Demand response resources: Who is responsible for implementation in a deregulated market?

Demand response resources (DRR) have potential to offer substantial benefits in the form of improved economic efficiency in wholesale electricity markets. Those benefits include better capacity factors for existing capacity, reductions in requirements for new capacity, enhanced reliability, relief of congestion and transmission constraints, reductions in price volatility, mitigation of market power and lower electricity prices for consumers. However, DRR has been slow to penetrate. There has been substantial disagreement as to which entities in a restructured market should promote the expanded implementation of DRR. This paper contends that no single entity can perform this function. But rather, wider implementation will need to accrue from coordinated actions along the electricity supply chain.     

Effects of regulatory reforms in the electricity supply industry on electricity prices in developing countries

Electric power sector reforms in the electricity supply industry have had an impact on industrial and household prices in developing countries in Latin America, the former Soviet Union, and Eastern Europe. Using original panel data for 83 countries during the period from 1985 to 2002, we examine how each policy instrument of the reform measures influenced electricity prices for countries in the above regions. We found that variables such as entry of independent power producers (IPP), unbundling of generation and transmission, establishment of a regulatory agency, and the introduction of a wholesale spot market have had a variety of impacts on electricity prices, some of which were not always consistent with expected results. The research findings suggest that neither unbundling nor introduction of a wholesale pool market on their own necessarily reduces the electric power price. In fact, contrary to expectations, there was a tendency for the price to rise. However, coexistent with an independent regulator, unbundling may work to reduce electricity prices. Privatization and the introduction of foreign IPP and retail competition lower electricity prices in some regions, but not all.     

Regulated and unregulated Nordic retail prices

Nordic residential electricity consumers can now choose among a number of contracts and suppliers. A large number of households have continued to purchase electricity from the incumbent supplier at default contract terms. In this paper, we compare the situation for such passive customers. Danish default prices are regulated whereas default prices in the other countries are unregulated. Systematic price differences exist among the Nordic countries. However, as wholesale prices sometimes differ the gross margin is a more relevant indicator. Regulated gross margins are lower in Denmark than in Sweden but higher than in Norway and Finland. Because of market design Norwegian default contracts are competitive whereas Swedish contracts provide the retailer with some market power. We interpret the low Finnish margins as a result of municipal retailers continuing traditional pricing from the monopoly period. Danish margins are higher than the competitive Norwegian margins but are earned from a much lower level of consumption. The annually margins earned per consumer are very close in the two countries, which indicates that the Danish regulation is achieving its objective of approaching competitive prices.     

Generators' bidding behavior in the NYISO day-ahead wholesale electricity market

This paper proposes a statistical and econometric model to analyze the generators' bidding behavior in the NYISO day-ahead wholesale electricity market. The generator level bidding data show very strong persistence in generators' grouping choices over time. Using dynamic random effect ordered probit model, we find that persistence is characterized by positive state dependence and unobserved heterogeneity and state dependence is more important than unobserved heterogeneity. The finding of true state dependence suggests a scope for economic policy intervention. If NYISO can implement an effective policy to switch generators from higher price groups to lower price groups, the effect is likely to be lasting. As a result, the market price can be lowered in the long-run. Generators' offered capacity is estimated by a two-stage sample selection model. The estimated results show that generators in higher-priced groups tend to withhold their capacity strategically to push up market prices. It further confirms the importance of an effective policy to turn generators into lower price groups in order to mitigate unexpected price spikes. The simulated market prices based on our estimated aggregate supply curve can replicate most volatility of actual DA market prices. Applying our models to different demand assumptions, we find that demand conditions can affect market prices significantly. It validates the importance of introducing demand side management during the restructure of electricity industry.     

Simulation of current pricing-tendencies in the German electricity market for private consumption

The German electricity market for private consumption is characterized by increasing prices and low participation of the consumers. This prompts us to investigate the interdependencies between the customers’ engagement in the market and the suppliers’ pricing strategies. Based on an analysis of the German retail market, an agent-based simulation model is developed. Whereas the behaviour of private customers is calibrated on field data, the suppliers learn to maximize profits with a feedback-learning heuristic. The simulation results show a tendency of rising prices, which are created without the assumption of tacit collusion among suppliers. We conclude that in Germany the current market pressure of private customers may not be a sufficient incentive for suppliers to lower electricity prices.     

