Econ energy market
Rannnn
SlidesElectricityCompetition-Revisedwithcharts.ppt
Electricity Restructuring
and Competition
Electricity Markets
- Traditional Organization of Electricity Provision in U.S.
- Govt regulated, vertically integrated public utilities
- Last 25 Years
- Wave of restructuring and introduction of electricity trading and competition across U.S. and other nations
- Now large-scale wholesale electricity markets operate across many parts of U.S.
Factors leading to restructuring & deregulation
Prior track record of deregulating energy markets and other industries once considered natural monopolies
telecomm, airlines, railroads,
High electricity prices in spite of regulation
In U.S. states such as NY, California, New England
In other countries, such as U.K.
As the U.S. electricity transmission grid was built out in the 2nd half of 20th century, electric utilities started buying and selling energy from each other
This illustrated feasibility of trading energy across the grid in markets
Political Push
2nd Bush President
Electricity Restructuring – A How-To Guide
- Unbundle generation from transmission and distribution
- It’s important to allow multiple business firms to own and operate generation plants (independent power producers (IPPs) or merchant generators)
- This may require forcing some vertically integrated IOUs to divest some of their generation assets
Electricity Restructuring – A How-To Guide
- Establish an organized market for wholesale electricity trading
- Sellers are firms like merchant generators that inject energy into the grid
- Buyers are retail distributors and industrial users that withdraw energy from the grid
- Market rules might include an advance-trading (e.g., day-ahead) market as well as a real-time balancing market
Electricity Restructuring – A How-To Guide
- Set up an organization to manage and coordinate energy flows over the grid
- This could be an independent system operator (ISO) or a regional transmission organization (RTO)
- Key responsibilities
- Balance energy supply and demand in real time
- Maintain system reliability
- Coordinate new transmission investments
Wholesale Market Competition
Electricity Restructuring – A How-To Guide
- Retail distribution
- Ownership and operation of local distribution networks would typically continue as regulated public utilities (natural monopoly rationale)
- But it is feasible to introduce retail competition via brokers and energy re-sellers who purchase wholesale energy, re-sell it to retail customers, and pay fees to local distribution companies for use of the local network.
Wholesale Electricity Markets
- Let’s examine a perfect competition model of a short-run (hourly) wholesale electricity market
- Demand Side
- Demand varies hour by hour, as weather conditions and desired electricity usage change
- Very price inelastic – most retail customers pay fixed retail prices
- Supply Side
- Most supply comes from fossil fuel generators
- FF supply is driven by cost of generation and capacities of generation units.
- Generation from renewables is intermittent
Fossil Fuel Generation and Supply
- Supply curve from FF generation is comprised of a series of steps –
- Width of step is generation capacity of a unit
- Height of step is marginal cost (MC) of the unit
- FF MC of generation
- MC = heat rate x fuel cost + emissions rate x emissions tax rate
Generation Example
Type Marginal Operating Cost Capacity
Nuclear $12/MWh 1000 MW
Coal $25/MWh 2500 MW
Gas $55/MWh 1500 MW
Turbine (peaker) $90/MWh 500 MW
Example with Supply and Demand
- Draw the competitive supply curve for the production of electric energy on this system
- Assume that demand is 3000 MW and is completely price inelastic in the very short run. What would be the spot price in a perfectly competitive wholesale electricity market?
- Assume that demand is 4500 MW and is completely price inelastic in the very short run. What would be the competitive spot price be?
- What if there is a downward sloping demand function:
- D(P) = 5050 – 10P
- What is the spot price in a perfectly competitive market?
- Assume that demand is 6000 MW for prices up to $110/MWh, but that 600 MW of this demand would be willing to be curtailed for prices above $110/MWh or more. What is the perfectly competitive market price in this case?
Competitive Supply Curve
Example - continued
- Let’s use the example to tease out wholesale purchase costs for buyers (distributors).
- Assume that demand is 3000 MW for 8 hours/day
- Assume that demand is 4500 MW for 12 hours/day
- Assume that demand is 6000 MW for prices up to $110/MWh, but that 600 MW of this demand would be willing to be curtailed for prices above $110/MWh or more for 4 hours/day
Example - continued
- Let’s use the example to tease out wholesale purchase costs for buyers (distributors).
