a maximum number of days each
Figure 1. (a) decreasing block tariff and (b) increasing block tariff
216
Tariff Studies
Figure 2. Time-of-use (TOU) tarrif: (a) two rates, (b) three rates
year. These days are not announced until a

day ahead or perhaps even the same day at
which the CPP period starts.
2. Extreme Day Pricing (EDP): This is similar
to CPP; however, the higher price is applied
for all 24 hours for a number of critical days,
the timing of which is only announced a day
ahead.
3. Extreme Day CPP (ED-CPP): This rate
design is another version of CPP in which
the critical peak price and correspondingly
lower off-peak price apply to the critical peak
hours on extreme days. Moreover, there is
no TOU pricing on other days.
4. Real Time Pricing (RTP): This rate design
provides for prices that vary hourly or halfhourly all year long. This may be applied for
some or a customers entire load. Customers
are notified of the prices one day ahead or
just hours ahead.
Figure 4 shows an example of the CPP and

RTP tariff structure.
Using different tariff systems exposes customers and entity (power companies) to several risks.
Flat rates, for example, have the lowest risk from
the customers viewpoint. This is because there
is a fixed charge irrespective of the amount and
the time when the customer consumed electricity.
On the other hand a flat rate would have the highest risk to power companies as they may be
subjected to supply electricity at a cost higher
than revenue during peak periods. The entity
(power company)-user risk trade-offs associated
with the different tariff rates are show in Figure
5 (Charles River Associates, 2005, p. 22). It can
be seen that flat rates lead to the lowest risk to
the customer, while the RTP tariff structure brings
with it the highest risk to the customer. The TOU
tariff structure leads to the best compromise of
risk for both the customer and the entity.
217
Tariff Studies
Figure 3. TOU tarrif implemented over weekdays
The tariff implementation, evaluation, and

monitoring is the responsibility of the electric
utility. This is conducted in close coordination
with suppliers of new metering, end-use controlling equipment, and billing systems required to
be installed at customer premises. In general, the
electricity regulatory body is responsible for
defining the tariff level and/or monetary value
which depends largely on the tariff structure or
model used.
Tariff includes several components that enter
into its calculation. These components include:
(1) certain return on investment; (2) operation and
maintenance costs; (3) depreciation; (4) interest
on investments and for operations; (5) taxes; (6)
performance-based penalty/bonus.
Electricity tariff structure takes different forms.
They can be generally categorized according to
consumer type. Consumer groups are classified
as: (1) residential or household;(2) commercial;
(3) services; (4) hotels; (5) industrial (large, medium, and small); (6) agriculture; (7) offices; etc.
These consumer classes differ from one country
to another.
Residential and some small commercial
consumers are usually offered a basic tariff of
either increasing block (more common) or decreasing block. This tariff is for electrical energy
218
consumed (kWh) per month. In some countries

Time-of-Use (TOU) is introduced to encourage
or discourage certain consumption habits. Tariffs
are designed also to encourage energy efficiency
or conservation.
New variants of the residential tariff include
Real-Time Pricing (RTP) and Critical-Peak Pricing
(CPP). With RTP consumer tariff tracks the price
in the power market. Normally the day-ahead
prices are considered in this case. Therefore, the
RTP offers an hour-to-hour price changes. On the
other hand CPP is designed to alert consumers to
a critical situation in the power system, i.e. system stress situation. Consumers are requested to
reduce their loads during such situations and in
return they will get some discounts on their bills
(Charles River Associates, 2005).
Other consumer categories are charged energy
and demand charges. Demand charge is applied to
the peak load consumed during the peak period.
This causes the shifting of loads away from the
peak period, which is a major utility concern resulting in lower power capacity additions. Moreover,
penalties for low power factor are also included
in the tariff of some large consumers.
Tariff setting process is a major exercise undertaken by the regulator every year or two years.
The process starts by the submittal of the power
Tariff Studies
Figure 4. (a) CCP and (b) RTP tariff pricing
companies their detailed tariff request proposal.

The proposal includes cost breakdown of investment and operating costs. The regulator assesses
the proposed rate against pre-set benchmarks.
These benchmarks are usually discussed with
the power companies. Moreover, the approval/
disapproval of the investment and operating costs
submitted by the power companies is communicated, discussed, and negotiated until agreement
is reached.
Public hearings are, sometimes, held to involve
the public at large in the tariff setting process. This
whole process applies to the regulated market
case. In liberalized markets the energy consumption portion of the tariff is, in essence, subject to
market forces. The T&D network services are
normally treated the same as in the regulated

market situation.
Special attention is given to the tariff of renewable plants. These plants are to the most part, in
comparison to other conventional large power
plants, not feasible as in the case of solar energy
or are close to feasible in case of wind energy.
Other renewables are in between the two limits.
Therefore, it is important to deal with renewables
in different fashion to be equitable.
Some of the special purchase rates for renewables include Feed-in-Tariff (FiT) or NetMetering (NM) methods. Another method is to
have a selling/buying relationship between the
renewable plant and the power network with some
favorite premium for the power purchased from
the renewable plant.
The basic concept of FiT is to offer guaranteed
rates for fixed periods of time for power produced
from renewables. These rates are generally offered in a non-discriminatory way for each kWh
produced depending on type of technology, location, size, quality of power output, and other sitespecific factors (Couture & Ganon, 2010). This
encourages investors to participate and enhances
the participation of renewable energy in the overall
power generation mix. This method is considered
the most effective tariff for renewable energy as
stated by the European Union (EU), well adapted
FiT regimes are generally the most efficient and
effective support schemes for promoting renewable electricity (European Commission, 2008,
p. 3) (see Figure 6).
Net metering method is basically to have a
two-way exchange of power between the renewable energy plant and the network without having
to engage in billing. In other words, the renewable
plant and the network will deal on kWh basis and
not monetary basis or kWh for kWh. This way
the issue of placing a price tag on electricity
produced from renewables will be avoided (Doris,
Busche, & Hockett, 2009; Forsyth, Pedden, &
Gagliano, 2002). NM has wide acceptance in
cases where there is no bias for renewables be-
219
Tariff Studies
Figure 5. User vs. entity risk
cause, for example, of abundance of other indigenous resources (see Figure 7).
The proper tariff model must be decided upon
after performing the following tasks (Rowlands,
2005):
1.
2.
3.
4.
Detailed site analysis and design

Permits from local municipalities
Financing of renewable systems
Installation and commissioning of renewable
systems
Figure 6. Feed-in-tariff (FiT) model
220
5. Interfacing with the local power distribution

company
The feed-in tariffs have proven to be the most
successful support mechanism in bringing about
new renewable power at low costs provided a
suitable practice design criteria is included in a
well-functioning feed-in tariffs (Jacobs & Jacobs,
2009).
To complete the story, then the tariff billing and
invoicing system must be a customized solution
Tariff Studies
Figure 7. Net-metering model
that takes into consideration many related modules.

The functionality of the modules cover several
disciplines including: complex availability management, tariff indexation management, energy
invoice management, capacity invoice management, liquidated damages management, outages
management, banked energy management, force
majeure event management, chronological data
management, user management, and data collection and management.
SOCIAL TARIFF IMPACTS

In some countries electricity tariff has certain social considerations. Therefore, tariffs are adjusted
to take these considerations into account. This
is a deviation from the true tariff, but it must be
undertaken to avoid any social implications and
hardships on certain citizen groups. In such cases
the regulatory body attempts to subsidize the tariff
for one consumer group and raise it to others. In
other words the tariff rate for lower income people
will be less than the economic or true cost of supply, while that for the higher income consumers
will be higher than the economic cost of supply.
This is called cross-subsidy. It distorts demand
by altering the elasticity relationship between
price of electricity and demand (Caves, Eakin,

& Faruqui, 2000).
It is desirable to do away with subsidies or
cross subsidies in order to truly reflect the cost of
supply. However, governments, and not regulatory
bodies, must think of other ways to compensate
the less privileged. It could be done by the social
welfare programs providing allowances to the less
privileged. This is usually done for fuel, food,
and medical subsidies. At any rate the electricity
tariff should be clear from any subsidies in order
to have an effective cost recovery system in place.
Another reason for eliminating subsidies is to
use the tariff as a price signaling instrument to
consumers (Chassin & Kiesling, 2008).
The social tariff concept actually is in direct
conflict with the rationale of electricity supply
industry reform and deregulation. It is also against
private enterprise. Therefore, it must be replaced
by other instruments. It is worth noting that even
in countries where governments are rich this type
of tariff is also troublesome. This is because in
these countries it is hard to convince people to
participate in DSM or EE activities as they have
no incentive or motive to change their consumption habits. It is strange enough that such social
tariff was used since average per capita income
is high, and people can afford to pay high tariffs.
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Tariff Studies
The difficulty in the social tariff issue is that

not only the lower income people benefit from
it, but a wide range of other consumers will also
benefit. These are called free riders. This distortion in the tariff will be carried away in all higher
tariff brackets.
Social tariff will lead to undesirable situation
in the distribution networks. This situation is
related to the unwillingness of the distribution
companies to invest in enforcing the networks in
areas feeding the disadvantaged or underprivileged
customers. The result would definitely be a lower
quality of power delivered and more interruptions
(in frequency, extent, and duration). The affordability and ease of access of electricity to certain
consumer groups, although important, should
not lead to supply electricity at prices where the
reliability of supply is unsatisfactory.
COST-REFLECTIVE TARIFF
Cost-reflective tariff will eliminate the cross subsidies which were created by social drivers. If such
cross subsidies are not removed, competition will
be driven away from the electricity market. With
no competition, prices may not go down, and this
would cause a reversal of the original intention
of the cross subsidies.
Even without reform and regulation, tariffs
that are well below efficient or true costs will
have an appreciable negative influence on the
financial viability of electricity companies. Exiting companies will suffer from reduced returns
which will force their shareholders to question the
feasibility of their investment. This will, in turn
lead to a case of stagnation in the development
of power facilities and networks to meet demand.
Cost-reflective tariffs are very important for
developing a competitive electricity retail market. This is because tariffs that reflect the cost
of electricity supply, including an acceptable
margin, will encourage investors to enter into the
electricity retail market considering it a lucrative
and guaranteed business. More entrants will be
222
willing to compete and existing ones will make

good returns on their investments.
As a matter of fact the most attractive business offer to investors in the electricity retail
business is the allocation of concession areas,
whereby each distribution company is allocated
a geographical area as a monopoly. This is driven
by the fact that electricity supply involves high
investments. If this was not the case and the tariff
was only cost-reflective the business would not be
attractive. Moreover, regulators usually include
a profit provision in the tariff calculation model.
It is worth mentioning that electricity tariff
for generation companies is different from T&D
companies. In the case of generation there is
no monopoly in any geographical area as in the
T&D or more precisely in the distribution case.
Therefore, tariff is set separately for generation
and distribution companies. Actually, in the case
of generation, tariff is referred to as wholesale,
while for distribution it is called retail. However,
in both cases the cost-reflective issue is included.
A cost-reflective pricing policy will cause
an increase in the adoption of energy efficiency
measures by allocating an appropriate value on
energy consumption. This will drive customer
behavior positively. Such tariff policies will also
make renewable energy resources more competitive (Stromback, 2009).
REGULATIONS AND TARIFFS

The electricity regulatory agency or commission is
responsible for tariff setting and periodic review.
The periodic review, which is carried out annually or every two years is needed to reflect any
major economic or market conditions. In between
reviews the tariff remains fixed in order to give
space for electricity companies to plan their future
system expansion based on projected revenue. In
some countries a fuel adjustment clause is added to
the tariff in order to affect any adjustment without
tariff review or amendments.
Tariff Studies
Tariff reviews, in general, are driven by the

following objectives (Commission for Energy
Regulation, 2004):
1. General
To avoid cross subsidies or reduce

their effect
To arrive at simplicity and transparency within the tariff structure

2. Competition
To facilitate wholesale competition

without any barriers to generating
companies
To facilitate retail competition without any barriers to distribution

companies
3. Efficiency
To develop efficient price signals to

consumers to guide consumption decisions and choice of supplier
To encourage efficient consumption

patterns amenable to EE programs
4. Equity (non-discrimination)
To avoid unnecessary bill impacts
To have just, reasonable, and not unfairly discriminatory charges

