- Email: [email protected]
Electric Power Supply Chain Management Addressing Climate Change
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Procedia Engineering
Procedia Engineering 00 (2011)29000–000 Procedia Engineering (2012) 749 – 753 www.elsevier.com/locate/procedia
2012 International Workshop on Information and Electronics Engineering (IWIEE)
Electric Power Supply Chain Management Addressing Climate Change Xiao-Hui Wangb*, Rong-Gang Conga * b
a School of Economics and Management, North China Electric Power University, Beijing, 102206, China Department of Marine Economic Management, National Marine Data & Information Service, Tianjin, 300171, China
Abstract Supply chain management played a critical role in the electric power industrial chain optimization. The purpose of this paper was to review a sample of the literatures relating to supply chain management and its possible applications in electricity power system, especially in the context of climate change. The study compared the difference between electric power supply chain management and traditional supply chain management. Furthermore, some possible research topics are addressed. The aim of this paper was to promote the application of supply chain management in the China electricity sector optimizations and brought a change in the related government policy options.
© 2011 Published by Elsevier Ltd. Selection and/or peer-review under responsibility of Harbin University of Science and Technology Keywords: Supply chain management; Electric power industry; Climate change
1. Introduction As rapid economic growth, China’s electric power industry has developed rapidly. In 1949, installed capacity of electricity and electricity generation are 1.85 million kilowatts (KW) and 4.3 billion kilo watthours (KWH), which are ranked twenty-first and twenty-fifth in the world respectively. At the end of 2009, China installed capacity of electricity and electricity generation reached 0.874 billion KW and 3650.6 billion KWH, which are both ranked second in the world. Since 1985, China’s power industry has reformed for more than twenty years, which can be divided into three stages: (1) In order to achieve rapid expansion of installed capacity, government encouraged social capital to invest in electricity plant from *
* Corresponding author. Email: [email protected]
1877-7058 © 2011 Published by Elsevier Ltd. doi:10.1016/j.proeng.2012.01.035
2750
Xiao-Hui and Rong-Gang Cong / Procedia Engineering 29 (2012) 749 – 753 WangWang and Cong/ Procedia Engineering 00 (2011) 000–000
1985 to 1998. And electricity price in this stage could guarantee the debt service. (2) Government function was separated from electricity enterprise management from 1998 to 2002. In 1997, State Power Corporation is established. And ministry of power industry was canceled in 1998. (3) To solve unfair competition among electricity enterprises due to vertically integrated operation, State Council issued “Electricity System Reform Program”. Generation and grid have been separated since 2002. Although, China's power industry has made great achievements in reform, there are still some defects in the power industry chain. They are: (1) Effective competition is not fully realized in the electricity market. China electricity market is mainly regional market on the basis of five power generation companies and two grid companies. Power is lack of effective exchange and it is difficult to achieve optimal allocation of resources. (2) The power industry lacks of scientific planning due to conflicts of interest between local and state governments. (3) Existing electricity price mechanism is not reasonable. China electricity price is mainly regulated by government using a cost-plus approach which is not suitable for formation of competition mechanism. (4) As natural monopoly enterprises, grids don’t have incentive to increase their efficiencies. On the other hand, climate change has an increasing impact on people’s production and life style. In recent years, climate change and some extreme weathers, such as snowstorm, brought a lot of certainties to electric system. On the whole, China's power industry chain urgently needed to be re-optimized, including generation, transmission, distribution and sale. But due to the special nature of electricity industry (regional segmentation, energy substitution, perishable and so on), classic supply chain management (SCM) theory needs to be adjusted to it, especially in the context of climate change. This paper aims to put forward the basis concept of electric power supply chain, compare it with traditional supply chain, review existing literatures and point out potential research topic in the future. This paper is organized as follows: Section 2 presents tradition supply chain concept and its new contents for electricity industry. Section 3 reviews traditional SCM and electricity power SCM research fields and future trends. Section 4 concludes. 2. Tradition supply chain vs. electricity power supply chain One of the most significant paradigm shifts of modern business management is that individual businesses no longer compete as solely autonomous entities, but rather as supply chains [1]. The definition of SCM which was developed and used by the GSCF (Global Supply Chain Forum) is as follows: “Supply Chain Management is the integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders” [2]. The broader understanding of the SCM concept is illustrated in Figure 1, which depicts a simplified supply chain network structure. Here SCM includes three elements: the business processes, the management components and the structure of the chain. Compared with other industries, electricity power industry has its own characteristics. They are: (1) Regional segmentation. Transport losses for electricity are significant over longer distances. Electricity is thus a regional good [4]. Long-distance transport of electricity is not economical or feasible. (2) Energy substitution. Although electrical energy is essentially homogeneous, its sources can be varied. Different energy sources, such as thermal power, hydropower and so on, can all be transformed to electricity. Therefore, there is energy substitution in electricity power supply chain management. But energy substitution is not perfect. For example, thermal power cannot be replaced by wind power completely up to now, because the power grid needs stable load, while the latter is volatile and intermittent.
