Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Keynote Speaker: D. Frank Wolak, Catedrático de Economía de Stanford University

80 views

Published on

VI SIMPOSIO EMPRESARIAL INTERNACIONAL FUNSEAM: RIESGOS Y OPORTUNIDADES DE LA TRANSICIÓN ENERGÉTICA
CLAUSURA - EFFICIENT PRICING: THE KEY TO UNLOCKING RADICAL INNOVATION IN THE ELECTRICITY SECTOR
Keynote Speaker: D. Edwin Quintanilla, ESAN, Ex-Ministro de Energía del Ministerio de Energía y Minas de Perú
5 de febrero de 2018
Barcelona

Published in: Environment
  • Be the first to comment

  • Be the first to like this

Keynote Speaker: D. Frank Wolak, Catedrático de Economía de Stanford University

  1. 1. Efficient pricing: The Key to unlocking radical innovation in the electricity sector Keynote Speaker: Frank Wolak Professor of Economics Director, Program on Energy and Sustainable Development Stanford University wolak@zia.stanford.edu
  2. 2. VI Simposio Empresarial Internacional FUNSEAM 2018 Motivation • Increasing share of intermittent renewables to achieve low carbon electricity supply industry creates many operational challenges • Intermittency at both ends of electricity delivery network • Utility scale wind and solar generation units connected to transmission network • Rooftop solar photovoltaic (PV) units connected to distribution network • Many technologies are currently available to address these operational challenges • Uncertain business case for these technologies because of inefficient wholesale and retail pricing of electricity
  3. 3. VI Simposio Empresarial Internacional FUNSEAM 2018 3 Price Volatility = Friend of Storage
  4. 4. VI Simposio Empresarial Internacional FUNSEAM 2018 4 Price Volatility = Friend of Storage
  5. 5. VI Simposio Empresarial Internacional FUNSEAM 2018 True Price Volatility and Renewables • Store when prices are low and sell when prices are high • Profitability of storage determined by difference between “sell price” and “buy price” not price level • Price level does not impact of business case for investments in storage or flexible load • Dynamic retail prices that pass-through hourly wholesale price provide incentives for storage investments and flexible demand • Regulators typically suppress price volatility which implies need for mandates and out-of-market payments for storage and flexible demand • Increases cost of serving demand relative to passing through hourly wholesale prices
  6. 6. VI Simposio Empresarial Internacional FUNSEAM 2018 Motivation • Existing wholesale and retail pricing mechanisms used by many markets are poorly suited to least-cost deployment of intermittent renewable generation • Unnecessarily increases cost of transition to a low carbon electricity supply industry • Limits financial incentive for development and adoption of technologies necessary to maintain transmission and distribution grid reliability • Improving efficiency of wholesale and retail pricing also requires safeguards to protect consumers from market manipulation and exercise of market power • Not all high and low prices are caused by underlying supply and demand conditions
  7. 7. VI Simposio Empresarial Internacional FUNSEAM 2018 Outline of Presentation • Four aspects of wholesale and retail electricity pricing that are essential to achieve efficient market outcomes with a significant share of intermittent renewables • Match between market mechanism and actual system operation • Managing mitigating system-wide and local market power • Symmetric treatment of load and generation in wholesale market • Long-term resource adequacy mechanism • Inefficient distribution network pricing with an increased share of intermittent distributed generation • Wolak, F.A. (2017) “The Economic Impact of Inefficient Distribution Network Pricing: Evidence from California and a Framework for a Proposed Solution,” on web-site • Economically inefficient bypass of grid-supplied electricity • Limited incentive for deployment of storage and load-shifting technologies
  8. 8. VI Simposio Empresarial Internacional FUNSEAM 2018 Four Lessons for Efficient Wholesale and Retail Pricing with Significant Intermittent Renewable Generation
  9. 9. VI Simposio Empresarial Internacional FUNSEAM 2018 Lesson #1: Match Between Market Mechanism Used to Set Prices and Actual System Operation