5. Consistency
To gain consistency with new market arrangements, including incentives for efficient location of new
generators
6. Renewables
To gain consistency with government

policy related to the promotion of
renewables.
7. Cost allocation and non-discrimination
Are costs being allocated appropriately according to causer pays principle?
Are prices reflecting marginal cost

signals?
8. Existing and alternative tariffs and connection charges
What other, alternative tariffs and

connection charges might better
achieve the objectives of the tariff

settings?
What tariff structures are well suited

to the retail markets?
How will decentralized generation be

facilitated?
9. Tariff constraints: metering and billing
capabilities
How would metering and billing

technology and investment affect the
choice and implementation of different tariffs?
10. Alternative screening and customer impact
How would the introduction of alternative tariff structures impact

customers?
Since one of the objectives of tariff review
is to ensure cost-based tariff structures, the first
step in reviewing the tariff structure is to choose
the appropriate cost basis. The cost basis is used
in allocating costs to classes, designing tariff
structures, and setting the monetary value for each
tariff component and for each consumer class.
There are two cost studies, which can be used in
determining the cost basis. The first is embedded
costing and the second is marginal costing.
Embedded cost, or average historical cost, tariff
analysis begins with total revenue requirement of
the electricity company for a given year. Because
revenue requirement is basically a function of past
investments, an embedded cost study essentially
attempts to define the responsibility of historical
costs relative to each consumer class.
A marginal cost study focuses on how the
system is planned and operated in order to know
how costs will change upon any increase in demand. It is a future looking method; whereby, it
calculates the cost of the next unit of energy to
be produced to meet the increase in demand. It is
also a bottom-up approach that begins with timedifferentiated unit costs per kWh and per kW of
monthly peak demand. These unit costs are used
to calculate the tariff to be set for each consumer
class (Turvey, 1968).
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Tariff Studies
In order to calculate the actual tariff to be

implemented the marginal costing principle is
usually used. According to economic theory, the
optimal allocation of resources is reached when
marginal cost is equal to marginal price. In the
short run an electricity company is better off if
the short-term marginal cost is lower than the rate
paid for electrical energy produced. The short run
marginal cost of supplying a certain customer is
defined as the incremental cost of providing an
extra unit of energy (kWh) including operating
costs and other costs corresponding to system
constraints or market distortions (Turvey, 1968).
A Long-Run Marginal Cost (LRMC) reflects
changes in costs in a situation in which all factors
of production factors can be altered. Therefore,
LRMC is the cost actually incurred to provide an
additional unit of electrical energy only when the
system is optimal. It includes the cost of capacity added to return the system back to optimality
(Marsden Jacobs Associates, 2004). A Short-Run
Marginal Cost (SRMC) is estimated assuming
that not all production factors are modified. This
means that new capacity can not be added and
increased demand has to be met with existing
capacity. However, if outage occurs due to this
mismatch the added cost of this reduced reliability
must be included. The difference between LRMC
and SRMC is not based on time horizon, but rather
on the flexibility to respond to load changes.
Marginal cost studies that are used in tariff development usually take into consideration capacity
additions that are expected over a given time period
of study. The added capacity considered cover
generation, transmission and distribution facilities.
For the considered capacity added both capital
cost as well as operating costs are included. The
end result would be the LRMC of added capacity
needed to meet the forecasted demand (Electricity
Supply Industry Planning Council, 2005).
In the following section a case study that was
performed to computer the electricity tariff in
Jordan is presented. Readers are advised to refer
to chapter (2) of this book, for clarifications of
acronyms used in the electricity sector entities.
224
CASE STUDY: ELECTRICITY

TARIFFS IN JORDAN (ERC, 2005)
Jordan is a low-middle income country, within the
Middle East Region, with an average income per
capita of about US$ 2,850, in 2009. Its population reached about 6.0 million inhabitants. Jordan
suffers from a chronic lack of adequate supplies,
so it depends heavily on imports of crude oil, and
natural gas. The annual energy bill has rapidly
increased leading to a growing concern about
energy consumption and its adverse impact on
the economy and the environment. The industrial
sector within Jordan was probably affected the
most by the economic and technological changes
the country witnessed during the past three decades. These changes were associated with an
enormous increase in the number of facilities and
produced products which resulted in an increase
on energy and electricity demands. According to
2009 statistics, as per the Electricity Regulatory
Commission, electricity consumption reached
nearly 14,200 GWh distributed as 29% (industrial), 36% (residential), 16% (commercial), 15%
(water pumping), 2% (street lighting), and 2%
(for other purposes).
Energy modeling is a tool that is used in planning and defining the future policy formulation of
the energy sector. It is concerned with problems
of energy supply and demand in different sectors
of the economy. Within Jordan, there exist several
studies attempting to analyze current and future
energy requirements for different sectors and industries. However, there is still a demand for more
detailed studies and tailor-made models which
are necessary to explain the driving forces behind
changes in electricity consumption in the different
sectors of the economy. Such models would help
energy planners to understand the implications of
changes in the exogenous variables and will be
of great help in designing better national energy
policies and strategies. Such models and studies
lend themselves to tariff assessment and pricing
policies within Jordan and probably any country.
Tariff Studies
Tariff Application
This section outlines the process to be used by
the Electricity Regulatory Commission (ERC) in
Jordan to set tariffs for the Distribution Licensees,
(ERC, 2005). The ERC will periodically review
the tariffs charged by the Distribution Licensees
and establish tariffs for the duration of the Tariff
Review Period. Because of the National Uniform
Tariff, the ERC will carry out the Periodic Tariff
Review for all three Distribution Licensees at the
same time. For the Tariff Application Process, the
Distribution Licensees will submit to the ERC a
range of financial and technical operating data
to be used by the ERC in evaluating their performance and setting tariffs for the future Tariff
Review Period.
Provisions of Tariff Application

The ERC will define the procedures for submittal
of data by the Distribution Licensees, the review of
the data and the calculation of revised tariffs in the
Tariff Regulations. These procedures will cover:

The timing for the Distribution Licensees

to submit the required data to the ERC
The process by which the ERC will review
and validate the data submitted
The data requirements for the submission
by the Distribution Licensees. A standard
Uniform System of Accounts that will
be used for tariff calculations will be defined by the ERC and provided to the
Distribution Licensees.
Revenue Requirements
The ERC will determine the maximum Revenue
Requirement for each Distribution Licensee for the
Core Activities under its License. This will include
the Revenue Requirements for both Core Tariff

and Core Non-Tariff Activities. This methodology
will apply to EDCO and IDECO, and later also
to JEPCO after 2011. This Revenue Requirement
will include the costs approved by the ERC for
the Distribution Licensee to provide the Core
Activities defined in the License and a return on
invested capital used in the Core Activities, as in
the following formula:
Re vRt = C t + [RABt RoRt ] Compt + SFt 1
(13.1)
where:
T = year index
RevRt = Annual Revenue Requirement for the
Core services that the Distribution Licensee
must provide under its License
Ct = Annual operating and maintenance costs
for the Core services plus the cost of Bulk
Supply purchases from NEPCO as Bulk Supply Licensee and Transmission Licensee and
recognised cost for purchases from embedded
generators
RABt = Regulatory Asset Base for the Core
Services for the year
RoRt = Permitted rate of return on the Regulatory Asset Base before tax
Compt = Financial penalties of the distribution licensee for failing to meet performance
standards.
SFt-1 = Shortfall (or excess) of prior years
actual revenue against the prior years revenue
requirement. This variance from prior year revenues will only apply to those four components.
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Tariff Studies
JEPCO Revenue Requirements

Prior to 2011
Prior to the end of JEPCOs existing concession
agreement in 2011, the Revenue Requirement for
JEPCO will be calculated as follows:
Re vRt = C t + [NetCapt RoRt ] Compt + SFt 1
(13.2)
where:
NetCapt = the Net Paid up Capital of JEPCO
for the year.
The rest of variables are defined as in Equation (13.1).
Operating and Maintenance

(O&M) Expenses
EDCO, IDECO, and JEPCO after 2011
For EDCO and IDECO and also for JEPCO after
2011, the O&M expenses that will be included
in the calculation of the Revenue Requirements
are only those expenses related to the provision
of Core Activities licensed, and will include the
following:
a. Depreciation on the assets included in the
Regulatory Asset Base, according to the
defined depreciation schedule for each asset
class.
b. Cost of Bulk Supply purchases from the
Bulk Supply Licensee under the Bulk Supply
Tariff
c. Cost of generation purchases from embedded generation. The amount included in the
Revenue Requirement will equal the lower
of average of the payments to embedded
generation and the Bulk Supply Tariff or
the Bulk Supply Tariff times the kWh of
generation purchased.
226
d.
e.
f.
g.
h.
i.
j.
k.
l.
Personnel costs
Material/supplies costs
Insurance
Travel expenses
Rents
Office supplies
Communications
Customer communications, billing etc
An allowance for Technical Distribution
Losses (as defined in the Distribution
Licensee Performance Standards)
m. An allowance for Administrative Losses
(as defined in the Distribution Licensee
Performance Standards)
n. An allowance for Non-Technical losses
(as defined in the Distribution Licensee
Performance Standards)
The ERC will assess the reasonableness of
the reported expenses. Only expenses reasonably
incurred by the Distribution Licensees in carrying
out their Core licensed businesses will be included
in the tariff calculations.
Expenses that will be explicitly excluded from
the O&M expenses for stetting tariffs include:

Expenses related to the provision of NonCore Activities

Expenses considered to be excessive or
not in the best interests of consumers of licensed activities
Penalties and/or fines whether imposed by
governmental bodies or the ERC or interest payments/penalties for late payment of
liabilities
JEPCO Prior to 2011

Prior to 2011, the permitted operating and maintenance expense to be included in the Revenue
Requirement calculations for JEPCO will include,
in addition to the items listed above, that the interest payments on existing loans, and future loans,
required to meet ongoing operation Core business
Tariff Studies
activities, included in JEPCOs balance sheet and

meeting the requirements of the Companies Law.
(13.4)
where:
Regulatory Asset Base (EDCO,

IDECO, and JEPCO, after 2011)
RABt+1 = Regulatory Asset Base in year t + 1
The ERC will determine the Regulatory Asset

Base for inclusion in the tariff calculations, as the
recognized value of the assets that are used and
useful in providing the Core licensed services, net
of capital grants, customer contributions, Rural
Fils contributions, accumulated depreciation on
the gross value of the assets, plus the capital investment in the projects that are under construction
and will be completed during the Tariff Review
Period plus the working capital requirement. The
Regulatory Asset Base for Year 1 of the Tariff
Review will be calculated as follows:
RABt = At CC t Rt Dt + Invt
RABt +1 = At +1 Dt +1 + Invt +1
(13.3)
where:
Dt+1 = Depreciation on assets in Year t+1

Invt+1 = approved investment levels for Year t +
1, works in progress
NET PAID UP CAPITAL:

JEPCO PRIOR TO 2011
For the purposes of calculating the Annual Revenue Requirement, the Net Paid Up Capital for
JEPCO is defined as follows the nominal value
of the stocks in JEPCO, which for year 2005 is
valued at 50m JD.
Rate of Return (RoR)
RABt = Regulatory Asset Base in Year t
RoR Prior to 2011
At = Recognized gross value of used and useful

assets related to Core Activities
Prior to 2011, the Rate of Return before tax that

will be used for each Distribution Licensee will
be the ones listed in Table 2.
CCt = Value of customer contributions accumulated to date
RoR after 2011
Rt = Value of Rural Fils contributions accumulated to date

Dt = Accumulated depreciation to date on assets
related to Core Activities
Invt = Approved investment levels for year t,
works in progress
The Regulatory Asset Base for subsequent
years will be calculated as:
In the years 2011 and after, the ERC will use the
following methodology to determine the Rate of
Return that the Distribution Licensees will be
entitled to earn on their Regulatory Asset Bases.
The allowed Rate of Return will be set equal to
the estimated Weighted Average Cost of Capital
(WACC) for the Core Activities of the Distribution Licensee. The WACC is the average of the
approved cost of debt and equity for the Distribution Licensees, weighted according to the share of
each of these financing sources in the approved
capital structure.
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Tariff Studies
The Rate of Return will be estimated on a real,

pre-tax basis as follows:
RoRWACC
RE
= Eq%
+ Db% RD (13.5)
1 TR
The Cost of Debt will be calculated as follows:

RD = RF + DP
(13.7)
where:
where:
DP = Debt premium
RE = Cost of Equity
The ERC will publish its rationale for the Rate

of Return calculation in the Interim Tariff Decision.
RD = Cost of Debt
Eq% = % of equity in overall capital structure
Db% = % of debt in overall capital structure
TR = Tax rate
The ERC will undertake a consultation with the
Distribution Licensees with regard to the appropriate capital structure to be used in the calculation
of the rate of return as part of the tariff review
process. The estimates of the percentage of Debt
and Equity in the optimal capital structure will be
determined as part of the tariff review.
The Cost of Equity will be calculated using the
Capital Asset Pricing Model as follows:
RE = RF + e [RM RF ]
(13.6)
where:
RE = Cost of Equity
RF = Risk free rate of Return.
RM = Return on the market portfolio of shares
post-investor tax.
e = Equity beta, reflecting the perceived riskiness of investing in distribution utilities,
compared to the overall market.
228
Compensation Payments
The Distribution Licensee will be required to
meet specified performance standards, as defined
in the Distribution Licence. The Performance
Standards Code will also specify financial
penalties, that the Distribution Licensees must
return to customers for failing to meet the specified targets on performance standards indicators.
These compensation payments will not be direct
payments from a Distribution Licensee to a specific customer. Rather these financial penalties
will be implemented through a reduction in the
maximum permitted revenue requirement that
a Distribution Licensee can earn and therefore
also reducing tariffs paid by consumers. These
financial penalties will not be implemented prior
to the end of Control Phase of the Performance
Standards implementation.
During each Tariff Review Period, the ERC
will calculate the total financial penalties that
each Distribution Licensee owes for failing to
meet performance standards in the previous Tariff
Review Period. The reduction in the Revenue
Requirement due to the financial penalties will
be spread out over the duration of the tariff review
period. As modified, in each Tariff Review Period
the compensation owed from the previous period
will be deducted from the Revenue Requirements.
Tariff Studies
Table 2. Distribution licensee in Jordan

Distribution Licensee
Annual Rate of Return
JEPCO
7.5-16% on Paid up Capital
EDCO
10% on Regulatory Asset

Base
IDECO
10% on Regulatory Asset

Base
For the duration of JEPCOs Concession

Agreement, any reduction in the Revenue Requirement due to financial penalties will be limited so
that the Revenue Requirement will be high enough
to provide JEPCO with a minimum return on Net
Paid Up Capital of 7.5%, as required according
to JEPCOs Concession Agreement.
Approval of Investment Programs

The ERC will determine the approved level of
investments for Core Activities for each Distribution Licensee for the duration of the Tariff Review
Period. To be approved by the ERC, investments
must meet the following criteria:

Investments are needed to replace worn

out, existing equipment
Investments are needed to meet forecast
demand growth
Investments are needed to improve or
maintain the quality of service, and to meet
performance standards.
The Distribution Licensees will be required to

provide, as part of the Tariff Application, the data
necessary to justify the proposed investment level.
National Uniform Tariff

