Generation capacity adequacy in interdependent electricity markets

This paper deals with the practical problems related to long-term security of supply in regional electricity markets with transmission constraints. Differences between regulatory policies and market designs in terms of generation adequacy policies may distort the normal functioning of the neighboring markets, as well as the reliability of supply. We test the effect of heterogeneous regulatory design between two interdependent markets: energy-only market, price-capped market without capacity mechanisms and price-capped markets with forward capacity contracts obligation. We rely on a long-term market simulation model in system dynamics that characterizes expansion decision in a competitive regime. The results show that differences in market designs affect both price and reliability of supply in the two markets. We examine both the short and long terms effect, and how free-riding may occur where capacity adequacy policies are adopted in one market but not the other. The main finding is that the lack of harmonization between local markets in policies to ensure capacity adequacy may lead to undesirable side effects.     

Simulation of the long-term dynamic of a market-based transmission interconnection

Competitive markets set a framework in which unregulated market-based interconnections are allowed and encouraged. However, the presence of merchant transmission lines in the role of interconnector raises questions about the impact of these agents on the market conditions and system operation. The interconnector could be allowed to withhold capacity in order to keep the price difference (and profit of it) or be enforced by a must-offer provision to bid all its capacity. In this paper, the long-term dynamic of a market interconnection is studied and analyzed in a test system through a bottom-up simulation model. The outcomes are measured by the level of electricity prices along the simulated period and the annual amount of energy not supplied. The results show that the prices are strongly affected in the average value and in the standard deviation. The benefits of an interconnection as regards reliability are not hidden by the merchant nature of the interconnector. The results of the simulation show that letting the interconnector to control the bids of capacity offered to the markets is not detrimental to the markets. However, there is a lost of benefits compared with the case of a mandatory must-offer provision if compared at the same capacity of transmission line.     

A regional energy paradox—the case of Central Norway

Central Norway is expected to have a gap of 8 TWh in 2010 because of heavy investments in energy-intensive industries. The region has two landing sites for natural gas and a considerable potential for wind power to cover the gap. Small-scale hydropower and upgrading of existing hydropower plants also constitute a regional energy potential. Paradoxically, the most realistic investment prospect seems to be extensive investments in new transmission lines to cover the supply deficit. The aim of this paper is to present a problem of regional supply security and public intervention to illustrate and discuss the challenges of arriving at long-term capacity adequacy in deregulated electricity markets.     

Joint electricity and carbon market for Northeast Asia energy interconnection

Decarbonization of the electricity sector is crucial to mitigate the impacts of climate change and global warming over the coming decades. The key challenges for achieving this goal are carbon emission trading and electricity sector regulation, which are also the major components of the carbon and electricity markets, respectively. In this paper, a joint electricity and carbon market model is proposed to investigate the relationships between electricity price, carbon price, and electricity generation capacity, thereby identifying pathways toward a renewable energy transition under the transactional energy interconnection framework. The proposed model is a dynamically iterative optimization model consisting of upper- level and lower-level models. The upper-level model optimizes power generation and obtains the electricity price, which drives the lower-level model to update the carbon price and electricity generation capacity. The proposed model is verified using the Northeast Asia power grid. The results show that increasing carbon price will result in increased electricity price, along with further increases in renewable energy generation capacity in the following period. This increase in renewable energy generation will reduce reliance on carbon-emitting energy sources, and hence the carbon price will decline. Moreover, the interconnection among zones in the Northeast Asia power grid will enable reasonable allocation of zonal power generation. Carbon capture and storage (CCS) will be an effective technology to reduce the carbon emissions and further realize the emission reduction targets in 2030-2050. It eases the stress of realizing the energy transition because of the less urgency to install additional renewable energy capacity.     

On the long run effects of market splitting: Why more price zones might decrease welfare

In liberalized electricity markets we observe different approaches to congestion management. While nodal pricing is implemented in Canada and some markets in the United States, European markets are split up into a limited number of price zones with uniform prices, in order to at least partially realize the benefits of regional price differentiation. Zonal boundaries often coincide with national borders, but some countries are also split into multiple zones. In this paper we shed light on possible negative welfare effects of market splitting that arise in a model where investment incentives in new generation capacity are taken into account if zones are misspecified. We show that standard approaches to configure price zones – on the basis of projected nodal price differences or congested transmission capacity – may fail to suggest reasonable zone specifications. Also an adjustment of Available Transfer Capacities (ATCs) between zones or a switch to flow-based market splitting does not ensure positive welfare effects. Our analysis suggests that a careful and detailed evaluation of the system is needed to ensure a reasonable zone configuration.     