Xiao-Hui Wang Cong Engineering / Procedia Engineering 29 (2012) 749 – 753 Wangand andRong-Gang Cong / Procedia 00 (2011) 000–000
(3) Perishable. Electricity is perishable good. Large-scale storage of electrical energy is not feasible, although there are batteries and pumped storage power station. Therefore, supply and demand balance of power system is very important. (4) Limited monopoly. Traditional electric power industry can be divided into generation, transmission, distribution and sale. Because each generation company can compete as separate individual and there is no duplication of investment, it is feasible to introduce competition into generation in theory, which is also necessary to improve generation efficiency. However, due to high barriers to entry generation industry and restrictions of transmission, it is impossible to form a perfectly competitive generation market. Because of its non-existence of scale economy, competition can be introduced to the sale of electricity in the perspective of social welfare. Transmission and distribution has a character of natural monopoly because of huge scale economy and sunk cost.
Fig. 1 Supply chain management: integrating and managing business processes across the supply chain. Source: Cooper et al. [3]
(Region, Fuel type, Generation Units unit)
(Region, unit)
Fuel Markets for Fuel Type 1
…
1.1
A.1.1
Distributer
Fuel Markets for Fuel Type 2
1.M
2.1
A.2.1 … A.n.1
B.n.1
…
2.M
B.2.1 … B.n.1
Fuel Markets for Fuel Type n
n.1
C.1.1
…
n.M
C.2.1 … C.n.1 Grids
A.1
…
A.k
Consumers A Region A
B.1
…
B.k
C.1
…
C.k
Consumers B
Consumers C
Region B
Region C
3751
4752
Xiao-Hui and Rong-Gang Cong / Procedia Engineering 29 (2012) 749 – 753 WangWang and Cong/ Procedia Engineering 00 (2011) 000–000
Fig. 2 The Electric Power Supply Chain Network with Fuel Supply Markets
So Electric Power Supply Chain Management is the integration of key business processes from generation, transmission, distribution to sales, which keeps balance between supply and demand and offers electricity and related services that add value for customers and other stakeholders. The understanding of Electric Power SCM concept can be illustrated in Figure 2. 3. A comparison of traditional SCM and electricity power SCM research fields and future trends Due to the characteristics of power industry, there are some differences between Electric Power SCM and traditional SCM, which can be summarized in Table 1. Table 1 Principal component bodies of traditional and electric power supply chain management
Logistics
Supply
Marketing
Others
Traditional supply chain management
Electric power supply chain management
Location-allocation decisions Distribution channel planning Forecast information management Physical distribution Capacity planning Logistics Postponement Network restructuring Supplier selection Demand Planning Supplier assessment Strategic alliances Vertical disintegration Pricing Efficient consumer response Efficient replenishment Customer service management After sales service Risk management Control in the supply chain Contract management Information management
Plant location selection Grid planning Load Management Grid dispatching Capacity planning Grid blocking Grid restructuring Fuel selection Electricity load forecasting Power source structure assessment Supplier alliances Deregulation Electricity pricing Electricity demand management Stock management Electricity customer management Revenue management Risk sharing Security management Optimize contract selection Information sharing
Though the research fields of Electric Power SCM and traditional SCM have some similarities as shown in Table 1, there are some differences between their focuses. For example, tradition SCM concerns the good flow throughout the logistics network in the physical distribution. As a special good; variable cost of power transportation is relatively low and real-time balancing of power supply and demand in the grid dispatching is more important. There are also some other differences. Overall, according to the existing literature, electricity pricing, power plant location and risk management are hot topics. Dynamic pricing refers to any electricity tariff that recognizes the inherent uncertainty in supply costs [5]. Electric loads follow patterns that vary over the day and the season. The daily variation is generally low (off-peak) demand overnight, a rise in demand in the morning to a shoulder period through the day, a high-demand period in the late afternoon and early evening (exacerbated by air conditioning on hot days), and a return to a lower, shoulder demand in the evening. In the absence of any price variation over the course of the day, this pattern repeats daily. The seasonal dimension depends on whether consumers in the area use electricity for heat or cooling, and the extremity of the climate variance. Dynamic pricing can include
