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Regulating Electricity Market

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  • 1. Regulation of electricity markets
    Jean-Philippe Meloche, 24 Feb 2010
    JPMeloche@nus.edu.sg
  • 2. Introduction to the world of competition regulation
    Introduction to electricity regulation
    Applied microeconomics
    Contents
  • 3. History and Structure
  • 4. In 1990, the government decided to deregulate and to privatise the electricity sector to reduce costs through competition
    Industry was separated into 4:
    Generation
    Transmission
    Distribution
    Supply
    Regulator (Ofgem) was created
    History of the energy deregulation
  • 5. Actual production of electricity
    Opened to competition
    Main technologies:
    Nuclear, Hydro, Combined Cycle Gas Turbines (CCGT), Coal, Renewables, Oil, French and Scottish exports
    Generation
  • 6. Types of station
    Base-load
    Cheap and/or inflexible (Nuclear, CCGT)
    Peak-load
    High cost and high flexibility (Oil, Pumped storage)
    Pumped storage stations
    Mid-merit plants fall between these two categories.
    Usually flexible and coal-fired
    Generation
  • 7. Transmission: high-voltage power lines
    Natural monopoly operated by the privately-owned National Grid Company (NGC)
    Distribution: low-voltage power lines to the final consumers
    Natural monopoly operated by 12 regional utilities
    Some very large consumers are connected directly to the Grid
    Supply: Sale of electricity to the final customers
    Competitive segment
    Transmission, Distribution, and Supply
  • 8. The Office of the Electricity and Gas Market (Ofgem) acts as a regulator
    Security of supply
    Market rules
    Some competition rules
    Decisions of the regulator can be appealed to the Competition Commission
    Regulation
  • 9. Costs and installed capacity
  • 10. How does it work?
  • 11. As uniform as it gets
    Demand must always be met
    Demand is very inelastic in the short run
    Demand varies every minute
    Supply cannot exceed demand
    Electricity cannot be stored in meaningful quantity
    Special nature of electricity
  • 12. Every day, the System Operator publishes a forecast of the electricity demand for the next day in half-hour increments
    The System Operator asks every company to submit one bid per half-hour bids for every gensetthey operate
    Electricity Pool
  • 13. Graphical representation of a bid
  • 14. Example of a market supply curve
    Problem?
  • 15. Market Price is established by equating demand and supply
    Every supplier scheduled to run receives the same price per MWh, regardless of its bid
    Consistent with economic theory
    Insures efficient dispatch
    Pricing mechanism
  • 16. Are prices too high?
  • 17. Decreasing gas coal prices
  • 18. Increasing plant efficiencies
  • 19. No change in real prices since 1991
  • 20. Price volatity
  • 21. Price volatity
  • 22. Prices are higher than they should be
    Generators have market power because:
    Electricity is a unique commodity
    Single Price under the Pool gives them an incentive to manipulate the pool rules
    Regulator needs more power to prevent abuse (Market Abuse Licence Condition)
    Ofgem’s price analysis
  • 23. Market is competitive
    Price is the result of the interactions of buyers and sellers and should not be mandated by the regulator
    They have not been convicted of any wrong-doing
    Generator’s case
  • 24. Given that some generators had refused the market condition, review if the continuation of their activities without that licence condition was contrary to the public interest.
    Competition Commission mandate
  • 25. The inquiry
  • 26. Politically-appointed members of the inquiry
    Permanent staff divided in three main groups:
    Economists
    Accountants
    Industrial advisers
    Lawyers on staff to advise on legal issues
    Structure of the inquiry
  • 27. Legal review
    What is ‘Abuse’
    MALC vs other laws
    Utilities Act
    Competition Act
    Accounting review
    Supernormal profits
    Economic review
    Public interest, Market power, Market structure, Incentives
    Technical review
    Manipulation of the rules
    Methodology
  • 28. Public interest
    Prices at competitive levels
    Market power
    Ability of a generator to increase prices consistently and profitably above competitive levels
    Depends largely on concentration of plant ownership, overall production capacity
    Prices
    What is the “correct” price? Short-term marginal cost? New entry cost?
    Should the regulator try to mandate price levels?
    Economic review -1
  • 29. Market definition
    Energy vs Electricity?
    Substitutes?
    Every half-hour? Every day?
    Base-load vs Peak?
    Market structure
    Dominant firms?
    Evolution of ownership in time
    Barriers to entry & exit?
    Perfect information?
    Incentives
    Repeated auctions provide room for collusion (concept in game theory)
    Single-price auction means that many benefit from a price increase
    Economic review -2
  • 30. Ways to ‘manipulate’ the market
    Increase bids
    Withdraw capacity
    Manipulate rules (third increment & capacity payments)
    Change in market rules (NETA)
    Technical review
  • 31. Example: Capacity withdrawal - 1
  • 32. Capacity withdrawal - II
  • 33. No case for their new market licence condition
    ‘Abuse’ was ill-defined
    No documented case of abuse
    Market rules were changing (Pool vs NETA)
    Conclusion

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