Market power in the European electricity market—The impacts of dry weather and additional transmission capacity

This paper uses a static computational game theoretic model of a fully opened European electricity market and can take strategic interaction among electricity-producing firms into account. The model is run for a number of scenarios: first, in the baseline under perfect competition, the prices differ due to the presence of various generation technologies and a limited ability to exchange electricity among countries. In addition, when large firms exercise market power, the model runs indicate that prices are the highest in countries where the number of firms is low. Second, dry weather would increase the prices in the hydro-rich Nordic countries followed by the Alpine countries. The price response would be about 20% higher with market power. Third, more transmission capacity would lower the prices in countries with high prices and it also reduces the impact of market power. Hence, more transmission capacity can improve market competitiveness.     

Did residential electricity rates fall after retail competition? A dynamic panel analysis

A key selling point for the restructuring of electricity markets was the promise of lower prices. There is not much consensus in earlier studies on the effects of electricity deregulation in the U.S., particularly for residential customers. Part of the reason for not finding a consistent link with deregulation and lower prices was that the removal of transitional price caps led to higher prices. In addition, the timing of the removal of price caps coincided with rising fuel prices, which were passed on to consumers in a competitive market. Using a dynamic panel model, we analyze the effect of participation rates, fuel costs, market size, a rate cap and switch to competition for 16 states and the District of Columbia. We find that an increase in participation rates, price controls, a larger market, and high shares of hydro in electricity generation lower retail prices, while increases in natural gas and coal prices increase rates. We also find that retail competition makes the market more efficient by lowering the markup of retail prices over wholesale costs. The effects of a competitive retail electricity market are mixed across states, but generally appear to lower prices in states with high participation rates.     

High penetration wind generation impacts on spot prices in the Australian national electricity market

This paper explores wind power integration issues for the South Australian (SA) region of the Australian National Electricity Market (NEM) by assessing the interaction of regional wind generation, electricity demand and spot prices over 2 recent years of market operation. SA's wind energy penetration has recently surpassed 20% and it has only a limited interconnection with other regions of the NEM. As such, it represents an interesting example of high wind penetration in a gross wholesale pool market electricity industry. Our findings suggest that while electricity demand continues to have the greatest influence on spot prices in SA, wind generation levels have become a significant secondary influence, and there is an inverse relationship between wind generation and price. No clear relationship between wind generation and demand has been identified although some periods of extremely high demand may coincide with lower wind generation. Periods of high wind output are associated with generally lower market prices, and also appear to contribute to extreme negative price events. The results highlight the importance of electricity market and renewable policy design in facilitating economically efficient high wind penetrations.     

Analysis of competition and market power in the wholesale electricity market in India

The electricity reforms were initiated in India with the objective of promoting competition in the electricity market. In order to promote competition, the Electricity Act 2003 was enacted and various policy initiatives were taken by the Government of India. Central Electricity Regulatory Commission (CERC) also facilitated competition through the regulatory framework of availability based tariff, Indian Electricity Grid Code, open access in inter-state transmission, inter-state trading and power exchanges. Despite these initiatives, electricity prices increased in the Wholesale Electricity Market in India (WEMI). This paper analyses the market structure and competitiveness in the WEMI. There are, of course, various potential reasons for the rise in the electricity price. This paper seeks to investigate, if market power was one of the reasons for increase in market prices. Concentration ratio, Herfindahl–Hirschman index, Supply Margin Assessment, and Residual Supply Index have been used to measure market power. This paper also uses the price–cost mark-up to examine, if exercise of market power led to higher margins. The analysis suggests that market power of firms may be part of the reason for the increase in electricity prices in WEMI. The study suggests various measures to increase competition in the WEMI.     

The British Model in Britain: Failing slowly

In 1990, Britain reorganised its electricity industry to run on competitive lines. The British reforms are widely regarded as successful and the model used provides the basis for reforms of electricity industries worldwide. The main reason for this perception of success is major reductions in the real price of electricity with no reduction in service quality. This paper examines whether the reputation of the British reforms is justified. It concludes that the reputation is not justified and that serious fundamental problems are beginning to emerge. The central question is: have the British reforms resulted in the creation of efficient wholesale and retail markets? On this criterion, the reforms have failed. The wholesale market is dominated by obscure long-term contracts, privileged access to the market and self-dealing within integrated generator/retailers, leaving the spot markets with minimal liquidity and unreliable prices. The failure to develop an efficient wholesale market places the onus on consumers to impose competitive forces on electricity companies by switching regularly. Small consumers will not do this and they are paying too much for their power. For the future, there is a serious risk that the electricity industry will become a weakly regulated oligopoly with a veneer of competition.     