The policy of the Government of Jordan is to
establish a National Uniform Tariff for each
customer class to be charged by all Distribution
Licensees to the customers within their service
territory. The existence of the National Uniform
Tariff means that the revenues that each Distribution Licensee collects with respect to their Core
Activities may not equal their permitted Revenue
Requirements due to differences in the permitted
costs of each company and the cross-subsidies
between customer classes.
Since the Distribution Licensees should not be
financially disadvantaged by the National Uniform Tariff, the ERC will oversee a mechanism
to ensure that the actual profit earned by each
Distribution Licensee is equal to the permitted
return on investment.
Calculating Tariffs
For each year of the Tariff Review Period, the
ERC will calculate the Annual Revenue Requirements for each Distribution Licensee based on
the forecast of standard Bulk Supply Tariffs for
each year of the tariff review period. The tariffs
for each customer class will be calculated such
that these tariffs, when multiplied by the load
forecast for each customer class, will equal the
sum of the Revenue Requirements for all three
Distribution Licensees.
The ERC will then calculate, for each Distribution Licensee, the difference between the
expected revenues of each Distribution Licensee,
based on the load forecasts and the new tariffs
for each customer class, and the annual Revenue
Requirements. The excess or shortfall of forecast
revenues to the Revenue Requirement will be
resolved through the National Uniform Tariff
Mechanism described below.
National Uniform Tariff Mechanism

To ensure that no Distribution Licensee is adversely financially affected by the National Uniform
Tariff, the ERC will require NEPCO, as the Bulk
Supply Licensee, to charge different Bulk Supply
Tariffs to each Distribution Licensee.
For each Distribution Licensee, the ERC will
calculate the revised total amount to be paid in
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Tariff Studies
Bulk Supply costs as the sum of the Distribution Licensees Bulk Supply costs at the standard
Bulk Supply Tariff plus the excess of the forecast
revenues to the revenue requirement. 1 The new
individual Bulk Supply Tariffs for each Distribution Licensee will be calculated by dividing the
revised Bulk Supply costs by the load forecast
for each Distribution Licensee.
The detailed methodology for calculating
the Bulk Supply Tariffs for each Distribution
Licensee will be as defined in the Bulk Supply
Tariff Methodology.
Adjustment of Tariffs between

Tariff Review Periods
During the periodic Tariff Review, the ERC will
establish tariffs for the duration of the Tariff
Review Period. In addition the ERC may update
tariffs within the Tariff Review Period to compensate for the following factors:

Tariffs need to be updated due to errors in

the previous years data used to calculate
tariffs
Tariffs need to be updated due to changes
in the assumptions used for calculating
tariffs.
Such adjustments can lead to either higher or

lower tariffs:

If companies have over-collected in prior

period, then tariffs will be lowered in coming time periods
If companies have under-collected in prior period, then tariffs will be increased in
coming time periods
The ERC has identified a number of factors

that would lead to changes in tariffs between
Reviews, including:
230
Variations Bulk Supply Tariffs: Any

change in the Bulk Supply Tariffs charged
by NEPCO to the Distribution Licensees
will lead to a change in the Distribution
Tariffs. Changes in the Bulk Supply Tariff
will lead to immediate changes in the
Distribution Tariffs.
Variations between Forecast and Actual
demand levels
Variations between Forecast and Actual inflation levels
Variations between Forecast and Actual
exchange rates
For the latter three categories, the ERC will

identify the magnitude of the impact of these
factors on the Revenue Requirements of the
Distribution Licensees. If the combined impact of
variations in these three factors is greater than 2%
of the Revenue Requirement of the Distribution
Licensees, the ERC will update the Distribution
Tariffs. If the combined impact is less than 2%,
the ERC will wait until the next Tariff Review
Period to adjust tariffs, to take into account these
variations (reflected in the Shortfall component
of the Annual Revenue Requirement).
Any Distribution Licensee may submit a
tariff change request to the ERC during a Tariff
Review Period. The ERC will evaluate the tariff
application and determine whether any changes
in the Distribution Tariffs and corresponding Bulk
Supply Tariffs are warranted based on unexpected
changes in the underlying assumptions used to
calculate the existing tariffs.
TARIFF REVIEW PROCESS

This section defines the Tariff Review Process
to be used by each of the Distribution Licensees
Tariff Studies
Form of Tariff Application

The Tariff Application for each Distribution Licensee will include:

Financial information as specified in the

Financial Data Requirements
Operational information: measures of operational performance as defined in the
performance standards included in the
Distribution License
Customer Information: this will include
a) number of customers by customer class
(historic and forecast values); b) consumption by customer class (historic and forecast values); c) maximum demand by customer class; d) revenue by customer class
Initial Tariff Decision

Following receipt of the required financial and
technical data from the Distribution Licensees,
the ERC will issue an Initial Tariff Decision. This
Initial Tariff Decision will document:

The proposed revenue requirements for

each Distribution Licensee
The resulting tariffs for each customer
class
The reasons for accepting or rejecting the
Distribution Licensees proposed costs and
investment levels
The ERC will provide the Distribution Licensees and other stakeholders, including consumers,
with a reasonable timeframe in which to respond
and make comments on the Initial Tariff Decision.
Final Tariff Decision

Following receipt and analysis of the comments
submitted by the Distribution Licensees and
other stakeholders, in response to the Initial Tariff Decision, the ERC will issue its Final Tariff
Decision. The Final Tariff Decision will include

the following:

A summary of all the comments submitted

by the stakeholders and the Distribution
Licensees
A description of any changes in the ERC
approach due to the comments submitted;
Final Revenue Requirement and Tariff
Decisions.
Public Notification
The ERC will notify the Distribution Licensees
and the public regarding the Final Tariff Decision.
The ERC will also update the Tariff Book with
the new tariffs.
SUMMARY
Economic theory states that any commodity or
service must be priced in accordance with the
value it has to the buyer. This price varies between
two upper and lower values. The lower value is
the actual cost of producing the commodity or
delivering the service. On the other hand, the
upper value is the maximum value that market
conditions or competition allows. In between these
two values is the right price.
Practices show that electricity is a very capitalintensive industry. To meet the peak loads, expensive generating plants need to be installed. As this
peak load is encountered during a small portion of
the year, then electricity prices rise for all consumers. In fact, a problematic and unfair situation can
arise as customers with flatter load shapes subsidize those with peaky load shapes. To alleviate
such problems, electricity pricing practices must
be altered to allow time-variation in costs. This
gives users an incentive to lower their peak usage
by limiting and/or shifting their activities. Several
pricing structures were presented in this chapter
that can contribute to improving economic effi-
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Tariff Studies
ciency in all market segments. It should be noted

that the full realization of the potential benefits of
time-varying pricing is not currently possible, as
many hurdles exist (technical, economic, political,
etc.) and need to be resolved.
Electricity tariff is similar to pricing any commodity or service, but yet it is quite different. It is
similar in the sense that it is the source of the power
companys revenue, which generally includes a
certain return on investment plus a recovery of
operating costs. However, it is different than pricing any commodity or service in the sense that,
in a regulated market, tariff setting is subject to
regulatory concession. Moreover, it is reviewed
annually or every two years, and it is also subject
to public acceptance in one form or another. In
an open competition, market tariff is determined
largely by market forces and strong competition.
Electricity pricing is based on achieving certain
objectives as follows: (1) to guarantee efficient
allocation of national economic resources; (2)
encouraging the adoption of certain EE measures;
(3) fair return on the utilitys investments; (4) fair
allocation of costs among the various consumers;
(5) simplicity and convenience in implementation.
Electricity tariffs, in general, need to reflect the
true cost of supply in order to ensure maintaining
an adequate level of security of supply and the
financial viability of the electricity sector including private and public entities. The true cost of
supply needs to be determined accurately by an
independent body. This is the role of the regulatory agency responsible for setting the tariff taking
into consideration the welfare of all stakeholders.
The regulator takes into consideration the
investments undertaken to serve the consumers,
enhance reliability, and extend the service to all
locations. Similar due diligence is also exercised
in recognizing operation and maintenance, and
administration costs. Penalties may be exerted on
bad performers and maybe bonus granted to good
performers. In other words the quality of power
delivered is one element of the tariff calculation
methodology.
232
The electricity tariff has a structure based on

certain elements. Fixed part of the tariff is related
to the fixed costs of the utility. Another part is
related to the energy consumption. A third part is
related to peak demand or capacity charge. Many
countries have selected to use combined tariff
of energy and capacity charges for industries,
commercial, and service sectors, but use only
energy-based tariffs for households.
Tariff includes several components that enter
into its calculation. These components include:
(1) certain return on investment; (2) operation and
maintenance costs; (3) depreciation; (4) interest
on investments and for operations; (5) taxes; (6)
performance-based penalty/bonus.
Electricity tariff structure takes different forms.
They can be generally categorized according to
consumer type. Consumer groups are classified
as: (1) residential or household; (2) commercial;
(3) services; (4) hotels; (5) industrial (large, medium, and small); (6) agriculture; (7) offices; etc.
These consumer classes differ from one country
to another.
Cost-reflective tariffs are very important for
developing a competitive electricity retail market. This is because tariffs that reflect the cost
of electricity supply, including an acceptable
margin, will encourage investors to enter into the
electricity retail market considering it a lucrative
and guaranteed business. More entrants will be
willing to compete, and existing ones will make
good returns on their investments. As energy prices
have increased world wide, electricity prices have
also risen proportionately. The growing concern
over environmental pollution, adds salt to injury.
So, energy efficiency has strongly introduced itself
as a way out of this situation. TOU tariffs and
other tariff systems, although they do not provide
incentives for a reduction in energy consumption,
they, nevertheless, encourage rational electricity
consumption. This can lead to significant cost
savings. These savings can be invested back in
the system to incorporate other energy efficiency
activities.
Tariff Studies
Since one of the objectives of tariff review

is to ensure cost-based tariff structures, the first
step in reviewing the tariff structure is to choose
the appropriate cost basis. The cost basis is used
in allocating costs to classes, designing tariff
structures, and setting the monetary value for each
tariff component and for each consumer class.
There are two cost studies, which can be used in
determining the cost basis. The first is embedded
costing, and the second is marginal costing.
Embedded cost, or average historical cost, tariff
analysis begins with total revenue requirement of
the electricity company for a given year. Because
revenue requirement is basically a function of past
investments, an embedded cost study essentially
attempts to define the responsibility of historical
costs relative to each consumer class.
A marginal cost study focuses on how the
system is planned and operated in order to know
how costs will change upon any increase in demand. It is a future looking method; whereby, it
calculates the cost of the next unit of energy to
be produced to meet the increase in demand. It
is also a bottom-up approach that begins with
time-differentiated unit costs per kWh and per
kW of monthly peak demand. These unit costs
are used to calculate the tariff to be set for each
consumer class.
A case study of the electricity tariff in Jordan
was presented that shows a real life implementation of a specific tariff system.
REFERENCES
Borenstein, S. (2005). The long-run efficiency of
real-time electricity pricing. The Energy Journal
(Cambridge, Mass.), 26(3), 93116. doi:10.5547/
ISSN0195-6574-EJ-Vol26-No3-5
Caves, D., Eakin, K., & Faruqui, A. (2000). Mitigating price spikes in wholesale markets through
market-based pricing in retail markets. The
Electricity Journal, 13(3), 1323. doi:10.1016/
S1040-6190(00)00092-0
Charles River Associates. (2005). Primer on

demand-side management with emphasis on
price-responsive programs. Report prepared for
the World Bank. Washington, DC: World Bank.
Chassin, D. P., & Kiesling, L. (2008). Decentralized coordination through digital technology,
dynamic pricing, and customer-driven control:
The GridWise testbed demonstration project. The
Electricity Journal, 21(8), 5159. doi:10.1016/j.
tej.2008.09.002
Cousins, J. T. (2011). Using time of use (TOU)
tariffs in industrial, commercial and residential
applications effectively. TLC Engineering Solutions Report. Retrieved from http://www.tlc.co.za/
white_papers/default.htm.
Couture, T., & Ganon, Y. (2010). An analysis of
feed-in tariff remuneration models: Implications
for renewable energy investment. Energy Policy,
38(2), 955965. doi:10.1016/j.enpol.2009.10.047
Doris, E., Busche, S., & Hockett, S. (2009). Net
metering policy development in Minnesota: Overview of trends in nationwide policy development
and implications of increasing the eligible system
size cap. Technical Report: NREL/TP-6A2-46670.
Retrieved from http://www.nrel.gov/docs/fy10osti/46670.pdf.
Electricity Supply Industry Planning Council.
(2004). Estimates of the long run marginal cost of
supplying electricity to small customers in 2005.
Washington, DC: Electricity Supply Industry
Planning Council.
ERC. (2005). Tariff methodology for distribution
licensees. Study Report. Washington, DC: ERC.
European Commission Staff. (2008). The support
of electricity from renewable energy sources.
Working Paper. Vienna, Austria: European Commission Staff.
233
Tariff Studies
Forsyth, T. L., Pedden, M., & Gagliano, T. (2002).

The effects of net metering on the use of small-scale
wind systems in the United States. Washington,
DC: National Renewable Energy Laboratory.
doi:10.2172/15002481
Electricity Pricing. (2011). Wikipedia entry.

