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![Page 1: POWER MARKET ECONOMICS Deregulation: Socio-economical and Technical Issues Inés Romero Navarro January 2004 Lund University, SWEDEN INDUSTRIAL ELECTRICAL.](https://reader035.fdocuments.us/reader035/viewer/2022081515/56649e555503460f94b4d04e/html5/thumbnails/1.jpg)
POWER MARKET ECONOMICS
Deregulation: Socio-economical and Technical IssuesInés Romero Navarro
January 2004Lund University, SWEDEN
INDUSTRIAL ELECTRICAL ENGINEERING AND AUTOMATION
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Inés Romero Navarro, IEA. LTH
Outline
• Introduction• Engineers vs. Economists• Market Architecture • Market Design• Conclusions
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Inés Romero Navarro, IEA. LTH
Introduction I
• Last century-power structure was constituted by large utilities, governed by market monopolies
• Today - competitive markets, deregulation or re-estructuring
• Electricity objective: ’Ensure delivery of energy to customers with high reliability and high quality contain, but optimizing the use of available resources’
• Reliability is today a popular term! – Reliability levels– The influence of the re-estructuring process on reliability levels– Investments in generation and transmission– Enough installed capacity
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Inés Romero Navarro, IEA. LTH
Introduction II
• Power Systems and Power Markets– lack of reliability (elasticity of demand and investments)– lack of sufficient capability (investments)– lack of coordination and communication
• Deregulation has increased the complexity to design and manage the power system ...
• but It is not the main cause of the low reliability levels in today’s networks
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Inés Romero Navarro, IEA. LTH
Engineering vs. Economics I• Power Market combines power system and market economic fields. Optimal
power market performance requires experts in both fields
• Experiences show lack of cooperation = Failure in the Market Design – Economists look at power as a common tradable good
– main challenge: maximize profit for both buyers and sellers
– Engineers focus on technical aspects (reliability, quality)
– forget about the competitive nature of product traded in the stock market
• Engineers + economic advise– Wrong assumption: ‘Power is comparable to other common transaction’
– Failure: Maximize market profit without considering the main constraints that threat power delivery
• California Summer 2000 opens a discussion about Ethics
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Inés Romero Navarro, IEA. LTH
Market Architecture (MA)
• Regulated and Deregulated services
• Bilateral and Centralized Markets
• Forward and Real Time Markets
• Customer Response
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Inés Romero Navarro, IEA. LTH
Re/deregulated Services • Ancillary Services (AS) and System Operator (SO)
– SO responsible to maintain system balanced: supply equal demand• frequency and voltage control• monopoly on the reactive power market
– AS are fully regulated, coordinated by SO, and benefit to the entire market
• Unit Commitment (UC) and Congestion Management (CM)– UC is handled by the generation side – CM is handled by SO (Revenues)
• Risk Management and Forward Markets (FM)
• Transmission and Distribution– Natural monopolies– New line – decision from either SO or a private company
• Retail Competition– Retailing services are related to financial transactions and sending out bills– Green power, reliability level - benefit of retail competition
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Inés Romero Navarro, IEA. LTH
Cen/decentralized Design
• Bilateral vs. centralized exchanges and pools– Define the role of SO
• Small role = market power from private parties (bilateral exchanges)• Large Role = inefficiency of non-profit organizations
– Bilateral markets are slow.• Problems to handle Unit Commitment and Congestion Management• Lack of transparent information
• Exchanges vs. pools– Exchanges are inefficient. Lack of reliability and coordination
– Pools induces gaming and inefficiencies caused by side payments
• Locational Pricing– Energy prices differ by location (congestion limits) = locational pricing
– They are competitive and unique, (supply and demand)
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Inés Romero Navarro, IEA. LTH
Forward and RT Markets
• Trading power involves a sequence of overlapping markets, forward and real time markets
– Forward markets are settled by long-term contracts
– Sold up to 1-2 years
– Covering from several years to the day before real time
– Financial markets
• The SO is responsible for the DA- and RT- markets– DA-market is handled in the form of exchanges or pools
– The market is operated as auctions
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Inés Romero Navarro, IEA. LTH
Customer Response
• Electricity marginal cost of production highly fluctuates and so does the delivery cost
• Real-time metering to measure fluctuations is limited at residential, commercial and industrial levels
• Customers lack information on continuous real-time prices. Low customer response to prices = Lack of demand elasticity
• Lack o demand elasticity = supply and demand curves may fail to intersect. SO is forced to set the price
• Today, all the markets operate in this way
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Inés Romero Navarro, IEA. LTH
Power Market Design (MD)• Congestion Pricing
• Refunds and Taxing
• Ancillary Services
• Market for Operating Reserves
• Market Power and Gaming
• Reliability and Investment Policy
• Requirements for Installed Capacity
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Inés Romero Navarro, IEA. LTH
Congestion Pricing
• Power limits protect the lines and stability of the system, by constraining the maximum capacity that can be transfer through the lines
• The result: Competitive locational energy prices (CLPs)– Minimize the production costs
– Least cost dispatch in a competitive market
– Computed in the DA market by a centralized market (SO)
– When handled centrally – No TR are issued
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Inés Romero Navarro, IEA. LTH
Refunds and Taxing
• SO charges for various services and uses of the system– PRICES- to encourage the efficient use of system facilities
– TAXES- to raise funds to pay for the facilities and various services
• Efficiency charging - efficient pricing for as many services and externalities as possible (lines, losses, reactive power, generator ramping)
• Prices determined by competition or by the system operator