Impact of wind farm integration on electricity market prices

Wind generation is considered one of the most rapidly increasing resources among other distributed generation technologies. Recently, wind farms with considerable output power rating are installed. The variability of the wind output power, and the forecast inaccuracy could have an impact on electricity market prices. These issues have been addressed by developing a single auction market model to determine the close to real-time electricity market prices. The market-clearing price was determined by formulating an optimal power flow problem while considering different operational strategies. Inaccurate power prediction can result in either underestimated or overestimated market prices, which would lead to either savings to customers or additional revenue for generator suppliers.     

Customer-economics of residential photovoltaic systems (Part 1): The impact of high renewable energy penetrations on electricity bill savings with net metering

Residential photovoltaic (PV) systems in the US are often compensated at the customer's underlying retail electricity rate through net metering. Given the uncertainty in future retail rates and the inherent links between rates and the customer–economics of behind-the-meter PV, there is growing interest in understanding how potential changes in rates may impact the value of bill savings from PV. In this article, we first use a production cost and capacity expansion model to project California hourly wholesale electricity market prices under two potential electricity market scenarios, including a reference and a 33% renewables scenario. Second, based on the wholesale electricity market prices generated by the model, we develop retail rates (i.e., flat, time-of-use, and real-time pricing) for each future scenario based on standard retail rate design principles. Finally, based on these retail rates, the bill savings from PV is estimated for 226 California residential customers under two types of net metering, for each scenario. We find that high renewable penetrations can drive substantial changes in residential retail rates and that these changes, together with variations in retail rate structures and PV compensation mechanisms, interact to place substantial uncertainty on the future value of bill savings from residential PV.     

Electricity wholesale market prices in Europe: Convergence?

This paper tests the hypothesis that the ongoing restructuring process in the European electricity sector has led to a common European market for electricity. Based on a Principal Component Analysis (PCA) of wholesale electricity prices in 2002–2006, we reject the assumption of full market integration. For several pairs of countries, the weaker hypothesis of (bilateral) convergence is accepted based on unit root tests (KPSS and ADF) and a convergence test based on filtered pairwise price relations. This indicates that the efforts to develop a single European market for electricity were so far only partially successful. We show that the daily auction prices of scarce cross-border transmission capacities are insufficient to explain the persistence of international price differentials. Empirically, our findings confirm the insufficiency of explicit capacity auctions as stated in the theoretical literature.     

Impact of wind generation control strategies, penetration level and installation location on electricity market prices

Integration of wind facilities into power system grids have several impact on power system related issues including; transmission congestion, optimum power flow, system stability, power quality, system economics and load dispatch. Consequently, wind farm control strategy, location across the distribution network and its penetration level could have an impact on electricity market prices. This paper addresses these issues, by developing a single auction market model. An optimal power flow problem was formulated for determining the close to real time electricity market-clearing price and the total cost of generation. Simulation results, considering different operational cases, are presented to highlight the impact.     

Transmission-constrained oligopoly in the Japanese electricity market

We simulate the Japanese wholesale electricity market as a transmission-constrained Cournot market using a linear complementarity approach. First, we investigate the effects of upgrading the bottleneck transmission line between the eastern and western regions, focusing on the mitigation of transmission congestion. Although increasing the bottleneck capacity would lead to welfare gains, they might not be substantial particularly when transmission capacity costs are taken into account. Second, we examine the effects of splitting the largest electric power company, which is located in the eastern region, focusing on the mitigation of market power. Splitting the largest company into two companies would lead to a 25% reduction in the eastern price, and a 50% reduction in deadweight loss. The divestiture of the largest company would have a significant effect of mitigating market power in the Japanese electricity market.     

Supply curve bidding of electricity in constrained power networks

This paper presents a Supply Curve Bidding (SCB) approach that complies with the notion of the Standard Market Design (SMD) in electricity markets. The approach considers the demand-side option and Locational Marginal Pricing (LMP) clearing. It iteratively alters Supply Function Equilibria (SFE) model solutions, then choosing the best bid based on market-clearing LMP and network conditions. It has been argued that SCB better benefits suppliers compared to fixed quantity-price bids. It provides more flexibility and better opportunity to achieving profitable outcomes over a range of demands. In addition, SCB fits two important criteria: simplifies evaluating electricity derivatives and captures smooth marginal cost characteristics that reflect actual production costs. The simultaneous inclusion of physical unit constraints and transmission security constraints will assure a feasible solution. An IEEE 24-bus system is used to illustrate perturbations of SCB in constrained power networks within the framework of SDM. By searching in the neighborhood of SFE model solutions, suppliers can obtain their best bid offers based on market-clearing LMP and network conditions. In this case, electricity producers can derive their best offering strategy both in the power exchange and the long-term contractual markets within a profitable, yet secure electricity market.     