Xiao-Hui Wang Cong Engineering / Procedia Engineering 29 (2012) 749 – 753 Wangand andRong-Gang Cong / Procedia 00 (2011) 000–000
time-of-use (TOU) rates, which are different prices in blocks over a day, based on expected wholesale prices, or real-time pricing (RTP) in which actual market prices are transmitted to consumers, generally in increments of an hour or less. Power plant location selection includes several factors: economic, technological and social nature. Sharma used a mined integer non-linear programming approach to analyze the optimal power plant location. He considered cost, security and system load ability [6] (Sharma, 2006). El-Fouly examined the impact of wind farm location on power system related issues, including transmission congestion, optimum power flow and so on [7]. As for electricity risk management, Deng and Oren reviewed different types of electricity financial instruments and the general methodology for utilizing and pricing such instruments. In particular, they highlighted the roles of these electricity derivatives in mitigating market risks and structuring hedging strategies for generators, load serving entities, and power marketers in various risk management applications [8]. Chung et al. examined shortterm price volatility in electricity market while a forward contract is introduced [9]. Their theoretical analysis showed that the proposed optional forward contract presented a more equitable and reasonable payoff structure that allowed the buyer and seller to earn a larger overall expected benefit, and the contractual arrangement supported efficiency in economic dispatch of electricity production and consumption. Compared with traditional SCM research field, electric power SCM will expand its field in the following aspects: Contracts management in electricity power SCM, information sharing, stock management and risk sharing. 4. Conclusion Application SCM theory to electricity power market is really a fairly new field, which attracts the attentions of scholars around the world. Electricity power SCM is not only a supplement of traditional SCM, but also an extension. It does not only expand tradition research field, but also develop the methodology. In future electricity power SCM, the time and space features of methodology would show different trends: (1) modelling time frequency transfers from long-term to the combination of short-term and long-term; (2) modelling scope transfers from micro to the combination of micro and macro. References [1] Lambert DM, Cooper MC. Issues in Supply Chain Management. Indus. Market. Manage 2000; 29(1): 65-83. [2] Lambert DM. Supply Chain Management: Processes, Partnerships, Performance, 3rd edition. Supply Chain Management Institute; 2008. [3] Cooper MC, Lambert DM, Pagh JD. Supply Chain Management: More Than a New Name for Logistics. Int. J. Logist Manage 1997; 8(1): 1-13. [4] Cong RG, Wei YM. Potential impact of (CET) carbon emissions trading on China's power sector: A perspective from different allowance allocation options. Energy 2010; 35(9): 3921-3931. [5] Faruqui A, George SS. The Value of Dynamic Pricing in Mass Markets. Electricity J 2002; 15(6): 45-55. [6] Sharma AK. Optimal Number and Location of TCSC and Loadability Enhancement in Deregulated Electricity Markets Using MINLP. Int. J. Emerging Elec. Power Systems 2006; 5(1): 6. [7] El-Fouly THM, Zeineldin HH, EI-Saadany EF, Salama MMA. Impact of wind generation control strategies, penetration level and installation location on electricity market prices. Renew. Power Gene 2008; 2(3): 162-169. [8] Deng SJ, Oren SS. Electricity derivatives and risk management. Energy 2006; 31(6): 940-953. [9] Chung TS, Zhang SH, Yu CW. Electricity market risk management using forward contracts with bilateral options. Gene, Transp & Distribution 2003; 150(5): 588-594.