  10. 10. VI Simposio Empresarial Internacional FUNSEAM 2018 Physical Realities of Transmission Network Operation • If suppliers know that model used to set prices is inconsistent with actual reality of how grid operates they will take actions to exploit this divergence • Classic example—Financial market assumes no transmission constraints in network (copper plate) for purposes of determining market price • Reality is that many low-offer price generation units cannot be accepted to supply energy because of configuration of network • Ordering offer prices from lowest to highest requires skipping many offers because of transmission constraints
  11. 11. VI Simposio Empresarial Internacional FUNSEAM 2018 Physical Realities of Transmission Network Operation • Typically use non-market mechanisms to – Pay suppliers above market price to supply more – Buy power from constrained suppliers to produce less • Suppliers quickly figure out how to take advantage of this divergence between financial market and physical realities of system operation for their financial gain – Many examples from industrialized and developing country markets • This is activity is typically called “re-dispatch process,” and in regions that do not respect this lesson in setting wholesale prices, these costs have rapidly grown
  12. 12. VI Simposio Empresarial Internacional FUNSEAM 2018 Solution: Locational Marginal Pricing • Price all relevant network and other operating constraints • Minimize as-bid cost to meet both energy and ancillary services demands at all locations in network subject to all relevant network and other operating constraints • Market operator computes optimal schedule of production for generation units given offer curves for energy and ancillary services and start-up cost offers submitted for all 24 hours of following day • Limits divergence between financial market and physical realities of grid operation • All US markets currently operate LMP markets – New Zealand and Singapore do as well
  13. 13. VI Simposio Empresarial Internacional FUNSEAM 2018 Solution: Locational Marginal Pricing • Objection to LMP often raised that it unfairly punishes customers that live in major load centers with higher prices – Grid would be planned differently if LMP pricing had been in place since start of electricity industry • Customers in San Francisco pay more than customers in Bakersfield (in Central Valley) • Can manage political challenge of charging different prices to different locations in grid through load-aggregation point (LAP) pricing – Charge all loads quantity-weighted average LMP over all points of withdrawal in retailer’s service territory
  14. 14. VI Simposio Empresarial Internacional FUNSEAM 2018 Solution: Multi-Settlement Market • All US wholesale electricity markets operate a day-ahead forward market and real-time imbalance market using LMP mechanism • Day-ahead forward market simultaneously procures all energy and ancillary services necessary to operate grid for all 24 hours of the following day by minimizing as-offered costs of energy and ancillary services • Allows Combined Cycle Gas Turbine (CCGT) units and other technologies with dynamic operating constraints to achieve least cost energy schedules for all hours of the day • Real-time market sets 5-minute prices that minimize as-offered cost of meeting imbalances between real-time supply and demand at all locations • Wolak (2011) “Measuring the Benefits of Greater Spatial Granularity in Short-Term Pricing in Wholesale Electricity Market” American Economic Review • Finds ~3 percent reduction in variable operating cost of meeting demand from multi-settlement LMP market relative to multi-settlement zonal market design • Even larger savings seem possible for European markets and markets with significant amounts of intermittent renewables
  15. 15. VI Simposio Empresarial Internacional FUNSEAM 2018 Ancillary Services and Renewables 2006 2012 2020 2006 2012 2020 2006 2012 2020 2006 2012 2020 Maximum Regulation Up Requirement (MW) 277 502 1,150 278 455 1,156 275 428 1,323 274 474 1,310 Maximum Regulation Down Requirement (MW) -382 -569 -1,112 -434 -763 -1,057 -440 -515 -1,278 -353 -442 -1,099 Maximum Load Following Up Requirement (MW) 2,292 3,207 6,797 3,140 3,737 7,015 2,680 3,326 6,341 2,624 3,063 6,457 Maximum Load Following Down Requirement (MW) -2,246 -3,275 -6,793 -3,365 -3,962 -6,548 -2,509 -3,247 -7,303 -2,424 -3,094 -6,812 Spring Summer Fall Winter Load, wind and solar forecast errors are the same as experienced today 2012 Case = 20% RPS (2,246 MW of solar and 6,688 MW of wind) 2020 Case = 33% RPS (12,334 MW of solar and 11,291 MW of wind) Expected increase in regulation and load-following capacity requirements in CAISO for increased intermittent resources