Economic viability and regulation effects of infrastructure investments for inter-regional electricity transmission and trade in China

The transition of energy structure to renewable energy is a social and systematic engineering that requires complex regional power interconnection as a support. Thus, an assessment of the economic viability of infrastructure investments for supporting such transmission expansion is crucial. This study presents a multi-regional power system optimization model to evaluate the potential economic benefits of infrastructure investments for the national inter-regional electricity network in China under various scenarios in the context of low-carbon transformation. Key factors influencing economic benefits are analyzed specifically and regulation barriers associated with inter-regional electricity trade are given particular attention. The results show that approximately 140 Giga Watt (GW) of infrastructure construction for the inter-regional electricity trade network is economically viable during the planning horizon. These new interconnections would lead to 250–440 billion RMB of economic benefits. Regional electricity trade barriers caused by imperfect market mechanisms have a negative impact on the economic benefits of transmission infrastructure investments, although they promote scale and utilization efficiency in the power sector of electricity-importing regions. Improving the national grid coordination mechanism to break the grid isolation between the State Grid Corporation of China and the China Southern Power Grid is crucial, because a large number of transmission lines connecting these two national-level power grids are economically viable.     

An incentive mechanism for electricity transmission expansion in Mexico

This study proposes an incentive regulatory framework for expanding electricity transmission in Mexico. A two-part pricing model is implemented within a combined merchant-regulatory structure. Three cases are considered. In the first, a monopolist with “postage stamp tariffs” serves the whole country using uniform prices. In the second case, one firm holds a regional monopoly in each of the five electricity areas. In the third, a monopolist operates in all areas of the national electricity system and discriminates in the prices it charges in each of the regions. This approach is described and then applied to the Mexican electricity transmission network. Using real data, the study compares all three cases in terms of profits, capacity increases, and network expansion. The results are found to depend on two effects: the “economies-of-scale effect”, in which the maximum level is reached with a single network; and the “discriminatory effect” that results when a firm can discriminate among types of consumers. The economies-of-scale effect produces greater capacity and network expansion, whereas the discriminatory effect increases profits.     

Executive summary of the 2000 US regional transmission organizationstudy

Over the past year, the future makeup of the US electric transmission industry has become better defined, although a number of unresolved issues still remain. The Federal Energy Regulatory Commission (FERC) has articulated its vision of a national transmission grid controlled by large entities, which it calls regional transmission organizations (RTO). FERC Order 2000 provides the latest piece of architecture to help define and drive the development of competitive markets for electricity generation and its transmission across the system     

Transmission capacities and competition in Western European electricity market

The integration of national electricity markets into a single European one is expected to reduce the ability of dominant players to exercise market power. This paper investigates whether or not existing transmission capacities of cross-border interconnectors are sufficient to achieve this result and create vigorous competition in the market. A model with two decision levels is used. On the first level profit maximizing generators play Cournot game against each other. On the last level the system operator clears the market and determines flows in the network to maximize social welfare subject to a set of physical constraints. As each strategic generator anticipates her impact on equilibrium prices and congestion in the system, her optimization problem is subject to equilibrium constraints from the system operator's problem.The analysis demonstrates that interconnector capacities in Western Europe are insufficient for integration alone to reduce the exercise of market power. I compare several possible competition-enhancing policies: expansion of interconnectors and different scenarios of national markets’ restructuring. I show that although increase of line capacity is a useful tool to stimulate competition in an integrated market, it is not a substitute for the restructuring of large players.     

Modelling the impacts of electric vehicle recharging on the Western Australian electricity supply system

This study investigates the potential impacts of EVs on the Western Australian electricity grid, the constraints on the system’s capacity to supply electricity for EV recharging and the options for managing those potential impacts and constraints. Western Australia is geographically isolated and the electricity network has no interconnection with neighbouring regions. The State energy and vehicle markets are independent of issues occurring in neighbouring states. Western Australia is a relatively clean sample space. This study eliminates uncertainty in vehicle adoption rates from analysis by assuming that all new vehicles are EVs. This gives a worst case scenario in terms of load growth and shows that it will over 200,000 EVs, which represents 10% of the fleet, before there is any significant impact on peak demand even if charging behaviours are left unfettered. The study also shows, however, that the electricity supply and transmission industry can achieve significant short- and long-term benefits if vehicle charging behaviours are managed from the outset, through, for example, demand management or structured tariffs. In the short-term, providing incentive for off-peak recharging increases utilisation of existing transmission capacity, and cheaper, more efficient base-load generation infrastructure. In the long-term, investment in more underutilised capacity can be avoided.     

Cost‐optimized allocation of wind power investments: a Nordic–German perspective

Using a linear cost minimization model with a 1 h time resolution, we investigated the influence of geographic allocation of wind power on large‐scale wind power investments, taking into account wind conditions, distance to load, and the nature of the power system in place (i.e. power generation and transmission capacities). We employed a hypothetical case in which a 20% wind power share of total electricity demand is applied to the Nordic–German power system. Free, i.e. geographically unrestricted, allocation of new wind power capacity is compared with a case in which national planning frameworks impose national limitations on wind power penetration levels. Given the cost assumptions made in the present work, the prospect of increasing the wind power capacity factor from 20 to 30% could motivate investments in transmission capacity from northern Scandinavia to continental Europe. The results obtained using the model show that the distribution of wind farms between regions with favorable wind conditions is dependent upon two factors: (i) the extent to which existing lines can be used to transmit the electricity that results from the new wind power and (ii) the correlation for wind power generation between the exporting region and the wind power generation already in place. In addition, the results indicate that there is little difference, i.e. just over 1%, in total yearly cost between the free allocation of new wind power and an allocation that complies with national planning frameworks. However, on a national level, there are significant differences with respect to investments in transmission and wind power capacities and the replacement of conventional power generation. Copyright © 2012 John Wiley & Sons, Ltd.     