5753
Procedia Engineering
Procedia Engineering 00 (2011)29000–000 Procedia Engineering (2012) 749 – 753 www.elsevier.com/locate/procedia
2012 International Workshop on Information and Electronics Engineering (IWIEE)
Electric Power Supply Chain Management Addressing Climate Change Xiao-Hui Wangb*, Rong-Gang Conga * b
a School of Economics and Management, North China Electric Power University, Beijing, 102206, China Department of Marine Economic Management, National Marine Data & Information Service, Tianjin, 300171, China
Abstract Supply chain management played a critical role in the electric power industrial chain optimization. The purpose of this paper was to review a sample of the literatures relating to supply chain management and its possible applications in electricity power system, especially in the context of climate change. The study compared the difference between electric power supply chain management and traditional supply chain management. Furthermore, some possible research topics are addressed. The aim of this paper was to promote the application of supply chain management in the China electricity sector optimizations and brought a change in the related government policy options.
© 2011 Published by Elsevier Ltd. Selection and/or peer-review under responsibility of Harbin University of Science and Technology Keywords: Supply chain management; Electric power industry; Climate change
1. Introduction As rapid economic growth, China’s electric power industry has developed rapidly. In 1949, installed capacity of electricity and electricity generation are 1.85 million kilowatts (KW) and 4.3 billion kilo watthours (KWH), which are ranked twenty-first and twenty-fifth in the world respectively. At the end of 2009, China installed capacity of electricity and electricity generation reached 0.874 billion KW and 3650.6 billion KWH, which are both ranked second in the world. Since 1985, China’s power industry has reformed for more than twenty years, which can be divided into three stages: (1) In order to achieve rapid expansion of installed capacity, government encouraged social capital to invest in electricity plant from *
* Corresponding author. Email: [email protected]
1877-7058 © 2011 Published by Elsevier Ltd. doi:10.1016/j.proeng.2012.01.035
2750
Xiao-Hui and Rong-Gang Cong / Procedia Engineering 29 (2012) 749 – 753 WangWang and Cong/ Procedia Engineering 00 (2011) 000–000
1985 to 1998. And electricity price in this stage could guarantee the debt service. (2) Government function was separated from electricity enterprise management from 1998 to 2002. In 1997, State Power Corporation is established. And ministry of power industry was canceled in 1998. (3) To solve unfair competition among electricity enterprises due to vertically integrated operation, State Council issued “Electricity System Reform Program”. Generation and grid have been separated since 2002. Although, China's power industry has made great achievements in reform, there are still some defects in the power industry chain. They are: (1) Effective competition is not fully realized in the electricity market. China electricity market is mainly regional market on the basis of five power generation companies and two grid companies. Power is lack of effective exchange and it is difficult to achieve optimal allocation of resources. (2) The power industry lacks of scientific planning due to conflicts of interest between local and state governments. (3) Existing electricity price mechanism is not reasonable. China electricity price is mainly regulated by government using a cost-plus approach which is not suitable for formation of competition mechanism. (4) As natural monopoly enterprises, grids don’t have incentive to increase their efficiencies. On the other hand, climate change has an increasing impact on people’s production and life style. In recent years, climate change and some extreme weathers, such as snowstorm, brought a lot of certainties to electric system. On the whole, China's power industry chain urgently needed to be re-optimized, including generation, transmission, distribution and sale. But due to the special nature of electricity industry (regional segmentation, energy substitution, perishable and so on), classic supply chain management (SCM) theory needs to be adjusted to it, especially in the context of climate change. This paper aims to put forward the basis concept of electric power supply chain, compare it with traditional supply chain, review existing literatures and point out potential research topic in the future. This paper is organized as follows: Section 2 presents tradition supply chain concept and its new contents for electricity industry. Section 3 reviews traditional SCM and electricity power SCM research fields and future trends. Section 4 concludes. 2. Tradition supply chain vs. electricity power supply chain One of the most significant paradigm shifts of modern business management is that individual businesses no longer compete as solely autonomous entities, but rather as supply chains [1]. The definition of SCM which was developed and used by the GSCF (Global Supply Chain Forum) is as follows: “Supply Chain Management is the integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders” [2]. The broader understanding of the SCM concept is illustrated in Figure 1, which depicts a simplified supply chain network structure. Here SCM includes three elements: the business processes, the management components and the structure of the chain. Compared with other industries, electricity power industry has its own characteristics. They are: (1) Regional segmentation. Transport losses for electricity are significant over longer distances. Electricity is thus a regional good [4]. Long-distance transport of electricity is not economical or feasible. (2) Energy substitution. Although electrical energy is essentially homogeneous, its sources can be varied. Different energy sources, such as thermal power, hydropower and so on, can all be transformed to electricity. Therefore, there is energy substitution in electricity power supply chain management. But energy substitution is not perfect. For example, thermal power cannot be replaced by wind power completely up to now, because the power grid needs stable load, while the latter is volatile and intermittent.
