Regulating Electricity Market


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Regulating Electricity Market

  1. 1. Regulation of electricity markets<br />Jean-Philippe Meloche, 24 Feb 2010<br /><br />
  2. 2. Introduction to the world of competition regulation <br />Introduction to electricity regulation<br />Applied microeconomics<br />Contents<br />
  3. 3. History and Structure<br />
  4. 4. In 1990, the government decided to deregulate and to privatise the electricity sector to reduce costs through competition<br />Industry was separated into 4:<br />Generation<br />Transmission<br />Distribution<br />Supply<br />Regulator (Ofgem) was created<br />History of the energy deregulation<br />
  5. 5. Actual production of electricity<br />Opened to competition<br />Main technologies:<br />Nuclear, Hydro, Combined Cycle Gas Turbines (CCGT), Coal, Renewables, Oil, French and Scottish exports<br />Generation<br />
  6. 6. Types of station<br />Base-load<br />Cheap and/or inflexible (Nuclear, CCGT)<br />Peak-load<br />High cost and high flexibility (Oil, Pumped storage)<br />Pumped storage stations<br />Mid-merit plants fall between these two categories.<br />Usually flexible and coal-fired<br />Generation<br />
  7. 7. Transmission: high-voltage power lines<br />Natural monopoly operated by the privately-owned National Grid Company (NGC)<br />Distribution: low-voltage power lines to the final consumers<br />Natural monopoly operated by 12 regional utilities<br />Some very large consumers are connected directly to the Grid<br />Supply: Sale of electricity to the final customers<br />Competitive segment<br />Transmission, Distribution, and Supply<br />
  8. 8. The Office of the Electricity and Gas Market (Ofgem) acts as a regulator<br />Security of supply<br />Market rules<br />Some competition rules<br />Decisions of the regulator can be appealed to the Competition Commission<br />Regulation<br />
  9. 9. Costs and installed capacity<br />
  10. 10. How does it work?<br />
  11. 11. As uniform as it gets<br />Demand must always be met<br />Demand is very inelastic in the short run<br />Demand varies every minute<br />Supply cannot exceed demand<br />Electricity cannot be stored in meaningful quantity<br />Special nature of electricity<br />
  12. 12. Every day, the System Operator publishes a forecast of the electricity demand for the next day in half-hour increments<br />The System Operator asks every company to submit one bid per half-hour bids for every gensetthey operate<br />Electricity Pool<br />
  13. 13. Graphical representation of a bid<br />
  14. 14. Example of a market supply curve<br />Problem?<br />
  15. 15. Market Price is established by equating demand and supply<br />Every supplier scheduled to run receives the same price per MWh, regardless of its bid<br />Consistent with economic theory<br />Insures efficient dispatch<br />Pricing mechanism<br />
  16. 16. Are prices too high?<br />
  17. 17. Decreasing gas coal prices<br />
  18. 18. Increasing plant efficiencies<br />
  19. 19. No change in real prices since 1991<br />
  20. 20. Price volatity<br />
  21. 21. Price volatity<br />
  22. 22. Prices are higher than they should be<br />Generators have market power because:<br />Electricity is a unique commodity<br />Single Price under the Pool gives them an incentive to manipulate the pool rules<br />Regulator needs more power to prevent abuse (Market Abuse Licence Condition)<br />Ofgem’s price analysis<br />
  23. 23. Market is competitive<br />Price is the result of the interactions of buyers and sellers and should not be mandated by the regulator<br />They have not been convicted of any wrong-doing<br />Generator’s case<br />
  24. 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.<br />Competition Commission mandate<br />
  25. 25. The inquiry<br />
  26. 26. Politically-appointed members of the inquiry<br />Permanent staff divided in three main groups:<br />Economists<br />Accountants<br />Industrial advisers<br />Lawyers on staff to advise on legal issues<br />Structure of the inquiry<br />
  27. 27. Legal review<br />What is ‘Abuse’<br />MALC vs other laws<br />Utilities Act<br />Competition Act<br />Accounting review <br />Supernormal profits<br />Economic review<br />Public interest, Market power, Market structure, Incentives<br />Technical review<br />Manipulation of the rules<br />Methodology<br />
  28. 28. Public interest<br />Prices at competitive levels<br />Market power<br />Ability of a generator to increase prices consistently and profitably above competitive levels<br />Depends largely on concentration of plant ownership, overall production capacity<br />Prices<br />What is the “correct” price? Short-term marginal cost? New entry cost?<br />Should the regulator try to mandate price levels? <br />Economic review -1<br />
  29. 29. Market definition<br />Energy vs Electricity?<br />Substitutes?<br />Every half-hour? Every day? <br />Base-load vs Peak?<br />Market structure<br />Dominant firms?<br />Evolution of ownership in time<br />Barriers to entry & exit?<br />Perfect information?<br />Incentives<br />Repeated auctions provide room for collusion (concept in game theory)<br />Single-price auction means that many benefit from a price increase<br />Economic review -2<br />
  30. 30. Ways to ‘manipulate’ the market<br />Increase bids<br />Withdraw capacity<br />Manipulate rules (third increment & capacity payments)<br />Change in market rules (NETA)<br />Technical review<br />
  31. 31. Example: Capacity withdrawal - 1<br />
  32. 32. Capacity withdrawal - II<br />
  33. 33. No case for their new market licence condition<br />‘Abuse’ was ill-defined<br />No documented case of abuse<br />Market rules were changing (Pool vs NETA)<br />Conclusion<br />