Transcript here - CEEM

Market design and market power in
wholesale electricy markets
Guido Cervigni
IEFE-Bocconi University, Milan
CEEM – Summer School on Economics of electricity markets
Ghent University, Faculty of Economics and Business Administration
1 September 2015
Agenda
1. Wholesale electricity markets
o Product standardisation
o Delivery and the settlement system
o Electricity trading
2. Competition policy in wholesale power markets
o
o
Market power in wholesale electricity market
Market power mitigation mechanisms
Agenda
1. Wholesale electricity markets
o Product standardisation
o Delivery and the settlement system
o Electricity trading
2. Competition policy in wholesale power markets
o
o
Market power in wholesale electricity market
Market power mitigation mechanisms
Product standardisation: time dimension
0
1/2
1 Time
1/2
0
1
1/2
1
-10
- 10
MW
0
-20
MW
-20
MW
 During the same hour all consumers withdraw 10 MWh
 Should they be buying the same product?
Product standardisation: geographic dimension
Zone 1
Maximum transfer capacity
1->2 = 200 MW
Zone 2
Supply: unlimited @30 €/MWh
unlimited@50€/MWh
Demand: 300 MW @any price
250 MW @ any price
 Should a consumer in Zone 1 and a consumer in Zone 2
with identical consumption buy the same product?
Product standardisation: Remark - 1
 In the «real time», injections must match withdrawals
MW
Injections by seller of 10
MWh in hour t
10
0
1/2
1 Time
Withdrawals by buyer of 10
MWh in hour t
-20
Half-hour with net
surplus (SO sells)
Balance («system» position)
in hour t
Half-hour with net
deficit (SO buys)
Product standardisation: Remark - 2
 In the real time network constraints must be met
Zone 1
Supply:
Maximum transfer capacity
1->2 = 200 MW
Zone 2
unlimited @30 €/MWh
unlimited@50€/MWh
300 MW @any price
250 MW @ any price
Demand:
Market equilibrium
sales with standard
product:
550 MW@30 €/MWh
Power flow 1->2 @
market equilibrium:
0 MW
250 MW (above transfer capacity)
SO actions to address
network constraint: Sell 50 MW in zone 1
Buy 50 MW in zone 2
Product standardisation: wrap-up
 Some product standardisation is necessary to
make electricity trading possible
 Product standardisation requires socialisation of
some costs
 We are still left with many products to trade
Agenda
1. Wholesale electricity markets
o Product standardisation
o Delivery and the settlement system
o Electricity trading
2. Competition policy in wholesale power markets
o
o
Market power in wholesale electricity market
Market power mitigation mechanisms
Injections and withdrawal commitments - 1
 Normal products:
o
o
o
o
Seller does not deliver … buyer does not consume
Consumer wants more … additional purchase
Seller overdelivers
… extra is returned or disposed of
Consumer does not receive …goods go back or disposed
 Consequences of any over/under delivery issues are
borne by (only) the parties to the transaction
Injections and withdrawal commitments - 2
 Electricity is different: over/under delivery – if not
addressed
–
causes a black-out, affecting all
consumers and producers
 How is this feature addressed?
o
o
The SO takes care of system balance at all times
Injections and withdrawal commitments are
financially
enforced
Example
Market participant G
MWh
50
25 MWh
50 MWh
25 MWh
Imbalance G
(bought by
G from SO)
0
MWh
Net physical
position at gate
closure
(Program)
50
Real time
actual net
injections
0
Market participant C
-50
0
-50 MWh
-50
MWh
-33 MWh
17 MWh
Imbalance C
(sold by C to
SO)
System Imbalance
+17 MWh
8 MWh
-25 MWh
Bought by
SO in the
Balancing
market
Balancing market, balancing perimeter and imbalance
charges
 The SO procures/disposes of any deficit/surplus of
electricity in the «balancing market»
 Alternative settlement systems differ in:
o
o
The balancing perimeter
Imbalance prices
Delivery and settlement: wrap-up
 Electricity delivery commitments can be enforced
only financially
 An imbalance is a difference between an
injection/withdrawal commitment (the program) and
actual injection/withdrawals
 Issues with standardisation of imbalance prices
Agenda
1. Wholesale electricity markets
o Product standardisation
o Delivery and the settlement system
o Electricity trading
2. Competition policy in wholesale power markets
o
o
Market power in wholesale electricity market
Market power mitigation mechanisms
Electricity is traded on multiple timeframes
Electricity market
transactions
Long term
transactions
Gate
closure
1 day before
delivery
Days before
delivery
Day-ahead
market
Real
time
Intraday
market
Time
System Operations
Reserve procurement, Congestion management, Balancing
• From multi-year
to week ahead
• Basaload/peak
products
• Decentralised
trading and
organised
venues
• Daily
• Hourly products
• Non
discriminatory
auctions
• Implicit
allocation of
transmission
rights
• Power exchanges
• Daily
• Hourly products
• Non
discriminatory
auctions or
continuous
trading
• Power exchanges
Imbalance
settlement
• SO is
counterparty to
all transactions
• Different
arrangements
across Europe
Agenda
1. Wholesale electricity markets
o Product standardisation
o Delivery and the settlement system
o Electricity trading
2. Competition policy in wholesale power markets
o Market power in the wholesale electricity market
o Market power mitigation mechanisms
The standard approach to assessing competition applied
to the wholesale electricity generation
14%
29%
57%
Industry structure
Relevant Market
Degree of competition
Non storability & network contraints: a different
competitive assessment in each hour?