Xiao-Hui Wang Cong Engineering / Procedia Engineering 29 (2012) 749 – 753 Wangand andRong-Gang Cong / Procedia 00 (2011) 000–000
(3) Perishable. Electricity is perishable good. Large-scale storage of electrical energy is not feasible, although there are batteries and pumped storage power station. Therefore, supply and demand balance of power system is very important. (4) Limited monopoly. Traditional electric power industry can be divided into generation, transmission, distribution and sale. Because each generation company can compete as separate individual and there is no duplication of investment, it is feasible to introduce competition into generation in theory, which is also necessary to improve generation efficiency. However, due to high barriers to entry generation industry and restrictions of transmission, it is impossible to form a perfectly competitive generation market. Because of its non-existence of scale economy, competition can be introduced to the sale of electricity in the perspective of social welfare. Transmission and distribution has a character of natural monopoly because of huge scale economy and sunk cost.
Fig. 1 Supply chain management: integrating and managing business processes across the supply chain. Source: Cooper et al. [3]
(Region, Fuel type, Generation Units unit)
(Region, unit)
Fuel Markets for Fuel Type 1
…
1.1
A.1.1
Distributer
Fuel Markets for Fuel Type 2
1.M
2.1
A.2.1 … A.n.1
B.n.1
…
2.M
B.2.1 … B.n.1
Fuel Markets for Fuel Type n
n.1
C.1.1
…
n.M
C.2.1 … C.n.1 Grids
A.1
…
A.k
Consumers A Region A
B.1
…
B.k
C.1
…
C.k
Consumers B
Consumers C
Region B
Region C
3751
4752
Xiao-Hui and Rong-Gang Cong / Procedia Engineering 29 (2012) 749 – 753 WangWang and Cong/ Procedia Engineering 00 (2011) 000–000
Fig. 2 The Electric Power Supply Chain Network with Fuel Supply Markets
So Electric Power Supply Chain Management is the integration of key business processes from generation, transmission, distribution to sales, which keeps balance between supply and demand and offers electricity and related services that add value for customers and other stakeholders. The understanding of Electric Power SCM concept can be illustrated in Figure 2. 3. A comparison of traditional SCM and electricity power SCM research fields and future trends Due to the characteristics of power industry, there are some differences between Electric Power SCM and traditional SCM, which can be summarized in Table 1. Table 1 Principal component bodies of traditional and electric power supply chain management
Logistics
Supply
Marketing
Others
Traditional supply chain management
Electric power supply chain management
Location-allocation decisions Distribution channel planning Forecast information management Physical distribution Capacity planning Logistics Postponement Network restructuring Supplier selection Demand Planning Supplier assessment Strategic alliances Vertical disintegration Pricing Efficient consumer response Efficient replenishment Customer service management After sales service Risk management Control in the supply chain Contract management Information management
Plant location selection Grid planning Load Management Grid dispatching Capacity planning Grid blocking Grid restructuring Fuel selection Electricity load forecasting Power source structure assessment Supplier alliances Deregulation Electricity pricing Electricity demand management Stock management Electricity customer management Revenue management Risk sharing Security management Optimize contract selection Information sharing
Though the research fields of Electric Power SCM and traditional SCM have some similarities as shown in Table 1, there are some differences between their focuses. For example, tradition SCM concerns the good flow throughout the logistics network in the physical distribution. As a special good; variable cost of power transportation is relatively low and real-time balancing of power supply and demand in the grid dispatching is more important. There are also some other differences. Overall, according to the existing literature, electricity pricing, power plant location and risk management are hot topics. Dynamic pricing refers to any electricity tariff that recognizes the inherent uncertainty in supply costs [5]. Electric loads follow patterns that vary over the day and the season. The daily variation is generally low (off-peak) demand overnight, a rise in demand in the morning to a shoulder period through the day, a high-demand period in the late afternoon and early evening (exacerbated by air conditioning on hot days), and a return to a lower, shoulder demand in the evening. In the absence of any price variation over the course of the day, this pattern repeats daily. The seasonal dimension depends on whether consumers in the area use electricity for heat or cooling, and the extremity of the climate variance. Dynamic pricing can include