Retrieved from http://en.wikipedia.org/wiki/
Electricity_pricing.
Jacobs, M., & Jacobs, D. (2009). Feed-in tariffs

go global: Policy in practice. Renewable Energy
World. Retrieved from http://www.renewableenergyworld.com/rea/news/print/article/2009/09/
feed-in-tariffs-goglobal-policy-in-practice.
Jongejan, A., Katzman, B., Leahy, T., & Michelin,

M. (2010). Dynamic pricing tariffs for DTEs
residential electricity customers. Report No.
CSS10-04. Ann Arbor, MI: University of Michigan. HEPI. (2009). Who is paying the most, who
is paying the least and where are prices heading
in Europe? London, UK: HEPI.
Marsden Jacobs Associates. (2004). Estimation

of long run marginal cost (LRMC). A report
prepared for the Queensland Competition Authority. Queensland, Australia: Marsden Jacobs
Associates.
Knapek, J., Benes, M., & Vasiek, J. (2008). What

are the major barriers of RES-E penetration in
the Czech Republic? In Proceedings of the 10th
World Renewable Energy Congress, (Vol. 1), (pp.
2663-2668). London, UK: Elsevier.
Rowlands, I. H. (2005). Envisaging feed-in tariffs for solar photovoltaic electricity: European
lessons for Canada. Renewable & Sustainable
Energy Reviews, 9(1), 5168. doi:10.1016/j.
rser.2004.01.010
Midden, C., Mtere, J., Weenig, M., & Zieverink,

H. (1983). Using feedback, reinforcement and
information to reduce energy consumption in
households: A field-experiment. Journal of Economic Psychology, 3(1), 6586. doi:10.1016/01674870(83)90058-2
Stromback, J. (2009). The need for smart metering (and more informative bills) throughout the
European electricity market Are we in danger of
cheating the public? Paper presented at the Smart
Metering Workshop. Rome, Italy.
Train, K. (1991). Optimal regulation: The economic theory of natural monopoly. Cambridge,
MA: MIT Press.
Turvey, R. (1968). What are marginal costs and
how they to estimate them? Technical paper 13.
Bath, UK: University of Bath.
ADDITIONAL READING
AEIC. (2011). Load research. Retrieved from
http://www.aeic.org/load_research/docs/12,
Time-of-Use_and Critical Peak_Pricing.pdf.
234
Spulber, D. F. (1992). Capacity-contingent nonlinear pricing by regulated firms. Journal of Regulatory Economics, 4(4), 99320. doi:10.1007/
BF00134924
Weiss, P. C., & White, M. W. (2005). Household
electricity demand, revisited. The Review of Economic Studies, 72(3), 853883. doi:10.1111/00346527.00354
Wilkinson, M. (2008). Get paid for solar power
on your roof. Sydney Morning Herald.
Woo, C. K., Lloyd, D., Orans, R., Horii, B., &
Heffner, G. (1995). Marginal capacity costs of
electricity distribution and demand for distributed
generation. The Energy Journal (Cambridge,
Mass.), 16(2), 111130. doi:10.5547/ISSN01956574-EJ-Vol16-No2-6
Tariff Studies
Yusta, J. M., Ramrez- Rosado, I. J., DominguezNavarro, J. A., & Perez-Vidal, J. M. (2005). Optimal electricity price calculation model for retailers
in a deregulated market. International Journal
of Electrical Power & Energy Systems, 27(5-6),
437447. doi:10.1016/j.ijepes.2005.03.002
ENDNOTE
1
If the forecast tariffs lead to a shortfall compared to the Revenue Requirement, then the
total Bulk Supply costs will be reduced by
this amount.
235
236
Chapter 14
Planning Tools
ABSTRACT
Planning is very important for the success of any project or business. Various tools need to be implemented in conducting the functions comprising the planning process. These tools aid the decision
making process and minimize the risks involved in the selection of the way to control the project under
consideration or running the business.
In this chapter, various categories of planning tools are discussed and explained. These tools are proposed to be applied at the different stages of the project. They are applicable to the strategic planning
stage and for the monitoring and evaluation stages. As the planning process is dynamic in nature, it is
highly recommended to apply different tools at different phases of the project.
INTRODUCTION
Planning tools are usually designed, in the context
of power system planning, for utilities and companies to collect information needed in conducting
various studies or analyses. For example, planning
tools are used to assess customer attitudes and
behaviors, and hence help in creating a marketing
plan. Or they are used in opinion-based evaluation
and comparison of alternatives. These tools can be
either qualitative or quantitative. Some well known
qualitative methods include: market and customer
opinion surveys, depth interviews, focus group
studies, and observational research techniques. On
the other hand, quantitative methods offer a way
to measure the market. These use decision making
tools, personal quantitative interviews, different
DOI: 10.4018/978-1-4666-0173-4.ch014
types of surveys (online, emails, telephone), and

due diligence analysis. Quantitative methods aim
to measure customer perceptions and needs in
addition to forecasting quantity.
Planning tools have evolved over time and
have become essential for any planning study.
Some tools are needed to collect information
from its various sources. These include surveys,
interviews, questionnaires, opinion surveys, focus
groups, projective techniques, etc. Each collection
method is dependent on a pre-prepared instrument
to be used during the collection function. The
design of the instrument is very important and the
quality of collected data in most cases depends
on the instrument. If the instrument was poorly
designed then the collected information will not
be adequate to build on or use in making certain
decisions.
Planning Tools
Other types of tools are related to group

thinking in order to reach consensus on a certain
subject or issue. These include focus groups,
brainstorming, brain pool, gallery method, nominal group, multi dot voting, and 6-3-5 method.
In such forum the participants are governed by a
predetermined set of rules of conduct during the
session. Each session must have a moderator to
run the show. Therefore, sometimes these tools
are called facilitation tools. The final outcome
of such an exercise is that the group at the end
will collectively agree on what they have started
to discuss. In other words they reach consensus.
Decision support tools are those used in helping
an individual or group to reach a decision. In many
instances the issue being discussed or studied is
very difficult or ambiguous. It needs some tools
to clarify it or simplify it in order for the person
or persons performing the assessment can be at a
position to make certain inferences or decisions.
These tools include multivariate, decision trees,
trend analysis, gap analysis, analytic hierarchy
process, and others.
Analytical tools are tools that are used to give
more understanding of certain data or information.
They are used by planners to explain some trends
or direction of operations, forecast of future events,
and expected outcomes. These include affinity
diagram, interrelationship diagraph, tree diagram,
prioritization matrix, matrix diagram, process
decision program chart, activity network diagram,
and cause-and-effect or fish bone diagram.
Strategic planning uses another group of planning tools. There are a variety of perspectives,
models and approaches used in strategic planning.
The development and implementation of these
different tools depend on a large number of factors, such as size of the organization, nature and
complexity of the organizations environment,
and the organizations leadership and culture. In
our context of power system planning we consider issues such as decisions related to change
management, core business, and power purchase
agreements, etc. as strategic in nature. Strategic
planning tools include: 1) Boston Consulting

Group Matrix; 2) GE Market Growth/Market
Share Matrix; 3) Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis; 4) Porters
Generic Competitive Strategies; and 5) Porters
Five Forces Model.
The abovementioned tools are discussed in
further details in the following sections.
DATA COLLECTION
Opinion Polls
Opinion polls for many years were conducted
through mail or person-to-person contact. Methods and techniques vary, but the end result is to
get the opinion of the polled group on a certain
issue. Verbal, ballot, and processed types can be
conducted efficiently. Opinion polling developed
into popular applications through popular thought,
although response rates are worrisome to the entity
conducting the poll. Recently opinion surveys
are being conducted through the use of Internet
surveys, where a sample is drawn from a large
panel of volunteers, and the results are weighed
to reflect the demographics of the population of
interest. In contrast, popular web polls draw on
whoever wishes to participate, rather than a scientific sample of the population, and are therefore
not generally considered professional (Barone,
2008; Bernard, 2006).
Opinion polls are used when the public at large
is intended. Issues such as selecting a site for a
certain power plant or facility, tariff adjustment,
licensing a power company, etc., are target for
opinion polling.
The instrument used for conducting opinion
polling is a simple list of easy-to-answer questions. Usually they are yes-no type questions
(Fowler, 1995). The polling process should not
take more than few minutes to conduct. Moreover,
the fashion of carrying out the polling should be
straightforward. It is well established that the
237
Planning Tools
wording of the questions, the order in which they

are asked, and the number and form of alternative
answers offered can influence results of polls. For
instance, the public is more likely to indicate support for a person who is described by the operator
as one of the best candidates. This support itself
overrides subtle bias for one candidate, as does
grouping some candidates in an other category
or vice versa. Thus comparisons between polls
often boil down to the wording of the question.
On some issues, question wording can result in
quite pronounced differences between surveys.
This can also, however, be a result of legitimately
conflicted feelings or evolving attitudes, rather
than a poorly constructed survey (Trochim, 2006;
Statistical Services Center, 2000).
Questionnaires
Questionnaires are forms used to collect answers
of participants either by direct interview or through
mail. The questionnaire is a powerful tool but its
design is very important. The level of confidence
in the collected answers depends greatly on the
design of the questions in the questionnaire. The
questionnaire is usually more involved than the
polling instrument. It includes some open ended
questions in addition to the yes-no and multiple
choice questions. Open ended questions are used
to collect thoughts and ideas of the respondents
regarding certain issues (Fowler, 1995).
Questionnaires are sent by mail or filled out
during an interview. If a questionnaire is sent by
mail it should be accompanied with explanatory
notes and directions to aid in the filling process.
In most cases mailed questionnaires are sent to a
specialized group of respondents (Dillman, 1991).
The persons conducting the interviews should
be well trained and understand all questions fully
in order to provide guidance to respondents. Some
badly designed questionnaires may have some
questions with more than one meaning or does
not have unique answers. In case of multiple
238
choice questions some questions may not have

the complete choices, which would either lead to
confusion or to leave the question unanswered.
Surveys
Surveys are tools that include more than one
tool together. A field survey usually includes
an interview, a questionnaire, and a part for the
interviewer to write down observations or facts
on the ground. In some instances the survey is
conducted in stages. The first stage is to send the
questionnaire to be filled. The second stage is to
conduct the interview to confirm and validate the
answers of the respondent and have some useful
discussion related to the open ended questions.
Finally the surveyor has the chance to express
certain observations and evaluations on the ground
(Lyberg & Kasprzyk, 1997).
Surveys vary according to objective. Objectives of surveys include fact-finding missions,
evaluation/assessment surveys, follow-up surveys,
needs assessment surveys, and others. The details
of each type of survey depend on the objective. For
example a fact-finding mission may not include
a questionnaire since it is a preliminary step. It
will include a check list type questionnaire to be
filled during the field visit to be followed by an
interview.
Interviews
An interview is conducted one-on-one, and lasts
between 30 and 60 minutes. Interviews are the
best methods for in-depth probing of personal
opinions, beliefs, and values. They are characterized by being very rich in the breadth and depth of
information, very flexible, and are very useful at
uncovering hidden issues. Moreover, they require
skilled interviewers.
The most effective controls, used by skilled
interviewers, to limit the effect of bias or steering of answers are (Weisberg, 2005):
Planning Tools
Asking enough questions to allow all aspects of an issue to be covered and to control effects due to the form of the question
(such as positive or negative phrasing)
The adequacy of the number of questions
is determined quantitatively with psychometric measures such as reliability coefficients, and
Analyzing the results with psychometric
techniques which synthesize the answers
into a few reliable scores and detect ineffective questions.
Focus Groups
It should be clarified at the onset that this tool is
used for both collecting information and in group
thinking. This discussion is pertinent to focus
group tool as a method for collecting information.
There will be no further discussion of the tool as
a group thinking tool.
The focus group is an interactive group discussion lead by a moderator. It is usually an unstructured (or loosely structured) discussion where the
moderator encourages the free flow of ideas. It
involves between 8 to12 members in the group
who fit the profile of the target group or consumer
but may consist of two interviewees (a dyad) or
three interviewees (a triad) or a lesser number of
participants (known as a mini-group). It usually
lasts for 1 to 2 hours and it is recorded on video/
DVD. The focus group may be streamed via a
closed circuit service for remote viewing of the
proceedings (Alexandria, 1997; Krueger, 1988;
Silverman & Zukergood, 2000).
Focus group sessions are inexpensive and fast.
The use of computer and internet technology is
a must for on-line focus groups. During focus
group sessions respondents feel a group pressure
to conform to, which is healthy. Group dynamics
are useful in developing new streams of thought
and covering a new issue thoroughly. It is usually
a good tool for introducing a new product, or in
criticizing a new law or policy before it is enacted
(Morgan & Kreuger, 1998).
Projective Techniques
Projective techniques are unstructured methods
that prompt, stimulate, or encourage the respondents to project their underlying motivations,
beliefs, attitudes, or feelings onto an ambiguous
situation (Kirton, 1989). They are all indirect
techniques that attempt to disguise the purpose of
the research. Examples of projective techniques
include (Jacobs & Heracleous, 2006; Kaner, et
al., 1996):

Word association: say the first word that

comes to mind after hearing a wordonly
some of the words in the list are test words
that the researcher is interested in, the
rest are fillersis useful in testing brand
namesvariants include chain word association and controlled word association
Sentence completion: respondents are
given incomplete sentences and asked to
complete them
Story completion: respondents are given
part of a story and are asked to complete it
Cartoon tests: pictures of cartoon characters are shown in a specific situation and
with dialogue balloonsone of the dialogue balloons is empty and the respondent
is asked to fill it in
Thematic apperception tests: respondents are shown a picture (or series of pictures) and asked to make up a story about
the picture(s)
Role playing: respondents are asked to
play the role of someone elseresearchers
assume that subjects will project their own
feelings or behaviors into the role
Third-person technique: a verbal or visual representation of an individual and
his/her situation is presented to the respondentthe respondent is asked to relate the
attitudes or feelings of that personresearchers assume that talking in the third
person will minimize the social pressure
239
Planning Tools
to give standard or politically correct

responses
successful or not. In some cases other beneficial

results stem from the brainstorming session. This
is considered a bonus (Witkin & Altschuld, 1995).
GROUP THINKING
Brain Pool
Brainstorming
Brain pool method or tool is another forum to reach

a consensus by a group of participants (Moore,
1987). It involves the following easy steps:
This tool is very useful in formulating a common

understanding or a stand related to a certain issue.
The session is usually directed by a moderator or
facilitator. Each participant is allowed to present
his/her opinion regarding the issue at hand. No
one is permitted to underscore, reject, or even
criticize any idea or thought brought about by
another participant. Once all views are collected
or put up on a board the process of processing the
information begins. All similar ideas are grouped
together. All contradicting ideas or concepts
are discussed thoroughly until the participants
who suggested them agree on one common one
(Schwartz, 1994; Hurt, 2000).
The main objective of the brainstorming session should be made clear to all participants. The
problem definition must be clear and exact. The
problem statement or critical issues to be discussed
must be declared and put up for everyone to see at
all times. The participants are constantly reminded
of the objective and problem definition in order
to have a fruitful session (Pounds, 1969).
The process continues until all views are collected and properly formulated. The changes in
wording or phrasing of any item must be done
with the full agreement of the participant who
suggested the item. The items are ranked according
to a certain agreed upon criterion. The criterion
could be the relevance to the subject matter, level
of importance, or order of listing in the original
problem statement.
A cross check between the objective and
problem definition statement from one side and
the consensus views and concepts from the other
is made. Through this check the facilitator can
decide if the objective was met and the session is
240
List a problem statement on a flip chart

