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Regulating Electricity Market

Regulating Electricity Market






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    Regulating Electricity Market Regulating Electricity Market Presentation Transcript

    • Regulation of electricity markets
      Jean-Philippe Meloche, 24 Feb 2010
    • Introduction to the world of competition regulation
      Introduction to electricity regulation
      Applied microeconomics
    • History and Structure
    • In 1990, the government decided to deregulate and to privatise the electricity sector to reduce costs through competition
      Industry was separated into 4:
      Regulator (Ofgem) was created
      History of the energy deregulation
    • Actual production of electricity
      Opened to competition
      Main technologies:
      Nuclear, Hydro, Combined Cycle Gas Turbines (CCGT), Coal, Renewables, Oil, French and Scottish exports
    • Types of station
      Cheap and/or inflexible (Nuclear, CCGT)
      High cost and high flexibility (Oil, Pumped storage)
      Pumped storage stations
      Mid-merit plants fall between these two categories.
      Usually flexible and coal-fired
    • 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
    • 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
    • Costs and installed capacity
    • How does it work?
    • 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
    • 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
    • Graphical representation of a bid
    • Example of a market supply curve
    • 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
    • Are prices too high?
    • Decreasing gas coal prices
    • Increasing plant efficiencies
    • No change in real prices since 1991
    • Price volatity
    • Price volatity
    • 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
    • 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
    • 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
    • The inquiry
    • Politically-appointed members of the inquiry
      Permanent staff divided in three main groups:
      Industrial advisers
      Lawyers on staff to advise on legal issues
      Structure of the inquiry
    • 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
    • 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
      What is the “correct” price? Short-term marginal cost? New entry cost?
      Should the regulator try to mandate price levels?
      Economic review -1
    • Market definition
      Energy vs Electricity?
      Every half-hour? Every day?
      Base-load vs Peak?
      Market structure
      Dominant firms?
      Evolution of ownership in time
      Barriers to entry & exit?
      Perfect information?
      Repeated auctions provide room for collusion (concept in game theory)
      Single-price auction means that many benefit from a price increase
      Economic review -2
    • Ways to ‘manipulate’ the market
      Increase bids
      Withdraw capacity
      Manipulate rules (third increment & capacity payments)
      Change in market rules (NETA)
      Technical review
    • Example: Capacity withdrawal - 1
    • Capacity withdrawal - II
    • No case for their new market licence condition
      ‘Abuse’ was ill-defined
      No documented case of abuse
      Market rules were changing (Pool vs NETA)