Abuse of dominance and antitrust enforcement in the German electricity market

In 2008, the European Commission investigated E.ON, a large and vertically integrated electricity company, for the alleged abuse of a joint dominant position by strategically withholding generation capacity in the German wholesale electricity market. The case was settled after E.ON agreed to divest 5 GW generation capacity as well as its extra-high voltage network. We analyze the effect of these divestitures on wholesale electricity prices. Our identification strategy is based on the observation that energy suppliers have more market power during peak periods when demand is high. Therefore, a decrease in market power should lead to convergence between peak and off-peak prices, after controlling for different demand and supply conditions as well as the change in generation mix due to the expansion of renewable technologies. Using daily electricity prices for the 2006–2012 period, we find economically and statistically significant convergence effects after the settlement of the case. In a richer specification, we show that the price reductions appear to be mostly due to the divestiture of gas and coal plants, which is consistent with merit-order considerations. Additional cross-country analyses support our results.     

Merit-order effects of renewable energy and price divergence in California’s day-ahead and real-time electricity markets

We answer two policy questions: (1) what are the estimated merit-order effects of renewable energy in the California Independent System Operator’s (CAISO’s) day-ahead market (DAM) and real-time market (RTM)? and (2) what causes the hourly DAM and RTM prices to systematically diverge? The first question is timely and relevant because if the merit-order effect estimates are small, California’s renewable energy development is of limited help in cutting electricity consumers’ bills but also has a lesser adverse impact on the state’s investment incentive for natural-gas-fired generation. The second question is related to the efficient market hypothesis under which the hourly RTM and DAM prices tend to converge. Using a sample of about 21,000 hourly observations of CAISO market prices and their fundamental drivers during 12/12/2012–04/30/2015, we document statistically significant estimates (p-value≤0.01) for the DAM and RTM merit-order effects. This finding lends support to California’s adopted procurement process to provide sufficient investment incentives for natural-gas-fired generation. We document that the RTM-DAM price divergence partly depends on the CASIO’s day-ahead forecast errors for system loads and renewable energy. This finding suggests that improving the performance of the CAISO’s day-ahead forecasts can enhance trading efficiency in California’s DAM and RTM electricity markets.     

The progressive inefficiency of replacing renewable obligation certificates with contracts-for-differences in the UK electricity market

This paper looks at the emerging risk/return profile for new renewable assets as a conventional wholesale electricity market progressively decarbonises. Using a detailed fundamental model of price formation risks, under increasing replacement of fossil fuel facilities with onshore and offshore wind, we show that the risk return profile becomes less attractive over time, and may therefore need sustained and possibly increasing policy support. Furthermore, we show that green certificate trading may become progressively more attractive as a supplementary support to wholesale prices, compared to fixed feed-in-tariffs. This is because the increasingly negative correlation between renewable output and wholesale prices reduces its revenue risk compared to fixed feed-in tariffs, if other factors remain constant, and thereby improves conventional financial performance risk metrics. In particular, this suggests that the recent energy policy change in Britain to move away from green certificates and into contracts-for-differences may have been ill-founded.     

Quantifying the impacts of national renewable electricity ambitions using a North–West European electricity market model

This work builds a comprehensive North–West European Electricity Market model for the year 2020 and uses it to quantify the impacts of ambitious national renewable electricity targets. The geographical coverage of the model comprises Germany, France, Belgium, Netherlands, Luxemburg, Great Britain and Ireland. The model simulates the electricity market operation for the entire region at half hourly resolution and produces results in terms of electricity prices, cross border flows, emissions and associated total system costs. The impact of two carbon prices is examined within the model. Results highlight the policy challenges that arise when individual Member States formulate renewable energy plans in isolation in the absence of integrated modelling of interconnected regions as cross border power flows play a more significant role in market dynamics especially in the presence of geographically dispersed variable renewable generation sources such as wind and solar. From a policy perspective results suggest that based on these national plans, congestion will be present on a number of key lines at long periods during the year.