- Assume that demand is 3000 MW for 8 hours/day
- Assume that demand is 4500 MW for 12 hours/day
- Assume that demand is 6000 MW for prices up to $110/MWh, but that 600 MW of this demand would be willing to be curtailed for prices above $110/MWh or more for 4 hours/day
- Then prices are:
- P = $25 for 8 hours/day
- P = $55 for 12 hours/day
- P = $110 for 4 hours day
- Average purchase cost for buyers
- = (8*$25+12*$55+4*$110)/24 = $50.4/MWh
Renewable Energy in Wholesale Markets
- What happens when renewable energy (wind turbines, solar panels) generation capacity is added?
- Let’s look at how the example changes when 1000 MW of solar photovoltaic generation capacity is added to the grid.
- Impact on wholesale prices and price volatility?
Competitive Supply Curve with 1000 MW renewable capacity added
Electricity Markets over the Grid
- Wholesale Electricity Competition
- The scope and size of the market can be expanded by using the transmission network to connect buyers and sellers. A bigger market can enable more suppliers to compete for sales.
- If there are no transmission bottlenecks, then a grid-connected area can operate as a single market with a single price.
- But sometimes transmission links will be capacity-constrained, and prices in different parts of the network will differ.
- Locational Marginal Prices
- Competitive prices at each node of the network that take into account transmission constraints.
- See next 2 slides for LMP contour maps
- Google MISO-PJM LMP contour map to see current map
MISO-PJM pricing contour map – evening March 11, 2019
MISO-PJM pricing contour map – afternoon March 12, 2019
Trouble w/ Electricity Markets?
- California restructured its electricity industry and opened wholesale market to competition in 1998
- California Energy Crisis of 2000
- Why?
- High summer demand
- Large drop in hydro-electricity imports
- Spike in natural gas prices
- Market power of IPPs – especially at peak demand times
- Impact
- BIG increase in wholesale prices (~400-500%)
- Distco’s squeezed
- Rolling blackouts
End of California Crisis
- Distribution utilities nearly bankrupt by early 2001
- California ended its restructuring experiment in 2001
- State govt negotiates new supply contracts for utilities (very costly contracts!)
- Arnold gets elected governor
- Restructuring grinds to a halt in most of Western U.S.
Why did restructuring flop in CA?
- Problems with CA restructuring plan
- Limits on long-term forward contracts between generation suppliers and distribution utilities
- Lack of retail buyer price response (no real time pricing)
- NIMBY obstacles to generation investments (not enough slack in system)
18 THE STANDARD PRESCRIPTION
FIGURE 2.1 Physical functions of electricity.
FINAL CUSTOMERS ( RETAIL SALES )
OFFICE HOUSEFACTORY
LOCAL DISTRIBUTION SYSTEM
GENERATION ( POWER PLANTS )
TRANSMISSION NETWORKS ( GRID )
FLOW OF POWERMETER
SYSTEM OPERATIONS
Reforming the Industr y 45
This is all we will say about Model 2 structural issues. Models 3 and 4 are where the action is. It is, however, worth remembering that the new trading arrangements can be developed and put into operation before Mod- els 3 and 4 are actually introduced. Transmission and system operations can be separated from generation and new trading arrangements instituted be- fore any deregulation takes place or any competitors enter the market. In the United States, this would be somewhat similar to the operation of the old tight pools, where (for many years, and well before the introduction of competition) the final price to customers was regulated but the dispatch and transmission were coordinated over a wide area, and the pricing rules for wholesale sales between companies were approved by FERC. This should not be taken as a proposal that the rules of the old tight pools should be adopted in the United States. However, the rules we do propose for trading arrangements later in the text could be adopted in modified form even be- fore wholesale competition is introduced.
M o d e l 3 : W h o l e s a l e C o m p e t i t i o n
Model 3 as we define it here has a fully competitive generating sector. There is no cost-of-service regulated generation. Distribution companies (now
FIGURE 3.3 Model 3—wholesale competition.
DISTCO
CUSTOMER
DISTCOLARGECUSTOMER LARGE
CUSTOMER
CUSTOMER
ENERGY SALES
IPPIPP IPP IPP IPP
TRANSMISSION WIRES
WHOLESALE MARKETPLACE
