Market architecture

''Market architecture'' – Robert Wilson
HSS511I Régulation et stratégies dans les industries de réseau en Europe
Mid-term defense. Article

Student:
Vicente Mataix Ferrándiz

Slide 1 of 24


Introduction
+20 years privatization movement
Game theory complements clasic theory
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●

Viewpoints privatization
I. From big monopole
Light separated firms
II. Unbundling
Improve efficency by price
III. Overcome organizational inertia
Incentives
Architecture market
a) Structure market
b) Design market

Electricity as example

Student:

Introduction
Slide 2 of 24


Electric market
Incomplete and imperfectly competitive
Electricity is a flow
●

Flow




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No one owns electricity
Market participants obtain privilegies(reciprocals)
Highly complex transmission system

Market

Can be only one spot market

A lot spatial/temporal effects

Student:

SO(System Operator)

Introduction
Slide 3 of 24


1. The extent of decentralization
1.1 Centralized systems
1.2 Decentralized systems
1.3 Summary comparison
1.4 Hybrid designs

2. Microstructure of forward and spot market
2.1 The spot market
2.2 Forward markets for reserves
2.3 Forward markets for transmission
2.4 Forward markets for energy

3. Mitigation of market power
4. Conclusions
Additional bibliography
Student:

Slide 4 of 24


1. The extent of
decentralization
Student:

Slide 5 of 24


Centralized systems
Characteristics
Forward/real-time optimization (generation, transmission, reserves)
➔
Pricing based opportunity cost (shadow prices)
➔

Require
“max-SO”

Participants reveal information

Input in algorithm

Negative points
No incentives
Inefficiencies

Student:

Reflect actual costs
Weak comptetive forces
Ignore contingencies/Imperfect optimization

Incompleteness of
optimization
models

1.The extent of decentralization
Slide 6 of 24

1.1 Centralized systems


Decentralized systems
Solve the dual of a primal optimization problem but...
Problems
➔

Inter-temporal costs must be internalized by participants

➔

No explicit coordination

Expectation of rational behavior

This brings complexity

Student:

Solution forward markets

Slide 7 of 24

1.2 Decentralized systems


Summary comparison
Centralized designs
– Manipilation by participants

Pricing/settlement complex

– Strongest with big competition/optimization

Decentralized designs
– Incomplete/unsynchronised markets

Complex internalization participants

– Strongest with good scheduling decisions of participants

Student:

Slide 8 of 24

1.3 Summary comparison


Hybrid designs
Central management (SO)+Participants manage own operations

Comparision with others industries
–
–
–
–

Natural gas
Rail lines
Airlines
Telecommunications

Student:

Slide 9 of 24

1.4 Hybrid designs/Comparision


2. Microstructure of
forward and spot
market
Student:

Slide 10 of 24


Spot market
➔

Flow

Interval 5/10 min (Imperfect metering and SW)

– Continous balancing demand/supply
– Expensive storage

➔

➔

Growing → “inc”
Declining → “dec”

Price
– Economic terms
Real-time+transmission cost (SO)
– Practice
Real-time price merit order
Systems
– Centralized
– Decentralized

Student:

SO have total control
Participation is voluntary

Greater volatility

2.Microstructure of forward and spot market
Slide 11 of 24

2.1 Spot market


Forward market for reserves
➔

Centralized vs Descentraized
– Centralized systems SO asign reserve energy
– Decentralized systems Self-provide/ buy to SO (weakest part desc.)

➔

Remains vertically integrated utilities
– Little use reserves in demand side
– Hierarchy derived from response times
– Price
Capacity-availabilty vs Price offered SO

Student:

Slide 12 of 24

2.2 Forward market for reserves


Forward market for transmission point2point (energy dissipated)
Transmission is a public good Technical externalities
➔
Decentralized systems vs centralized
– Decentralized
• SO buy counterflows in market
• Price: Rely to market “inc”/”dec” (fragile, possible collapse)
– Zonal pricing (strategies/no local effects)
• Sequence optimization
• Transmission right: Financial/Schedule
– Centralized
• Reduce flow/Produce counterflows
• Price: System price+ Injection price
• Symultaneous optimization
• Transmission right: Injection/withdrawal point
➔

Student:

Slide 13 of 24

2.3 Forward market for transmission


Forward market for energy
Time frame
– Real time/Day ahead
Reserves/voltage control/etc...
– Longer time frames
➔
Centralized systems vs Decentralized systems
– Centralized Consolidate
– Decentraliced Not consolidate
Better describe of forward markets
➔
Organizational forms
– Contracts between participants (Market Manager broker)
– Exchanges (Market Manager adds demand and supply)
➔
Trading arrangements
– Try to solve the deficiencies of exchange procedures
➔

Student:

Slide 14 of 24

2.4 Forward market for energy


3. Mitigation of power
market
Student:

Slide 15 of 24


➔

Mitigate market power
– Monopoles with long-term contracts audited
– Long-term forward contracts with fixed prices
– ….

➔

Centralized systems vs Decentralized systems
– Decentralized just monitor
– Centralized have more control of market

Student:

3.Mitigation of power market
Slide 16 of 24


4. Conclusions
Student:

Slide 17 of 24

➔

Centralized vs Decentralized
– Centralized designs Optimize and coordinate operations (Few incentives/
Market powers)
– Decentralized designs Incentives and competition (Deficiencies
coordinated/Separate spot and forward market/Price discovery)

➔

not

Price discovery Better performance
– “Invisible hand”
– Recent procedure to improve price discovery

➔

Economic theory Contribute to market architecture
– Electric market example: Promote price discovery
– Help in trend to decentralization (author opinion)

Student:

5.Conclusions
Slide 18 of 24


Personal point of view
– Why is important this article
– Limitations
– Future

Student:

5.Conclusions
Slide 19 of 24


Addditional
bibliography
Student:

Slide 20 of 24


Centralization and autonomy in international-marketing decision making.
Jacques Picard et al. Topic: Centralization. Note:Old (1993)

Dynamic general equilibrium models with imperfectly competitive product
markets. Julio J.Rotmberg et al. Topic: Modelization of market. Note:Old (1993)
Institutional competition versus centralization: Quo vadis Europe?. Horst
Siebert et al. Topic: Centralization

Centralization vs. decentralization in a multi-unit organization: A
computational model of a retail chain as a multi-agent adaptive system.
Chang Myong-Hun et al. Topic: Centralization and modelization of market

The economist as enginner: Game theory, experimentation and
computation as tools for design economics. Alvin E. Roth. Topic:
Modelization of market (econometrics)

Student:

Slide 21 of 24


Market design: The policy uses of theory. John McMillan. Topic: Market design
Centralization vs decentralization. An application to price setting by a
multi-market. Ricardo Alonso et al. Topic: Centralization
The european electricity market: Centralization of regulation or
competition between regulatory approaches?. Lars Kumkar.
Topic:
Centralization and electricity market

The trouble with electricity markets: understanding California’s
restructuring disaster. Severin Borenstein. Topic: Electricity market

Student:

Slide 22 of 24


Thanks for your
attention
Student:

Slide 23 of 24


Student:

Slide 24 of 24

Market architecture

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