• Energy taxes are regulators to motivate/reduce the consumption of a specific
type of energy – renewable energies, clean and green energies
– Customers response (ecological food market)
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Inés Romero Navarro, IEA. LTH
Ancillary Services
• Frequency and Voltage Support– Frequency stability and power balancing - provided by regulation and frequency
response services; – Market for trading reactive power (SO)
• Black-start Capability– extreme failures, full or partial blackouts– Re-start the system requires generators with black-start capability
• Transmission Security– ‘keep the grid operating’- SO (transmission rights or energy bids in the DA)– Re-scheduling differences between the DA and RT markets
• Economic Dispatch – ‘use of generators to minimize the cost of production’ – DA and RT markets are important in order to dispatch economically
• Trading Enforcement– ‘metering of power flows between all trades and the common grid and
setting accounts with traders who deviate’- SO
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Inés Romero Navarro, IEA. LTH
Market for Operating Reserves
• Spinning reserve (SR)– ‘increase in the output that a generator/load can provide in ten minutes (load)’
– Regulation, 30 minutes non-spinning reserves, and ten-minute reserves (gas turbines)
• Expensive– Total SR = largest amount of power that can be lost under a single contingency
– total cost of SR depends on cost of the energy provided when the reserves are called on, and chance to be called
– ‘Capacity-bid scoring is efficient’
• Non optimal bids = inefficient dispatch (market estimates)
– Gaming
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Inés Romero Navarro, IEA. LTH
Market Power I - Introduction• Ability to affect the market price, resulting in a profitable action for the supplier/s,
and in a market price away from the competitive levels
• Monopoly Power: benefits from the market power are for the sellers /suppliers = Prices higher than the competitive ones
– A supplier withholds power = higher prices and an inefficient market
– Profit to the actor but also other suppliers. Wealth Transfer
– Problem: supply curves are often vertical or almost vertical = Measure the Markup
– Market protection to ensure that the bid that raises the price may not set the price
• Monopsony Power: benefits from the market power are for the customers – Holding out the demand/bidding a price that is lower than the power’s marginal value
– TSOs exercise it by withholding interruptible load or controlling imports/exports
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Inés Romero Navarro, IEA. LTH
Market Power II - Gaming
• Market power is exercised in RT. Never in forward markets
• However, any exercise of market power in the RT market will be reflected in the future forward markets since their price is directly derived from the RT price = GAMING
• High spot prices motivate more suppliers to act in the market– regulators will start taking restriction actions = Threat of Entry
– restrictions hold down prices and participation
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Inés Romero Navarro, IEA. LTH
Market Power III - Solutions • Competition, monitoring and enforcement of the market are necessary to
control the exercise of market power
• High demand elasticity and low supplier concentration is desired– Access to RT prices
• If the demand of elasticity is failing, which other factors are maintaining the competitive response of the market?
– forward contracts and obligation of suppliers (controlled by policy)
– uncertainty of the demand which causes supply-curve bidding
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Inés Romero Navarro, IEA. LTH
Reliability & Investment Policy I• Reliability refers to security to deliver power to customers
– Importance at all levels• Incentive investments- establishing new policies and rewarding• Reliability market for customers (elasticity of demand)• Motivate renewable and green investments
– Reliability, price spikes and investments determined by regulatory policies
• If supply not equal to demand, the market cannot determine a price – Traditional markets - enough installed generation capacity - high costs Gen.
– Today – shedding load or by fixing a high price
– Best solution: increase demand elasticity
• The minimal price intervention that would produce a reasonable level of reliability is known as value-of-lost-load (VOLL) pricing –(Regulator)
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Inés Romero Navarro, IEA. LTH
Reliability & Investment Policy II• Profit is the key to encourage investment
– High prices induce investments = increase Installed Capacity
– Short-run competitive prices induce right level of investment and reliability
– Side effects of the reliability policy:• Infrequent high price peaks -risk for investors (Risk Premium) • Extremely high prices facilitate the exercise of market power.
• Long-run investments– Generators sell in FM. Suppliers/customers buy in FM or RT
• Preference: forward market -lock a price and avoid the volatility of the spot market-
– long-term and spot prices must be close to each other • High spot prices will influence long-term prices (investment long-term market)• Low spot prices will influence long-term prices (investment RT market)
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Inés Romero Navarro, IEA. LTH
Requirements for Installed Capacity
• Optimal level of installed capacity (Icap) – acceptable number of hours of load shedding around one day every ten years,
reliability of the generators, and variations of the load, • spare capacity - neighborhood of 118% of expected peak load• Individual requirements for installed capacity
• The Individual requirements are met by either purchasing generation or by contracting for its use. Penalties:
– To any load-serving utility that fails to own or contract for the required capacity
– To generators that fail the contract
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Inés Romero Navarro, IEA. LTH
Conclusions • The famous break down in California market 2000
– Market characterized by low profits and lack of an investment policy– 1990s increase of load in the Western region– Compromised available capacity
• Results– Extremely high prices (172 $/MWh in August 2000 vs. 58$/MWh in May)– Lack of price control - lack of customer response – Exercise of market power– Shortages - lack of reliability– Bankruptcy or insolvency of large companies– Losses for investors, – Unemployment– High costs for customers
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Inés Romero Navarro, IEA. LTH
?Questions