14%
14%
17%
14%
29%
17%
57%
30% of the time
70%
10% of the time
60%
60% of the time
Does market power depend on market shares?
€/MWh
€/MWh
Profit
P. Mkt Pwr
Profit
P. Comp
MW
A small generators woith much market power
MW
Does market power depend on market shares?
€/MWh
€/MWh
P. Comp
P. Mkt Pwr
MW
High concentration with no market power
MW
Market power assessment based on pivotality
Bid curve
Ppivot
 A possible index of market power in
electricity generation is the ability to
corner the market - or Pivotality
Pivotality
profits
 Generator i is Pivotal in hour t, in an
hour, if in that hour:
Market_demand– Capacity_but_i’s > 0
↓
Assess market power based on the
Number of hours in which the generator is
Pivotal
Demand
 Market power: ability and incentive to set
prices higher than the competitive level
Variable cost
Pcomp
Capacity of competitors and
imports
Generator’s capacity
Generator’s pivotal capacity
Adjusted Pivotality indicators
Pivotal Capacity
(MW) - Ability
Ability to cross
the market
Ability & Incentive
to exercise market
power
Inflexible output = 0
Incentive to cross
the market
Hedged load = 0
Pivotal capacity
(MW) - Incentives
 Hourly pivotality adjustments


Ability measure: Pivotal Capacity – Inflexible generators
Incentive measure: Pivotal capacity – Hedged load
Examples
Pivotal Capacity
(MW) - Ability
Pivotal Capacity
(MW) - Ability
Inflexible
output = 0 MW
Inflexible
output = 0 MW
Hedged load = 0
Pivotal capacity
(MW) - Incentives
Hedged load = 0
Pivotal capacity
(MW) - Incentives
Many hours with incentives and
ability to corner the market
Few hours with incentives and
ability to corner the market
↓
↓
Market power issues
No market power issues
Agenda
1. Wholesale electricity markets
o Product standardisation
o Delivery and the settlement system
o Electricity trading
2. Competition policy in wholesale power markets
o Market power in the wholesale electricity market
o Market power mitigation mechanisms
Market power mitigation: capacity divestiture - 1
€/MWh
D post div D pre div
MC post div
MC pre div
Source: Federico
and Lopez 2009
Divested quantity
MW
 Divestiture lowers and flattens the firm’s residual demand
…
Market power mitigation: capacity divestiture - 2
€/MWh
€/MWh
P pre div
P post
div
MR post div
MR pre
div
MW
 Reducing the profit maximising price …
MW
Market power mitigation: long term contracting
€/MWh
€/MWh
P pre
contr
MC
MC
P post
contr
D
D
MR pre contr
MW
MR post
contr
Contracted
quantity
MW
 The long-term contract makes part of the firm’s revenues
independent of the spot market price
Comparison
 Advantages of contracting over divestitures:
o Politically easier
o No impact on scale economies
 Drawbacks
o Incentives to sustain spot prices above profit max level to
support future long term negotiations
o Less effective (given the volume)
Market power mitigation: price cap
€/MWh
Demand
Supply net of
withholdng Supply
€/MWh
Demand
Supply
Price
increase
Price
increase
Withheld
capacity
MWh
MWh
Withheld
capacity
 With-holding as the largest impact on prices when the system is tight
 An overall price cap (below VOLL) mitigates market power but …
 Results in «missing money»
Market power mitigation: bid mitigation
 The generator’s bid in the spot market is constrained
every time the generator’s is assessed to enjoy
«great» market power
Phase 1: Screening
Phase 2: Mitigation
Example: (PJM) any
three generators pivotal
to solve a constraint in a
15 min period?
Cost-based bids enforced
on the three jointly pivotal
generators
• You may want to take a look at:
The economics of electricity markets, Pippo Ranci
and Guido Cervigni Eds, Elgar, 2013
• I can be reached at: [email protected]