  16. 16. VI Simposio Empresarial Internacional FUNSEAM 2018 Solution: Multi-Settlement Market • Multi-settlement, LMP market prices all relevant operating constraints (including transmission losses) in the day-ahead and real-time markets • No infeasible schedules, so there is no need for re- dispatch process, because day-ahead market accounts for all relevant operating constraints in setting prices and day-ahead schedules • LMP markets price local and global scarcity of energy and ancillary services • LMPs can be above highest offer price at a location • Provides strong incentives for storage, load-shifting investments, and automated response investments to take place when and where they provide the greatest economic benefits to transmission grid
  17. 17. VI Simposio Empresarial Internacional FUNSEAM 2018 Lesson #2: System-Wide and Local Market Power Mitigation
  18. 18. VI Simposio Empresarial Internacional FUNSEAM 2018 Local Market Power Problem • Transmission network was built for former vertically integrated utility regime • Built to take advantage of fact that both transmission and local generation can each be used to meet an annual local energy need • Captures economies of scope between transmission and generation • Vertically-integrated utility considered local generation and transmission on equal basis to find least-cost system-wide solution to serve load • Transmission capacity across control areas of vertically-integrated monopolists built for engineering reliability • Sufficient transmission capacity so imports could be used to manage large temporary outages within control area • Few examples where transmission capacity was built to facilitate significant across-control-area electricity trade--California/Oregon
  19. 19. VI Simposio Empresarial Internacional FUNSEAM 2018 Origins of Local Market Power • Transmission network configuration, geographic distribution of wholesale electricity demand, concentration in local generation ownership, and production decisions of other generation units combine to create system conditions when a single firm may be only market participant able to meet a given local energy need • Firm is monopolist facing completely inelastic demand • No limit to price it can bid to supply this local energy • Regulator must design local market power mitigation mechanisms • Limits ability to supplier to exercise unilateral market power and distort market outcomes
  20. 20. VI Simposio Empresarial Internacional FUNSEAM 2018 Local Market Power Mitigation (LMPM) • All US markets have some form of ex ante automatic mitigation procedure for local market power • History of US industry led to transmission network poorly suited to wholesale market regime • All AMP procedures follow three-step process • Determine system conditions when supplier is worthy of mitigation • Mitigate offer of supplier to some reference level • Determine payment to mitigated and unmitigated suppliers • Two classes of AMP procedures • Conduct and impact • NY-ISO, ISO-NE • Market Structure-Based • CAISO, PJM, ERCOT 20
  21. 21. VI Simposio Empresarial Internacional FUNSEAM 2018 Local Market Power Mitigation (LMPM) • As share of energy from intermittent renewables increases, need for explicit local market power mitigation mechanism increases • When wind or solar energy is unavailable, remaining suppliers can have a substantial ability to exercise unilateral market power • Existence of a local market power mitigation mechanism increases likelihood that scarcity is cause of high prices at certain locations in grid • Pricing local scarcity stimulates efficient deployment of storage, load-shifting and automated response technologies • Straightforward to incorporate automatic LMPM mechanism in locational marginal pricing market 21
  22. 22. VI Simposio Empresarial Internacional FUNSEAM 2018 Lesson #3: Symmetric Treatment of Load Generation