Each participant thinks up three ideas and
lists them on a sheet of paper
Participants place the sheets in the middle
of the table
Participants think three more ideas and
place them into the pool
As the group proceeds through the exercise, participants can access the pool and
retrieve other sheets to help stimulate additional ideas
Read the ideas and discuss the pros and
cons of each idea
The group then selects the best ideas.
Gallery Method
Gallery method or tool is another forum to reach a
consensus by a group of participants (Van Gundy,
1993). It involves the following easy steps:

Write a problem statement on a flip chart

Attach one flip chart per participant on the
wall
Briefly discuss the statement for
clarification
Each participant writes down ideas for 5
minutes
Group does a walk-around and comments
or adds to others lists
Each person returns to own sheet and adds
to the ideas
Individuals explain their ideas
Group evaluates and selects best ideas.
Planning Tools
Nominal Group
The group votes on the best ideas.
Nominal group method or tool involves the following steps (Julie, Clark, & Stein, 2004):

Write out a problem statement on a flip

chart
Allow 5-10 minutes for participants to
write down their ideas (no discussion)
Record the ideas in a round-robin fashion
Discuss the ideas and select best ones.
Multi-Dot Voting
Multi-dot voting is another consensus seeking
method. It is simply explained by the following.
This process is often used to condense or prioritize information gathered in a nominal group or
brainstorming process. It is very effective. All ideas
proposed by the group are listed on flip chart or
white board. Each participant is given dots or
markers to use. Only one dot/mark per idea/item
is allowed. A tallying of the results is performed.
Finally ideas/items are ranked (Missouri Strategic
Planning, 2002).
6-3-5 Method
The 6-3-5 method or tool is another forum to reach
a consensus by a group of participants (Missouri
Strategic Planning, 2002). It involves the following easy steps:

Divide a group into 6 participants

Write the problem statement on a flip chart
or white board
Each participant has 5 minutes to record 3
ideas across a three-column form
Participants pass the form to the next group
Repeat the sequence every 5 minutes
Participants can add ideas to the list or
build on someone elses ideas
Call time after 30 minutes
Discuss the pros and cons of each idea
DECISION SUPPORT ANALYSIS

Due Diligence Analysis
Due diligence is a legal term that describes the
level of care or judgment that a reasonable person
would be expected to exercise in a given situation. The term finds application in a wide range of
business settings. These include: 1) mergers and
acquisitions, 2) technology sourcing, 3) occupational safety and health, 4) environmental impact
assessments, 5) supplier-vendor relationships, 6)
asset valuation decisions, and 7) employee hiring or promotion practices and others (Hollyday,
1995). Performing a due diligence analysis in
such situations helps managers make informed
decisions and reduce the risks incurred by the
business. Real due diligence analyses validate all
the technological, legal, financial, commercial, operational, and strategic assumptions underpinning
the decision. Due diligence is a guaranteed way
to minimize the risk of failure, or the embarrassment of discovering what underlies spectacular
success (Hollyday, 1995; Matsatsinis & Siskos,
2002). Due diligence analysis covers the following main aspects:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Technology
Product (s) / Service (s)
Market
Cost / Benefit
Financial Requirements
Environmental Considerations
Infrastructure
Capital Structure
Organizational Aspects
Legal Issues
241
Planning Tools
Due diligence also applies to the process of

making corporate investments in technology, or
the purchase of one company by another. In the
area of mergers and acquisitions, a due diligence
analysis is an important part of the process of
evaluating potential investments and confirming
basic information before entering into a transaction. A proposed merger or acquisition gets
cancelled if conflicts over intellectual property
rights, personnel, accounting discrepancies, or
incompatibilities in integrating operating systems
appear. In other words the process of investigating,
and compiling a complete understanding of any
possible conflicts or avoiding risks is known as
due diligence (Steinberg, 2002).
When a business makes a purchase offer of
any kind, it is often a matter of policy to make the
offer contingent on the results of a due diligence
analysis. This analysis might include reviewing
financial records, hiring experts to examine the
assets in question, and taking other reasonable
steps to make sure that all questions are answered
and expectations met. Experts suggest that sellers also perform due diligence analysis prior to
entering into a transaction. Going through this
process helps sellers be prepared for any questions
that might arise out of the buyers due diligence
analysis, and also gives sellers a basis on which
to evaluate the merits of potential purchase offers
(Steinberg, 2002; Copeland, 2000).
Decision Support Systems (DSS)

A DSS is a computer-based information system
that supports business or organizational decisionmaking activities. A DSS serves all levels of an
organization and help to make decisions, which
may be rapidly changing and not easily specified
in advance. In other words a decision support
system adds to the intelligence of the organization
(Power, 2002).
DSS are a specific class of computerized
information system that supports business and
organizational decision-making activities. A prop-
242
erly designed DSS is an interactive software-based

system intended to help decision makers compile
useful information from raw data, documents,
personal knowledge, and/or business models to
identify and solve problems and make decisions
(Sauter, 1997).
Typical information that a decision support
application might gather and present would be:

Accessing all current information assets,

including legacy and relational data sources, cubes, data warehouses, and data marts
Comparative sales figures between one
week and the next
Projected revenue figures based on new
product sales assumptions
The consequences of different decision alternatives, given past experience in a context that is described
Three fundamental components of a decision

support systems architecture are as follows:

The database (or knowledge base),

The model (i.e., the decision context and
user criteria), and
The user interface.
The users themselves are also important components of the architecture.

DSS technology levels (of hardware and software) may include:
1. The actual application that will be used by
the user. This is the part of the application
that allows the decision maker to make decisions in a particular problem area.
2. Generator contains hardware/software environment that allows people to easily develop
specific DSS applications.
3. Tools include lower level hardware/software.
DSS generators including special languages,
function libraries and linking modules.
Planning Tools
An iterative developmental approach allows for

the DSS to be changed and redesigned at various
intervals. Once the system is designed, it will need
to be tested and revised for the desired outcome.
The support given by DSS can be separated
into three distinct, interrelated categories: Personal Support, Group Support, and Organizational
Support.
DSS components may be classified as:
1. Inputs: Factors, numbers, and characteristics
to analyze
2. User Knowledge and Expertise: Inputs
requiring manual analysis by the user
3. Outputs: Transformed data from which DSS
decisions are generated
4. Decisions: Results generated by the DSS
based on user criteria
5. Analytic hierarchy process
Analytic Hierarchy Process (AHP)

The AHP method is a theory of relative measurement with absolute scales of both tangible
and intangible criteria based on the judgment
of knowledgeable and expert people. The AHP
reduces a multidimensional problem into a one
dimensional one, since it is a method of reaching
group consensus through a mathematical model.
Decisions are determined by a single number
for the best outcome or by a vector of priorities
that gives an ordering of the different possible
outcomes (Saaty, 2005).
The AHP is based on collecting expert opinions
regarding certain alternatives or competing actions
in a one-to-one comparison in order to reach a
final decision. In other words the method asks
the expert to weigh each pair of alternatives at
a time until all have been compared regarding a
certain criterion. Then the intermediate decisions
are used as basis for comparison regarding another
criterion etc., until all levels of comparison are
taken into consideration. The final outcome is a
priority listing of the alternatives being compared

each with a final score.
AHP is a structured technique for dealing
with complex decisions. Rather than prescribing
a correct decision, the AHP helps the decision
makers find one that best suits their goal and their
understanding of the problemit is a process of
organizing decisions that people are already going
through, but trying to do in their heads.
Users of the AHP first decompose their decision problem into a hierarchy of more easily
comprehended sub-problems, each of which can
be analyzed independently. The elements of the
hierarchy can relate to any aspect of the decision problemtangible or intangible, carefully
measured or roughly estimated, well- or poorlyunderstoodanything at all that applies to the
decision at hand (Saaty, 2005).
Once the hierarchy is built, the decision makers
systematically evaluate its various elements by
comparing them to one another two at a time, with
respect to their impact on an element above them
in the hierarchy. In making the comparisons, the
decision makers can use concrete data about the
elements, or they can use their judgments about
the elements relative meaning and importance. It
is the essence of the AHP that human judgments,
and not just the underlying information, can be
used in performing the evaluations (Saaty, 2005).
The AHP converts these evaluations to numerical values that can be processed and compared
over the entire range of the problem. A numerical
weight or priority is derived for each element of the
hierarchy, allowing diverse and often incommensurable elements to be compared to one another
in a rational and consistent way. This capability
distinguishes the AHP from other decision making
techniques (Saaty, 2005).
In the final step of the process, numerical
priorities are calculated for each of the decision
alternatives. These numbers represent the alternatives relative ability to achieve the decision goal,
so they allow a straightforward consideration of
the various
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The diagram of Figure 1 shows a simple

AHP hierarchy at the end of the decision making
process. Numerical priorities, derived from the
decision makers input, are shown for each node
in the hierarchy. In this decision, the goal was to
choose the most suitable leader based on four specific criteria. Simon was the preferred alternative,
with a priority of 0.491. He was preferred about a
third more strongly than John, whose priority was
0.370, and about three times more strongly than
Kate, whose priority was only 0.139. Experience
was the most important criterion with respect to
reaching the goal, followed by Skills, Education,
and Age. These factors were weighted 0.577,
0.220, 0.147, and 0.056, respectively.
While it can be used by individuals working
on straightforward decisions, the Analytic Hierarchy Process (AHP) is most useful where teams
of people are working on complex problems,
especially those with high stakes, involving human perceptions and judgments, whose resolutions
have long-term repercussions. It has unique advantages when important elements of the decision
are difficult to quantify or compare, or where
communication among team members is impeded by their different specializations, terminologies, or perspectives.
Figure 1. AHP method example
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Decision situations to which the AHP can be

applied include (Saaty, 2005):
1. Choice - The selection of one alternative
from a given set of alternatives, usually
where there are multiple decision criteria
involved.
2. Ranking - Putting a set of alternatives in
order from most to least desirable.
3. Prioritization - Determining the relative
merit of members of a set of alternatives, as
opposed to selecting a single one or merely
ranking them.
4. Resource allocation - Apportioning resources
among a set of alternatives.
5. Benchmarking - Comparing the processes in
ones own organization with those of other
best-of-breed organizations.
6. Quality management - Dealing with the
multidimensional aspects of quality and
quality improvement.
Multivariate Analysis (MVA)

MVA is based on the statistical principle of multivariate statistics, which involves observation
and analysis of more than one statistical variable
at a time. The technique is used, in design and
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analysis, to perform trade studies across multiple

dimensions while taking into consideration the
effects of all variables on the responses of interest
(Triantaphyllou, 2000).
Uses for multivariate analysis include the following applications:

Capability-based design (also known as

design for capability)
Inverse design, where any variable is considered an independent variable
Analysis of Alternatives (AoA), with
which the selection of concepts is done to
fulfill a customer need
Analysis of concepts with respect to changing scenarios
Identification of critical design drivers and
correlations across hierarchical levels.
Trend Analysis
The term trend analysis refers to the concept
of collecting information and attempting to spot
a pattern, or trend, in the information. In some
fields of study, the term trend analysis has more
formally-defined meanings.
Although trend analysis is often used to predict
future events, it could be used to estimate uncertain
events in the past, such as how many breakdowns
or system collapse conditions took place during
a certain time period.
Gap Analysis
In business and economics, gap analysis is a tool
that helps a company to compare its actual performance with its potential performance. At its
core are two questions: Where do we stand?
and Where do we want to be? If a company or
organization is not making the best use of its current resources or is forgoing investment in capital
or technology, then it may be performing at a level
below its potential. This concept is similar to the
case of a person not realizing his or her potential.
The objective of gap analysis is to identify the

gap between the optimum allocation of the inputs
(resources) and the current level of allocation.
This helps provide the company with insight into
areas which could be improved. The gap analysis
process, for a business, involves determining and
approving the difference between requirements
and current capabilities.
It is also used in determining the gap between
supply and demand. This analysis is very important
for a newly established company that intends to
compete in an existing market. The outcome of
such analysis is a close approximation of the gap
available in the market that the new entrant can
have a share in.
Gap analysis naturally stems from benchmarking and other assessments. Once the general
expectation of performance in the industry is understood, it is possible to compare that expectation
with the companys current level of performance.
This comparison becomes the gap analysis.
It can be performed, in different perspectives,
as follows:
1.
2.
3.
4.
5.
Organization (e.g., human resources)

Business direction
Business processes
Technology
Analytical tools [Source: Wikipedia]
DECISION AIDING TOOLS