Xiao-Hui Wang Cong Engineering / Procedia Engineering 29 (2012) 749 – 753 Wangand andRong-Gang Cong / Procedia 00 (2011) 000–000
time-of-use (TOU) rates, which are different prices in blocks over a day, based on expected wholesale prices, or real-time pricing (RTP) in which actual market prices are transmitted to consumers, generally in increments of an hour or less. Power plant location selection includes several factors: economic, technological and social nature. Sharma used a mined integer non-linear programming approach to analyze the optimal power plant location. He considered cost, security and system load ability [6] (Sharma, 2006). El-Fouly examined the impact of wind farm location on power system related issues, including transmission congestion, optimum power flow and so on [7]. As for electricity risk management, Deng and Oren reviewed different types of electricity financial instruments and the general methodology for utilizing and pricing such instruments. In particular, they highlighted the roles of these electricity derivatives in mitigating market risks and structuring hedging strategies for generators, load serving entities, and power marketers in various risk management applications [8]. Chung et al. examined shortterm price volatility in electricity market while a forward contract is introduced [9]. Their theoretical analysis showed that the proposed optional forward contract presented a more equitable and reasonable payoff structure that allowed the buyer and seller to earn a larger overall expected benefit, and the contractual arrangement supported efficiency in economic dispatch of electricity production and consumption. Compared with traditional SCM research field, electric power SCM will expand its field in the following aspects: Contracts management in electricity power SCM, information sharing, stock management and risk sharing. 4. Conclusion Application SCM theory to electricity power market is really a fairly new field, which attracts the attentions of scholars around the world. Electricity power SCM is not only a supplement of traditional SCM, but also an extension. It does not only expand tradition research field, but also develop the methodology. In future electricity power SCM, the time and space features of methodology would show different trends: (1) modelling time frequency transfers from long-term to the combination of short-term and long-term; (2) modelling scope transfers from micro to the combination of micro and macro. References [1] Lambert DM, Cooper MC. Issues in Supply Chain Management. Indus. Market. Manage 2000; 29(1): 65-83. [2] Lambert DM. Supply Chain Management: Processes, Partnerships, Performance, 3rd edition. Supply Chain Management Institute; 2008. [3] Cooper MC, Lambert DM, Pagh JD. Supply Chain Management: More Than a New Name for Logistics. Int. J. Logist Manage 1997; 8(1): 1-13. [4] Cong RG, Wei YM. Potential impact of (CET) carbon emissions trading on China's power sector: A perspective from different allowance allocation options. Energy 2010; 35(9): 3921-3931. [5] Faruqui A, George SS. The Value of Dynamic Pricing in Mass Markets. Electricity J 2002; 15(6): 45-55. [6] Sharma AK. Optimal Number and Location of TCSC and Loadability Enhancement in Deregulated Electricity Markets Using MINLP. Int. J. Emerging Elec. Power Systems 2006; 5(1): 6. [7] El-Fouly THM, Zeineldin HH, EI-Saadany EF, Salama MMA. Impact of wind generation control strategies, penetration level and installation location on electricity market prices. Renew. Power Gene 2008; 2(3): 162-169. [8] Deng SJ, Oren SS. Electricity derivatives and risk management. Energy 2006; 31(6): 940-953. [9] Chung TS, Zhang SH, Yu CW. Electricity market risk management using forward contracts with bilateral options. Gene, Transp & Distribution 2003; 150(5): 588-594.
5753