  23. 23. VI Simposio Empresarial Internacional FUNSEAM 2018 Symmetric Treatment of Load and Generation • Folk Theorem—Restructuring benefits consumers only if all market participants face efficient price signals • Unless policymaker is willing do this, don’t restructure • Default price for “marginal (not all) consumption” of all consumers should be real-time wholesale price • Consumer is not required to pay this price for any of its consumption, just as generator is not required to sell any output at real-time price • To receive fixed price, consumer must sign a real-time price hedging arrangement with load-serving entity or electricity supplier • There is nothing unusual about hedging spot price risk • Health, automobile and home insurance, cellular telephone
  24. 24. VI Simposio Empresarial Internacional FUNSEAM 2018 Day-Ahead versus Real-Time Dynamic Pricing • Symmetric treatment of consumers and producers • Default price that producer receives and consumers pays is real-time price • Only if producer sells (consumer buys) in day-ahead forward market can it be paid (or pay) the day- ahead price, but only for quantity sold (bought) in day-ahead market and not for actual production (consumption) • If default price that all consumers pay and generators receive is real-time (not day-ahead) price, this will foster investments in storage, automated and manual demand response, and other innovative technologies for providing flexibility
  25. 25. VI Simposio Empresarial Internacional FUNSEAM 2018 Benefits of Active Participation • Why active participation of consumers is essential • Managing intermittency • Efficient deployment of distributed generation and storage • Managing unilateral market power • Three necessary conditions for active participation • Technology--Interval meters • Adequate information • Dynamic pricing • Wolak (2013) “Economic and Political Constraints on the Demand-Side of Electricity Industry Re-structuring Processes,” Review of Economics and Institutions, describes the rationales for these necessary conditions • Dynamic Pricing versus Time-of-Use Pricing • Dynamic pricing plans • Hourly Pricing (HP) • Critical Peak Pricing (CPP) • Critical Peak Pricing with Rebate (CPP-R) 25
  26. 26. VI Simposio Empresarial Internacional FUNSEAM 2018 Day-Ahead versus Real-Time Dynamic Pricing • All US dynamic pricing plans currently based on day-ahead prices • Critical peak pricing (CPP), CPP with rebate, Hourly pricing (HP) plans • Day-ahead prices are substantially less volatile than real-time prices • Consumers adjust day-ahead schedules based on day-ahead prices • Day-ahead price-responsiveness of customer assessed in • Wolak, Frank (2010) “An Experimental Comparison of Critical Peak and Hourly Pricing: The PowerCentsDC Program,” on web-site • Wolak, Frank (2006) “Residential Customer Response to Real-Time Pricing: The Anaheim Critical-Peak Pricing Experiment,” on web-site • Real-time responsiveness assessed in – Andersen, Hansen, Jensen, and Wolak (2017) “Using Real-Time Pricing and Information Provision to Shift Intra-Day Electricity Consumption: Evidence from Denmark” on web-site
  27. 27. VI Simposio Empresarial Internacional FUNSEAM 2018 Lesson #4: Mechanism for Ensuring Long- Term Resource Adequacy
  28. 28. VI Simposio Empresarial Internacional FUNSEAM 2018 Resource Adequacy Internationally • Two dominant resource adequacy paradigms outside of US • Capacity-based resource adequacy mechanism • Some or all units receive administrative $/KW-year payment • Cost-based energy market • Suppliers do not offer into day-ahead or real-time markets • System operator uses technical characteristics of units to dispatch and set an imbalance price • Paradigm exists in virtually all Latin American countries—Chile, Brazil, Peru, Argentina • Energy-based resource adequacy process • Long-term forward contracts for energy to hedge day-ahead and real- time price risk and finance new investment • Most industrialized countries—Australia, New Zealand, Nordic Market, ERCOT (Texas), California
  29. 29. VI Simposio Empresarial Internacional FUNSEAM 2018 US Approach to Resource Adequacy • Bid-based capacity payment mechanism with bid-based energy market exists primarily in eastern US markets • Pay market-clearing price for both energy and capacity • “Historical Rationale” for capacity payment mechanism (“market”) in US • Offer caps on energy market necessitated by inelastic real-time demand for electricity due to fixed retail prices that do not vary with hourly system demand • Capped energy market creates so called “missing money” problem because of argument that prices cannot rise to level that allows all generation units to earn sufficient revenues to recover costs • “Conclusion”--Capacity payment necessary for provide missing money • Capacity payment mechanism requires all retailers to purchase a pre- specified percentage (between 15 to 20 percent) above of their peak demand in installed capacity • Strong incentive for system operator and stakeholders to set a high reserve margin