Decision theory, is an extremely confusing term
to managers due to the fact that there are many
different views about the subject. One class of
people considers decision theory to be a science
that is strongly related to statistics. A second class
regards decision theory as both science and art.
Another class treats the subject as a part of operations research, and consider the subjects of utility
theory, decision rules, Bayes theorem, probability
theory, game theory, set theory, and truth tables.
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Finally, others equate the subject with management techniques linked with network analysis.
Practically, different techniques implemented
in decision theory lead to two kinds of decisions:
programmed and un-programmed. Programmed
decisions are rule-based decisions that are adopted
in highly structured organizations, and are usually
taken by relatively junior staff, or by a computer.
The un-programmed (innovative) decisions tackle
new areas and new problems, and are the main
pre-occupation of senior managers.
In the following sections different analytical
tools that are used in the decision making process
are presented. It must be known that analytical
tools include tools that are used to process data
or information to obtain certain concepts or inferences. They are used for organizing thoughts in
the group thinking process. Moreover, they are
used in reaching consensus or making decisions.
In other words such tools are useful in all aspects
and stages of the planning process.
Affinity Diagram
This tool takes large amounts of disorganized data
and information and enables one to organize it into
groupings based on natural relationships. It was
created in the 1960s by Japanese anthropologist
Jiro Kawakita. It is also known as KJ diagram,
after Jiro Kawakita. Affinity diagram is a special
kind of brainstorming tool.
Interrelationship Diagram
This tool displays all the interrelated cause-andeffect relationships, factors involved in a complex
problem, and describes desired outcomes. The
process of creating an interrelationship diagraph
helps a group analyze the natural links between
different aspects of a complex situation.
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Tree Diagram
This tool is used to break down broad categories
into finer and finer levels of detail. It can map levels
of details of tasks that are required to accomplish
a goal or task. It can be used to replace broad general subjects by detailed subjects. Developing the
tree diagram helps one move their thinking from
generalities to specifics. It is called tree because
it looks exactly like a tree, whereby each branch
is divided into one or more branches, just like
a tree. Each branch is associated with a certain
probability of occurrence. The final outcome of
each route combining alternative branches is the
overall probability of occurrence of that branch.
The best choice is the route of branches that has
the highest probability of occurrence.
Decision trees are used to represent alternative courses of action pictorially. They show the
possible outcomes of different choices, taking
into account probabilities, costs, and returns.
Moreover, they enable decision makers to define
the consequences of their choices, which leads to
the selecting the most appropriate course of action
in terms of viability, cost, and profit.
As such a decision tree uses a tree-like graph or
model of decisions and their possible consequences, including chance event outcomes, resource
costs, and utility. Such trees are a popular and
allow the representation of alternatives or options
in the decision making process. Decision trees are
commonly used in operations research and they
allow complex business rules to be represented in
a hierarchical tree format. In more specific terms
these trees are used in decision analysis, to help
identify a course of action most likely to reach a
certain goal. Another use of decision trees is as
a descriptive means for calculating conditional
probabilities.
A decision tree consists of three types of nodes
(see Figure 2):
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Figure 2. Type of nodes in decision tree
1. Decision nodes: commonly represented by

squares. The output of the decision node
represents the available alternatives.
2. Chance nodes or state of nature node: is
represented by circles. Each chance node
input is one of the possible alternatives. Its
output represents the possible sates.
3. End nodes: represented by triangles. The end
node represents the possible outcome of the
decision related to the relative alternative.
Prioritization Matrix
Drawn from left to right, a decision tree has

only burst nodes (splitting paths) but no sink nodes
(converging paths). Therefore, used manually,
they can grow very big and are then often hard
to draw fully by hand.
In decision analysis, a decision tree and
the closely-related influence diagram are used
as visual and analytical decision support tools,
where the expected values (or expected utility)
of competing alternatives are calculated.
This tool shows the relationship between items.

At each intersection, a relationship is either absent
or present. It then gives information about the
relationship, such as its strength, the roles played
by various individuals or measurements. Six differently shaped matrices are possible: L, T, Y, X,
C, R, and roof-shaped, depending on how many
groups must be compared.
This tool is used to prioritize items and describe

them in terms of weighted criteria. It uses a
combination of tree and matrix diagramming
techniques to do a pair-wise evaluation of items
and to narrow down options to the most desired
or most effective.
Matrix Diagram
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Process Decision Program

Chart (PDPC)
A useful way of planning is to break down tasks
into a hierarchy, using a Tree Diagram. The PDPC
extends the tree diagram a couple of levels to
identify risks and countermeasures for the bottom level tasks. Different shaped boxes are used
to highlight risks and identify possible countermeasures (often shown as clouds to indicate
their uncertain nature). The PDPC is similar to
the Failure Modes and Effects Analysis (FMEA),
which is widely used in power systems, in that
both identify risks, consequences of failure, and
contingency actions; the FMEA also rates relative
risk levels for each potential failure point.
Activity Network Diagram (AND)

An Activity Network Diagram (AND) is also
called an Arrow Diagram (because the pictorial
display has arrows in it) or a PERT (Program Evaluation Review Technique) Diagram, and it is used
for identifying time sequences of events which
are pivotal to objectives. In Critical Path Analysis
this helps the teams to comprehend specific event
sequences driving time requirements for objective
achievement. Activity Network Diagrams are also
very useful when a project has multiple activities
which need simultaneous management.
Activity Network Diagrams started out as an
engineering and construction project management tool. Critical Path Analysis draws on this
methodology to identify and standardize medical
management activities.
An Activity Network Diagram helps to find
out the most efficient sequence of events needed
to complete any project. It enables you to create a
realistic project schedule by graphically showing
the following:

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The total amount of time needed to complete the project
The sequence in which tasks must be carried out

Which tasks can be carried out at the same
time
Which are the critical tasks that you need
to keep an eye on
A network diagram is a special kind of cluster

diagram, which even more generally represents
any cluster or small group or bunch of something,
structured or not. Both the flow diagram and the
tree diagram can be seen as a specific type of
network diagram.
Cause-Effect Diagram
Cause-effect diagram, Ishikawa diagram, or
fishbone shape, includes aspects such as Equipment, Process, People, Materials, Environment,
and Management. All these factors are possible
causes for the overall problem. Smaller arrows
connect the sub-causes to major causes.
Ishikawa diagrams were proposed by Kaoru
Ishikawa in the 1960s. He pioneered quality
management processes in the Kawasaki shipyards,
and in the process became one of the founding
fathers of modern management.
It was first used in the 1960s, and is considered
one of the seven basic tools of quality control. It
is known as a fishbone diagram because of its
shape, similar to the side view of a fish skeleton.
Causes in the diagram are often categorized,
such as to the 8 Ms, 8 Ps, or 4 Ss, described
below. Cause-and-effect diagrams can reveal key
relationships among various variables, and the
possible causes provide additional insight into
process behavior.
Causes can be derived from brainstorming
sessions. These groups can then be labeled as
categories of the fishbone. They will typically be
one of the traditional categories mentioned above
but may be something unique to the application in
a specific case. Causes can be traced back to root
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causes with the 5 Whys technique; what, where,

when, why, who.
The 8 Ms (Used in Manufacturing)

Machine (technology), Method (process), Material (includes raw material, consumables, and
information.), Man Power (physical work)/
Mind Power (brain work): Kaizens, Suggestions,
Measurement (inspection), Milieu/Mother Nature
(environment), Management/Money Power, and
Maintenance.
The 8 Ps (Used in Service Industry)

Product = Service, Price, Place, Promotion,
People, Process, Physical Evidence, and Productivity and Quality
The 4 Ss (Used in Service Industry)

Surroundings, Suppliers, Systems, and Skills.
STRATEGIC PLANNING
Strategic planning is the process of the development and implementation of plans for specific
goals and directing the business. So, different
institutes use strategic planning tools to check
for their desired future (Costin, 1998). A welldesigned strategic plan puts the company on a solid
ground as its strategies tactics are set and defined
which lead to a constant improvement in the business by means of eliminating causes of errors. For
the currently changing and challenging business
strategic planning contributes enormously to
the economy and environment of that business.
In the long-term, strategic planning contributes
positively not only to forecasting and budgeting,
but practically to the real life problems within the
business environment. This helps in composing
a macro-view of the business from present and
future perspectives. Thus, investment opportu-
nities are executed on a regular basis. Strategic

planning also enables to correctly define goals /
objectives as key feature for successful business.
This implies a sustained business through finding
and maintaining profitable markets. Of course, as
the employees have a better understanding of the
directions and goals of the business they become
part of the team and the ownership of the plans
success. Using strategic planning tools helps in
the identification of strengths and weakness of the
business, so strengths are enhanced, and weaknesses are treated and improved. Furthermore,
strategic planning is also important in identifying
and analyzing the opportunities and potential risks
(threats) to the economy. This will contribute to
the: a) preparation for the future, b) identification
of risky areas before-hand, c) handling unforeseen
crisis, d) saving of time, money, and resources, e)
monitoring progress in a business operation, and
f) maintaining the level of incurred profit (David,
2003; Houlden, 1996; Wheelen & David, 1998).
Different strategic planning tools and techniques are available that suit most of the business
fields. In the following sections the discussion of
the main tools is presented in some details.
Strengths, Weaknesses,
Opportunities, and Threats
(SWOT) Analysis
SWOT analysis is a strategic planning tool, usually used as part of doing an environmental scan,
that help identify internal factors (i.e. strengths
and weaknesses) that need to be planned for, and
external factors (i.e. opportunities and threats)
that need to be planned for in determining where
a business should be going in the future.
More specifically, the process involves identifying Strengths (S), Weaknesses (W), Opportunities (O), and Threats (T), which is what the
acronym SWOT stands for.
The SWOT analysis can be done as part of
strategic planning, but it can also be done inde-
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pendently from other processes as standalone

(Smawfield, 2007).
By capitalizing on strengths and eliminating or
correcting weaknesses, a company is better able
to take advantage of opportunities as they emerge
and cope with threats before they become reality. Figure 3 shows the four elements of SWOT
analysis as applied to an organization or company.
It can be seen that the strengths and weaknesses
are internal to the company, while opportunities
and threats are external. By investigating and assessing both internal and external factors affecting
the companys performance, a clearer vision of
success and failure possibilities is achieved.
PEST Analysis
The PEST Analysis or model is another tool, quite
similar to the SWOT tool, but is more specialized and focused on the external environment
and important factors that can affect present and
future performance of the business. The PEST
acronym stands for: Political, Economic, Social,
and Technological.
The first step in PEST analysis is to take advantage of political, economic, social and technological factors and at the same time minimize
risks associated with those trends and expected
changes. Then a business strategy or strategies is
formulated to capture the positive trends and mitigate the negative ones (Businessballs.com, 2011).
Scenario Planning
Scenario planning is a term for a very logical and
sensible process. A scenario is a possible future
course of action based on certain assumptions
and conditions. This is why this tool is sometimes
called the what if process. It involves looking
into the future with certain possible events in mind
and analyzing what will happen to the company as
a result if those things happened, and consequently,
planning to minimize any negative consequences
250
and capture all positive opportunities (Hunger &

Wheelen, 1997).
Scenario planning is often applied to any
business. For example, a power company might
anticipate what would happen if a major hurricane
hit and destroyed a major facility, such as a power
plant. As a result they would minimize their risk
by using other geographically separate plants from
the one that was destroyed, or purchase power
from neighboring systems.
The technique can look at any set of possible
conditions and circumstances. For example, a
power company uses it in forecasting future demand. In this application, the possible scenarios
for future demand may be labeled as follows:

Low
Medium
High
The outcome of the forecast is three forecasts

in one. The low scenario is based on being pessimistic with the driving forces for demand, i.e.
lower economic growth, less investments, etc. The
medium scenario is based on a business as usual
scenario. Finally the high scenario deals with very
prosperous and growth oriented conditions.
Competitive Analysis
A competitive analysis involves looking at your
competitors and using such information to identify
where your strengths are relative to those competitors. One of the pillars for becoming competitive is to leverage your strengths with respect to
competitors, and minimize your weaknesses with
respect to competitors. A competitive analysis is
really a subset of doing an environmental assessment (Articles Zone, 2011).
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Figure 3. SWOT analysis
Competitive Analysis Goals Grid

A goals grid is a relatively simple technique to
help you think more clearly about organizational
and company goals. In particular, it is useful when
you are doing strategic planning (Articles Zone,
2011). This tool is intended to help you answer
the following questions:
1. What are we really capable of doing in a
good manner?
2. Do we have all key areas covered?
3. What are we overlooking, neglecting, or
omitting?
4. Have we adequately thought of all
possibilities?
5. How do our objectives relate to one another
and tom our vision and mission?
6. What does the past performance tell us about
our willingness to risk, to change?
7. Are we in a good position in the market?
The goals grid itself is a box with four quadrants in ita goals matrix, in other words. You
classify goals according to two dimensions using
a Yes/No system. Each goal falls within one of
the boxes depending on the answers to the following questions:
1. What do you want that you dont have?
(Achieve)
2. What do you want that you already have?
(Preserve)
3. What dont you have that you dont want?
(Avoid)
4. What do you have now that you dont want?
(Eliminate)
Supply Chain Analysis

Regardless of the business, its important to ensure that when a customer wants something, say
a product or service, that you have it available
for the customer in a timely manner. What will
happen if a consumer switched a light bulb, and it
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did not light due to a power outage of some sort?

For a little while this is acceptable, especially if
it does not happen frequently. However, if it lasts
for long or if it happens often, this will jeopardize
the power companys performance position with
the regulatory authority. This may affect a penalty
of some kind.
In other businesses, the customer will simply
switch to another supplier or service provider.
This is clearly a case of loss of revenue, which
should be avoided at all times.
Obviously, matching the needs of customers
and the supply (usually of products or services)
is important and requires planning. Supply Chain
Analysis (or Supply Chain Strategic Planning)
is the process of doing this matching (Articles
Zone, 2011).
The complexity of supply chain analysis depends on the type of business, business size, and
some other factors. Large companies, for example,
often use sophisticated computer software to track
and manage production/servicing, inventory/service backlog, delivery, customer satisfaction, and
to track customer purchasing patterns.
Even if computer software packages are not
needed, it is useful to at least have some data
about buying trends and shifts in order to use that
information to manage supply. That data could be
internally generated, or more generic data may
be available from third parties such as a trade
journal or report on trends in holiday seasons or
special occasions.
Situation, Target, and

Path (STP) Analysis
STP method divides the planning process into three
parts or components. The first starts with defining
the Situation by evaluating and analyzing the
current status and how it came about. The second
component, Target, involves defining goals
and objectives for the future. This is referred to
as defining the ideal situation or desired future
status. Finally the Path component involves
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defining an action plan or path to achieve the goals

or future state. The STP is simple, but accurately
describes, at least in a general way, what strategic
planning involves.
Boston Consulting
Group (BCG) Matrix
BCG Growth/Share matrix is a chart created by
the Boston Consulting Group in 1970. This tool
was developed to help in analyzing business
units, product lines or industries, and based on
such information to decide on cash allocation
and spending according to relative market share
and market growth (Armstrong & Brodie, 1994).
The BCG Matrix, shown in Figure 4, made a
significant contribution to strategic management
and continues to be an important strategic tool
used by companies today. The matrix provides a
comprehensive picture of the strategic position
of each separate business within a company. This
is used by management to determine the future
strategic actions. The necessary data can often
be collected easily from secondary sources. The
BCG gives a static snapshot of the value chains
performance in an end market and is not capable
of describing the market dynamics or the potential
for change (Armstrong & Brodie, 1994).
Each quadrant of the matrix describes the
status of the value chain against its competitors
and suggests its potential for competitiveness:

Dogs: value chains with low market share

in a mature, slow-growing market. It suggests low returns on investment and should
be dropped from further consideration.
Cash cows: value chains with high market
share in a slow-growing market. It suggests
that value chain should be milked for the
time being but not invested in because the
market isnt really growing.
Stars: value chains with a high market
share in a fast-growing market. The hope
is that stars become the next cash cows.
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Figure 4. BCG matrix model
Question marks: value chains with low

market share in a fast-growing market.
They will need heavy investment to increase their market share, hopefully to become a star. Otherwise, when the market
eventually matures and growth slows, the
value chain may slip down into the dog
category.
The BCG Matrix presents, graphically, the

differences among these business units in terms
of relative market share and industry growth rate.
The vertical axis represents in a linear scale the
growth rate of the market in which the business
exists. This is generally viewed as the expected
growth rate for the next five years of the market in
which a particular business competes. The values
of the vertical axis are the relevant market growth
rates (i.e., 5 percent, 10 percent, 15 percent, 20
percent, etc.). Usually a 10 percent cut-off level
is selected in order to distinguish high from low
market growth rate (a 10 percent value corresponds
to doubling current experience in the next five to
seven years).
The horizontal axis represents the market

share of a business within a firm relative to the
market share of the largest competitor in the
market. Relative market share is an indicator of
an organizations competitive position within the
industry and underlies the concept of experience
curve. Thus, business organizations with high
relative market share tend to have a cost leadership position.
Each of a companys products, services, or business units is plotted on the matrix and classified
as one of four types. Separate business strategies
are chosen for each product, service, or business
unit according to the BCG analysis.
General Electric Matrix

In the 1980s General Electric, along with the
McKinsey and Company Consulting group, developed a more involved method for analyzing
a companys portfolio of businesses or product
lines (Coyne, 2008). This nine-cell matrix considers the attractiveness of the market situation and
the strength of the particular business of interest.
These two dimensions allow a company to use
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much more data in determining each business

units position.
The key to the successful implementation of
this strategic tool is the identification and measurement of the appropriate factors that define market
attractiveness and business strength. Strategic
planners are responsible for determining the factors. The attractiveness of the market may be based
on such factors as market growth rate, barriers to
entry, barriers to exit, industry profitability, power
of the suppliers and customers, availability of
substitutes, negotiating power of both customers
and members of the channel of distribution, as
well as other opportunities and threats.
The strength of a particular business may be
based on such factors as market-share position,
cost placement in the industry, brand equity, technological position, and other possible strengths and
weaknesses. The development of General Electric
(GE) matrix, presented in Figure 5, requires assessing the criteria to evaluate both industry attractiveness and business strength. The calculation
of scores for these dimensions is frequently based
on a simple weighted sum formula.
Figure 5. GE matrix
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To consider this approach as a matrix analysis,

industry or market attractiveness is placed on the
vertical axis with the possible values of low,
medium, and high. Business strength is placed on
the horizontal axis with the possible values of
weak, average, and strong. A circle on the matrix
represents each business unit (or product line).
The size (area) of each circle represents the size
of the relevant market in terms of sales. A portion
of the circle is shaded to represent the market
share of each business unit or product line within
the market.
Porters Generic
Competitive Strategies
This method was proposed by Michael Porter
and aims to categorizing the various types of
competitive strategies. He identified two generic
competitive strategies: overall lower cost and differentiation. These strategies are termed generic
because they can be applied to any size or type
of business. Overall lower cost strategy is related
to companies that can develop, manufacture, and
distribute products more efficiently than their
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competitors. In other words, they control their

cost. On the other hand, differentiation refers to
the cases where companies under this category
are able to provide superior products based on
some factor(s) other than low cost. Differentiation
can be due to customer service, product quality,
unique style, and so on (Porter, 1980).
Porter also suggests another dimension that
affects a companys competitive position. This
other factor is its competitive scope. Competitive
scope means the breadth of a companys target
market. A company can have a broad (mass market) competitive scope. Alternatively, it can have
a narrow (niche market) competitive scope. The
combination of broad scope and narrow scope with
a low-cost strategy and differentiation results in
the following generic competitive strategies: cost
leadership, cost focus, differentiation, and focused
differentiation, as shown in Figure 6.
Porters Five-Forces Model

The competitive nature of the market or segment
should be evaluated before a company enters a
market or market segment. Five forces collectively
determine the intensity of competition in an industry. These are: 1) threat of potential entrants,
2) threat of potential substitutes, 3) bargaining
power of suppliers, 4) bargaining power of buyers, and 5) rivalry of existing firms in the industry.
Porters Five Forces framework was developed by
Harvards Michael Porter (1990) using concepts
from industrial organization economics to analyze
five interacting factors critical for an industry to
become and remain competitive. By using the
model shown in Figure 7, a firm can identify the
existence and importance of the five competitive
forces, as well as the effect of each force on the
firms success.
Each of these forces has several determinants.
The intensity of industry competition: number of
competitors, rate of industry growth, industry
overcapacity, exit barriers, diversity of competitors, informational complexity and asymmetry,
brand equity, fixed cost allocation per value
added, protection against imports, government
policies to support/hinder competition or monopolies, and coordination within the industry
participants.
Figure 6. Porters competitive matrix
255
Planning Tools
Figure 7. Porters five forces framework
The bargaining power of buyers: buyer volume,

buyer switching costs relative to firm switching
costs, buyer information availability, availability of existing substitute products, buyer price
sensitivity, price of total purchase, consumer
protection laws.
The bargaining power of suppliers: degree of
differentiation of inputs, presence of substitute inputs, supplier concentration to firm concentration
ratio, cost of inputs relative to selling price of the
product, importance of volume to supplier, existing
laws and regulations to protect local suppliers.
The threat of new entrants: the existence of
barriers to entry, economies of product differences, brand equity, capital requirements, access
to distribution, absolute cost advantages, learning
curve advantages, government policies.
The threat of substitute products: buyer propensity to substitute, relative price performance
of substitutes, buyer switching costs, perceived
level of product differentiation.
The nature of competition is often affected by
a variety of factors, such as the size and number
of competitors, demand changes for the industrys products, the specificity of assets within the
256
industry, the presence of strong exit barriers, and

the variety of competitors.
Recently, several researchers have proposed a
sixth force that should be added to Porters list in
order to include a variety of stakeholder groups
from the task environment that wield over industry
activities. These groups include governments,
local communities, creditors, trade associations,
special interest groups, and shareholders.
The implementation of strategic planning
tools serves a variety of purposes for firms. These
include the clear definition of an organizations
vision and mission, and the establishment of performance indicators from which progress can be
measured and future actions can be planned (Stahl
&Grigsby, 1992). Furthermore, the strategic planning tools should communicate those goals and
objectives to the organizations stakeholders. Thus,
the value of such tools is based on the objective
insight of those who participate in their preparation. It is also important for those individuals who
will implement the strategies to play a role in the
strategic planning process. This often requires a
team effort that should allow a variety of inputs
and should result in a better overall understand-
Planning Tools
ing of the companys current and future relative

or competitive position.
SUMMARY
In this chapter various tools used in the general
planning process were discussed. These tools result
in a better plan with minimum expected deviations when practically implemented. The stage of
analysis in the planning process is very important,
especially when large amounts of investment are
involved, as the case of power systems. It is of
great importance to spend enough time in the
analysis stage rather than implementing a plan on
a trial-and-error basis, as the latter will be very
costly for any business.
It is of great importance to establish a sound
body of knowledge in regard of the project or
business under investigation. This serves in
enhancing the decision making process and provides the planner with adequate information and
intelligence. Several planning tools fall under
the category of data collection techniques that
serve this purpose. These include: opinion polls,
questionnaires, surveys, interviews, focus groups,
and projective techniques.
Decision support analysis is an important
category of planning tools. This can be done using several techniques including: AHP, DSS, due
diligence analysis, Multivariate Analysis (MVA),
trend analysis, gap analysis, and decision trees.
Decision trees are popular and attractive tools that
are used in classification and prediction. They are
considered as a visual aid device for illustrating
some or all of the choices available at various
stages in a multi-stage decision process, and the
consequences of each choice. The strength of
the decision trees rise from that fact that they
are constructed based on rules that are put and
understood by humans.
There are several tools that are used in the
strategic planning process. The most important
and widely used one is the SWOT analysis tool,
where strengths, weaknesses (constituting the

internal factors within the business), in addition
to the opportunities and threats (the factors from
outside the business) are defined, and remedy
measures are implemented to sort out problems.
Other strategic planning tools were discussed
including: PEST Analysis, Scenario Planning,
Competitive Analysis, Competitive Analysis
Goals Grid, Supply Chain Analysis, Situation,
Target, and Path (STP) Analysis, Boston Consulting Group (BCG) Matrix, General Electric
Matrix, Porters Generic Competitive Strategies,
and Porters Five-Forces Model.
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About the Authors
Fawwaz Z. Elkarmi is Associate Professor and Dean at Amman University/Faculty of Engineering,

freelance consultant, energy/electricity expert, and trainer. Dr. Elkarmi worked in government, paragovernment, and private sectors for 25 years in Jordan and 9 years abroad (Kuwait and USA). He holds
a Doctor of Engineering degree from Texas A&M University, 1981. Dr. Elkarmi is a registered Expert
engineer with the Jordan Engineers Association, a Senior Member of IEEE, and a Chartered Engineer
with IEE. Moreover, he is a member of the Institute of Management Consultants (IMC) and holds a
Certified Management Consultant (CMC) title. Dr. Elkarmi, in addition to teaching full-time, conducts
training in Jordan and abroad in strategic planning and business planning, project evaluation, performance
improvement, start-up businesses, professional management consulting, electrical system development,
tariff studies and investment planning, load research, energy and demand forecasting, demand side
management, energy efficiency, energy conservation, environmental impact assessment, process optimization, and new product development. He also provides consultation in business development, feasibility studies, organizational re-engineering, business turnaround, project appraisal, and investment
assessment. Dr.Elkarmi served as director for MMIS Management Consultants; General Manager of
Arab Development for Food Industries Free Zone Zarka; Managing Director, Quality Consultancy
Company (QCC); Director, Industry Sector and Mineral Resources at the Higher Council for Science
and Technology (HCST); Director, Energy Sector Technologies at the Higher Council for Science and
Technology; Acting General Manager (Part-time) for Palestine Industrial Investment Company (PIIC)
in Nablus Palestine; and Director of Planning at the Jordan Electricity Authority. Dr. Elkarmi worked
as the Director of IRADA, which is a project sponsored by the Ministry of Planning for assisting
entrepreneurs in establishing their businesses, including the preparation of feasibility studies, business
plans, request for financing, and registration procedures. Dr. Elkarmis relevant expertise in energy
projects consists of the following: Committee chairman for the formulation of energy strategies and
policies for Jordan; Assisted a Saudi manufacturing company-Jeddah to formulate a strategic plan;
Conducted several training courses on Demand Side Management (DSM) and project evaluation for
electricity companies in Jordan, Saudi Arabia, and Syria; Member on the Board of Directors of the
National Electric Power Company (NEPCO), from 2004-2008; Participated as a local consultant with
a local and an international consulting firm in developing the energy strategy for Jordan; Participated
as a local consultant with a local and an international consulting firm in developing an integrated resource
plan for Jordan; Participated in conducting the feasibility study of the interconnection with Egypt; Conducted Summer Time evaluation study for Jordan; Conducted several tariff adjustment studies; Conducted cost of production studies for the power system in Jordan in order to optimize the economic
dispatch of the generation and transmission systems in Jordan; Studied several demand management
About the Authors
options for application in Jordan; Worked as consultant and energy expert for local electricity and industrial firms in Jordan in issues related to quality of supply and tariff; Conducted a feasibility study to
develop a wind farm for a Danish wind manufacturing company; Conducted a study for a technical assistance development agency in Germany to assess the potential of DSM in Jordan; Conducted a study
for a technical assistance development agency in Germany to assess the potential of energy efficient
electrical appliances in the household and commercial sectors in Jordan; Participated with a local energy service company in conducting an energy awareness study for energy efficient appliances in the
household and commercial sectors in Saudi Arabia; Contracted by a UN organization to perform a project final review for an energy efficiency program in Saudi Arabia; Assisted a local manufacturing company in assessing energy and electricity supply options for a plant in Ghore Al-Safi; Conducted several
feasibility studies for industrial and commercial projects including environmental aspects; Conducted
a feasibility study for a biogas plant in Jordan for an investment group; Conducted a feasibility study
for the conversion of the waste of olive oil production plants to useful and environmentally benign
products; Member of the Board of the Fiber Optic Company; Published several journal articles and
technical reports in the various fields of energy/electricity technologies and environmental issues; Worked
as consultant for a local group of industrial companies to assist them in negotiating with government
and electricity companies to reach an acceptable agreement to import natural gas for power generation.
This work included studying all options and assessing their economics as well as reviewing contract
agreements and terms and conditions of gas/power purchase and sale; and Advised a local electricity
distribution company in a dispute with a local manufacturing company over electricity bills and low
power factor penalty collection.
Nazih M. Abu-Shikhah is currently working as a commissioner in the electrical regulatory commission (ERC) in Jordan. He is an Assistant Professor and Headed the Department of Electronics and
Communications Engineering at Amman University/Faculty of Engineering for two years. He also was
the Deputy Dean of the Faculty of Engineering at Amman University for two years as well. Dr. AbuShikhah worked in government, para-government, and private sectors for about 20 years in Jordan and
abroad (Kuwait and Australia). He holds a Doctor of Engineering degree from Queensland University
of Technology, Australia, 2002. Dr. Abu-Shikhah is a registered Expert engineer with the Jordan
Engineers Association. Dr. Abu-Shikhah, in addition to teaching full-time, conducts training in Jordan
and abroad in strategic planning and business planning, project evaluation, performance improvement,
start-up businesses, professional management consulting, electrical system development, tariff studies
and investment planning, load research, energy and demand forecasting, demand side management,
energy efficiency, energy conservation, environmental impact assessment, process optimization, and
new product development. He also provides consultation in business development, feasibility studies,
organizational re-engineering, business turnaround, project appraisal, and investment assessment. Dr.
Abu-Shikhahs relevant expertise in energy projects consists of the following: Power system operation
planning within National Electric Power Company (NEPCO); Short/medium/long -term Load forecasting
applied to NEPCO grid; Optimization of operational costs studies; Generation expansion and availability
studies; Developing reliability and performance indicators; Powers system security assessment through
load flow, short circuit, and stability assessment; Load research statistical and time series analysis;
Developing computer codes that were implemented in the course of system operation; Fault analysis
within NEPCO grid; Syrian interconnection feasibility studies; Reactive power compensation studies;
273
About the Authors
Voltage stability and voltage profile analysis; Conducted several tariff adjustment studies; Studied several
demand management options for application in Jordan; Worked as counterpart with German Technical
Aid company (GTZ), Italian Electricity (ENEL); Consultaion service with Baily Jordan at an industrial
plant in Yanbu / KSA; and Published several journal articles and technical reports in the various fields
of energy/electricity technologies and environmental issues.
274
275
Index
A
active solar techniques 129
Activity Network Diagram (AND) 248
Alternating Current (AC) 173
Analytic Hierarchy Process (AHP) 65, 243-244
Artificial Neural Networks (ANN) 72
Avoided Costs 92, 94, 97, 161, 169, 182, 184-186,
196
B
Back Propagation (BP) neural networks 73
Benchmarking 3, 26, 31, 34, 44, 51, 57, 98, 139,
244-245
bioalcohol 129
biodiesel 129-130
bioethanol 129-130
biofuel 129-130
bio-mass 121-122, 124, 129-130, 133
biomethanol 129
Boston Consulting Group Matrix 237
brain pool - See Group Thinking Methods.
Building Energy Rating (BER) 88-89
Build-Lease-Operate-Transfer (BLOT) 208
Build-Lease-Transfer (BLT) 208
Build-Own-Operate (BOO) 207
Build-Own-Operate-Transfer (BOOT) 208
Buy-Build-Operate (BBO) 208
C
Capacitor Commutated Converters (CCC) 173
Capacity Margin (CM) 35
capacity resource planning 29
capital requirements 191, 201-202, 256
carbon emissions 18
Certified Emissions Reductions (CERs) 19
Clean Development Mechanism (CDM) 19
commercial loads 9, 21, 52, 55