  30. 30. VI Simposio Empresarial Internacional FUNSEAM 2018 US Approach to Resource Adequacy (RA) • Problems with logic underlying standard rationale for capacity payment mechanism • In a world with interval meters, customers can be charged default price equal to hourly real-time price for their hourly demand • For all system conditions hourly price can be set to equate hourly supply and demand, which eliminates missing money problem • Setting required amount of capacity to be purchased is likely to create missing money problem • By setting a high capacity requirement relative to peak demand, there is excess generation capacity relative to demand, which depresses energy prices, which creates need for increase in capacity payment • Capacity markets are extremely susceptible to exercise of unilateral market power • Vertical supply (installed capacity) meets vertical demand • Capacity payment mechanisms are only markets in name, administrative payment loosely based on cost in reality • Conclusion—”Capacity market” becomes very inefficient form of cost of service regulation layered on top of energy market
  31. 31. VI Simposio Empresarial Internacional FUNSEAM 2018 Benefits and Costs of Capacity-Based RA Process • Capacity-based resource adequacy process does not address primary resource adequacy problem with a large intermittent renewables share • Sufficient energy available to meet system demand for all states of the world with a large amount of intermittent resources • McRae and Wolak (2016) “Diagnosing the Causes, of the Recent El Nino Event and Recommendations for Reform” provide analysis of problem for Colombian electricity supply industry • Capacity shortfall highly unlikely to occur • Inadequate energy to meet demand far more likely • Fixed price forward contracts for energy insure against this risk • Wolak (2017) “Measuring the Impact of Purely Financial Participants on Wholesale and Retail Market Performance: The Case of Singapore,” argues for standardized futures market-based long-term resource adequacy process • Excess generation capacity due to required capacity purchases reduces true price volatility • Limits incentive for energy efficiency and storage investments
  32. 32. VI Simposio Empresarial Internacional FUNSEAM 2018 Conclusions • Challenges of integrating significant renewables at both ends of grid likely to become even greater and more costly to solve in the future • Efficient pricing of energy and ancillary services will ensure cost-effective development and deployment of innovative technologies necessary to manage an increasing amount of intermittent renewables – Price all relevant operating constraints for transmission and distribution networks in short-term and long-term markets
  33. 33. VI Simposio Empresarial Internacional FUNSEAM 2018 Conclusions • True wholesale and retail price volatility is the friend of the cost effective deployment of intermittent renewables and new technologies necessary to maintain system reliability • Major competition policy challenge is distinguishing wholesale and retail prices reflect true supply and demand conditions, not the exercise of unilateral market power – Multi-settlement LMP market – Local market power mitigation mechanism – Symmetric treatment of load and generation – Energy based resource adequacy process
  34. 34. VI Simposio Empresarial Internacional FUNSEAM 2018 Questions/Comments For more information http://www.stanford.edu/~wolak
  35. 35. VI Simposio Empresarial Internacional FUNSEAM 2018 California Storage Mandate • California has passed AB 2514 which requires three investor-owned utilities (IOUs) in California to procure 1,325 MW of electricity and thermal storage by 2020 • 700 MW target at transmission network level • 425 MW target at distribution network level • 200 MW target at the customer premises level • California Public Utilities Commission (CPUC) have allowed IOUs to rate-base almost $60 million in storage investments as transmission and distribution services • If an asset is rate-based, the IOU is guaranteed a rate- of-return on investment for useful life of investment • Storage mandates likely to be very expensive way to achieve storage needed to meet renewables goals

×