Compact Fluorescent Lighting (CFL) 90
corporate planning 7-8, 10
cost-reflective tariff 222
Credit risk 201-202
creditworthiness 191, 203
Critical Peak Pricing (CPP) 216
Cumulative Expansion Costs (CEC) 154
D
daily load variation curve 9
Data Collection Methods

focus groups 236-237, 239, 257-258

interviews 236, 238, 257

projective techniques 239

questionaires 236, 238, 257
debt capital 203
Debt Service Coverage Ratio (DSCR) 205
decision support tools 237
decision theory 245-246
decision trees 237, 246, 257
demand consumption 53, 56
demand side alternatives 158, 168
demand side management 2, 14, 19, 22, 48-49, 5152, 54-57, 84, 86, 99-100, 106, 108, 114, 120,
157
deregulation 13-16, 25-26, 29, 54, 59, 100, 206, 221
Design-Build (DB) 207
Design-Build-Finance-Operate (DBFO) 207
Design-Build-Operate-Maintain (DBOM) 208
distribution planning 11, 28, 31, 139
due diligence analysis 236, 241-242, 257
E
Economic analysis 193, 197-198, 210
Effective Load-Carrying Capability (ELCC) 36
Index
electrical load forecasting 61-63, 68

electricity market structure 4, 16
electricity micro level 4
Electricity Regulatory Commission (ERC) 23, 92,
225
electricity restructuring reform 16-17
electricity sector 4, 14, 67, 92, 99, 103, 138, 162,
164-166, 213-215, 224, 232
electricity sub-sector 4, 6
electricity supply industry 14-18, 20, 22-23, 52, 54,
58-59, 99, 221, 224, 233
electricity tariff 4, 15-16, 22, 28, 48, 54, 59, 75, 93,
113, 119, 144, 202, 213-216, 218, 221-222,
224, 232-233
electric load 52-53, 55, 57, 68, 72-73, 77, 79-80, 147
electric power systems 8, 11-12, 45-46, 81, 142,
154, 181, 189-190
electromagnetic pollution 20
Emergency Operating Procedure Expectations
(EOPE) 36
energy conservation 19, 22, 77, 98, 114, 120
energy consumption 31, 52-53, 56-58, 82-85, 92, 94,
97, 101, 109, 113-115, 119-120, 127-128, 140,
158, 214, 219, 222, 224, 232, 234
energy efficiency 2, 9, 14, 19, 22, 48-49, 51-54,
57-59, 82-88, 90-101, 106, 142, 156, 158, 164166, 169, 218, 222, 232
energy efficient appliances 82-85, 91, 96-97
Energy Not Served (ENS) 34, 44
energy sector 4, 122, 158, 224
Energy Service Companies (ESCOs) 87
energy storage 21, 102
environmental externalities 156, 162-163
environmental pollution 4, 18, 20, 82-83, 95, 100,
105, 158, 160, 162-163, 168, 232
expansion planning 3, 27-28, 41, 45-46, 63, 80, 145146, 150, 154-155, 158, 161, 167-168, 196
expansion studies 9, 27, 34, 41-42, 44, 51, 57, 143144, 146, 149-151, 153-154
Expected Loss of Load (XLOL) 36
Expected Un-Served Energy (EUE) 36
export insurance 204
Extreme Day CPP (ED-CPP) 217
Extreme Day Pricing (EDP) 217
F
Feed-in-Tariff (FiT) 219-220
Financial analysis 7, 11, 193, 197-200
276
Firm Capacity Equivalent (FCE) 36

Flexible AC Transmission System (FACTS) 181
Flexible Utility Load shape 101
Forced Outage Rates (FOR) 42, 151
Foreign currency risk 201
fourteen principles of management 6
frequency stability 31, 33
Fuel prices risk 201
fuzzy logic systems 74
G
gallery method - See Group Thinking Methods.
Gap Analysis 237, 245, 257
GE Market Growth/Market Share Matrix 237
generation expansion planning 41, 45, 63, 145-146,
155
generation planning 9, 11, 28-30, 139, 145, 147
geothermal energy 127, 130-131
greenhouse gas emissions 18, 84, 136
green power 14, 124-126, 128, 134-136
green pricing 125, 134
grid interconnections 171-172, 178-179, 185, 187188
grid stability 180-181
Group Thinking Methods

6-3-5 method 237, 241

brain pool 240

brainstorming 240

gallery method 240

multi-dot voting 241

nominal group 241
H
Harmonic distortion 39, 178
hydroelectric energy 128
I
Independent Power Producers (IPP) 138
Independent System Operator (ISO) 16
industrial loads 9
Integrated Resource Planning (IRP) 55, 156, 169
Interest Coverage Ratio (ICR) 205
Internal Electricity Market Directive 96/92/EC 16
Internal Rate of Return (IRR) 193
International Emissions Trading (IET) 19
Investment Costs (IC) 194
Index
J
Joint Implementation (JI) 19
K
Kyoto Protocol 18-19, 136
L
large disturbance stability 32
Liquidity risk 201
Load Building 101, 103
load forecasting 2, 8, 29, 31, 51, 53, 57, 61-64, 6768, 70, 72-81
load modeling 53, 58-59, 80
load research 2, 47-49, 51, 53-54, 56-60, 71, 76, 91,
103, 105, 234
Load Shifting 101, 106
Long Run Marginal Cost (LRMC) 164, 234
long-term load forecasting 62, 80
Loss of Energy Probability (LOEP) 36
Loss of Load Expectation (LOLE) 36, 42, 150
Loss of Load Probability (LOLP) 34-35, 44
M
Marginal Costs (LRMCs) 93
medium-term forecasting 62, 65, 76
Micro Combined Heat and Power (MCHP) 19
multi-dot voting - See Group Thinking Methods.
Multivariate Analysis (MVA) 244, 257
N
National Electric Power Company (NEPCO) 23, 41,
77, 93, 149
Net-Metering (NM) 219
Net Present Value (NPV) analysis 193
Net Working Capital (NWC) 200
nominal group - See Group Thinking Methods.
O
Operation and Maintenance Costs (OMC) 194
opinion polls 237
P
Particle Swarm Optimization (PSO) algorithm 75
passive solar techniques 128
Peak shaving/clipping 101, 105
Phasor Measurement Units (PMU) 37

planning criteria 2, 10, 27-30, 33-35, 41-45, 144,
146, 150, 154, 158, 160, 168
planning process 5, 27
planning tools 236
plant rehabilitation 19
POSDCORB 5
power contracts 11
power industry 1, 9, 20, 25, 29, 79, 124, 127, 171,
181, 191, 210-211, 213
power line failure 188
power line operation 187
power line security 187
Power Quality (PQ) 37
power supply industry 13, 24
power system expansion planning 27, 45, 145, 154
power system operation 11, 13
power system planning 1-2, 4, 8-11, 13, 26, 28, 4546, 56, 59, 80, 98, 140, 143, 147-148, 155, 162,
169, 191, 236-237
Present Worth (PW) analysis 193
Price updating 186
Probability of Positive Margin (POPM) 36
Process Decision Program Chart (PDPC) 248
Public-Private Partnership (PPP) 13, 17, 191, 193,
206
R
Real Time Pricing (RTP) 217
regulatory incentives 146
regulatory requirements 11, 137
Renewable Energy (RE) 121
Reserve Margin (RM) 35, 42
residential loads 9
Revenue Requirements 225-226, 228-231
rotor-angle stability 31-32
S
short-term forecasting 62-63, 75, 77, 81
small signal stability 32
social tariff 221-222
solar energy 90, 121, 128, 130, 141, 196, 219
solar-thermal technologies 128
supply side options 92, 157-158, 161-162, 166-167,
169
Support Vector Machines (SVM) 74
SWOT analysis 237, 249
277
Index
technical planning 7-8, 10, 172, 179

Third Party Access (TPA) 15
tidal energy 129, 140
Time-of-Use (TOU) tariff 216
Total Cost (TC) 195
Transmission and Distribution (T&D) system planning 9
transmission expansion 33, 143, 154-155
transmission network expansion planning 45, 145146
transmission planning 11, 30-31, 33, 139, 146
transmission system operation 30
Transmission System Operator (TSO) 16
Trend Analysis 237, 245, 257
United Nations Framework Convention on Climate

Change (UNFCCC) 18
278
V
Valley Filling 101, 103
very short-term forecasting 63
voltage stability 31-33, 180, 182
W
WASP (Wien Automatic System Planning Package)
148
water pollution 186
wind power 128, 133, 140

Power System Planning

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Power System

Published in the United States of America by

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Detailed Table of Contents

Power System Planning Process

linkages of the various functions of the planning

Power System Planning Process

Figure 1. The future of power system industry

planning criteria that are presented in Chapter 3,

used (Chapter 14) which are used throughout the

POWER SYSTEM COMPOSITION

Power System Planning Process

tems depending on the time frame of the plan. If

Figure 2. Basic structure of power system

Power System Planning Process

In the context of power system planning the

In this book we are concerned mainly with the

Power System Planning Process

Figure 3. Energy and electricity within the national economy

THE PLANNING PROCESS

action plans and draw the strategic directions

Power System Planning Process

Figure 4. Electricity sub-sector relationships

b. Organizing, that is the establishment of the

Figure 6 is a schematic representation of the

Power System Planning Process

Figure 5. The planning process

9. Scalar Chain (line of authority with peer

or less, performed by any planner regardless of

Power System Planning Process

Figure 6. Management functions

the whole company/organization and is directed

the trip. Moreover, technical planning involves

POWER SYSTEM PLANNING

Power System Planning Process

of generating units and fuel requirements. This is

studies. The area under the load curve measures

Power System Planning Process

Figure 7. Power systems planning process environment

Guarantee commitment of current

Eventually this is reflected on customers and

are partly concerned with corporate issues such

Power System Planning Process

of the overall power system planning process,

governmental institutes. Finally, state-of-the-art

Power System Planning Process

James, M. (2010). Economic market design and

Saccomanno, F. (2003). Electric power systems:

Schlabbach, J., & Rofalski, K. H. (2008). Power

Rebennack, S., Pardalos, P., Pereira, M., & Iliadis,

Factors Affecting the Future

new ownership models that separate government

Factors Affecting the Future of Power Supply Industry

business in the electricity sector. It will introduce

satisfaction has become an important factor in

Factors Affecting the Future of Power Supply Industry

and introducing choice and competition. On the

Factors Affecting the Future of Power Supply Industry

possible the exchange of large volumes of data

model as in the previously discussed vertical model

Factors Affecting the Future of Power Supply Industry

States electricity prices

Lower electricity prices