Statistical analysis of negative prices in European balancing markets

The presence of renewable power generation technologies increases the need for system flexibility due to their variable nature. The increasing share of variable renewables in European power systems create a downward adequacy problem, which deals with the ability of power systems to cope with periods of excess generation. The occurrence of negative prices on Central Western European electricity markets confirms the relevance of this issue, which is referred to as “incompressibility of power systems” and is assessed as a barrier for further renewable power integration. The objective of this article is to identify the main drivers of negative price periods in European balancing markets, by means of both an empirical and regression analysis. Results confirm a positive relation with the scheduled generation of renewables and inflexible base load, as well as a negative relation with the scheduled system load. Furthermore, the occurrence of negative prices is related to the positive and negative forecast error of renewable generation and demand, respectively. It is concluded that negative balancing market prices provide a market signal for investments in flexibility sources such as flexible generation, demand response, electricity storage, and interconnector capacity.     

Mothballing in power markets: An experimental study

The deregulation of many electricity markets over the last two decades raises a number of issues, among which: securing adequate investments in capacity, and the possibility of cyclical behavior in capacity, are important for security of supply. A number of policies and market mechanisms aiming for capacity adequacy and market stability exist; in this paper we focus on one of these, mothballing of generation capacity. In electricity markets, mothballing is the possibility for a power generation company to temporarily withdraw generation capacity for a time, often for a year or more. Our hypothesis is that mothballing will help to stabilize markets, but at the same time increase prices. We test this hypothesis using laboratory experiments, with a simplified model of a generic electricity market. We report an experiment with twelve markets, where subjects make investment decisions; half of them had full capacity utilization (T1) and the other half had the option to mothball capacity (T2). The predictions of the effects of mothballing were confirmed in the experimental markets: prices and generation capacity exhibit clear cycles in T1, and damped cycles in the second set of experiments, T2. Furthermore, mothballing leads to higher prices on average.     

Planning India's long-term energy shipment infrastructures for electricity and coal

The Purdue Long-Term Electricity Trading and Capacity Expansion Planning Model simultaneously optimizes both transmission and generation capacity expansions. Most commercial electricity system planning software is limited to only transmission planning. An application of the model to India's national power grid, for 2008–2028, indicates substantial transmission expansion is the cost-effective means of meeting the needs of the nation's growing economy. An electricity demand growth rate of 4% over the 20-year planning horizon requires more than a 50% increase in the Government's forecasted transmission capacity expansion, and 8% demand growth requires more than a six-fold increase in the planned transmission capacity expansion. The model minimizes the long-term expansion costs (operational and capital) for the nation's five existing regional power grids and suggests the need for large increases in load-carrying capability between them. Changes in coal policy affect both the location of new thermal power plants and the optimal pattern inter-regional transmission expansions.     

What drives renewable energy development?

This viewpoint reviews renewable energy development in 14 markets that differ in market structure (restructured vs. not restructured), use of feed-in-tariff (FIT) (yes vs. no), transmission planning (anticipatory vs. reactive), and transmission interconnection cost allocated to a renewable generator (high vs. low). We find that market restructuring is not a primary driver of renewable energy development. Renewable generation has the highest percent of total installed capacity in markets that use a FIT, employ anticipatory transmission planning, and have loads or end-users paying for most, if not all, of the transmission interconnection costs. In contrast, renewable developers have been less successful in markets that do not use a FIT, employ reactive transmission planning, and have generators paying for most, if not all, of the transmission interconnection costs. While these policies can lead to higher penetration of renewable energy in the short run, their high cost to ratepayers can threaten the economic sustainability of renewable energy in the long-run.     

Welfare and competition effects of electricity interconnection between Ireland and Great Britain

This study analyzes the effects of additional interconnection on welfare and competition in the Irish electricity market. I simulate the wholesale electricity markets of the island of Ireland and Great Britain for 2005. I find that in order for the two markets to be integrated in 2005, additional interconnection would have to be large. The amount of interconnection decreases for high costs of carbon, since this causes the markets to become more similar. This suggests that in the absence of strategic behavior of firms, most of the gains from trade derive not from differences in size between countries, but from technology differences and are strongly influenced by fuel and carbon costs. Social welfare increases with interconnection, although at a decreasing rate. As the amount of interconnection increases, there are also positive effects on competition in Ireland, the less competitive of the two markets. Finally, it is unlikely that private investors will pay for the optimal amount of interconnection since their returns are significantly smaller than the total social benefit of interconnection.     

Resource adequacy reliability and the impacts of capacity subsidies in competitive electricity markets

Motivated by recent interventions by the states of New Jersey and Maryland and the introduction of PJM's Minimum Offer Price Rule (MOPR) for capacity markets, we analyze the impact of subsidized government investments in electrical generation on electricity markets. We extend the model of Joskow and Tirole (2007) to address the interconnected nature of the PJM grid by considering a market with two different locations connected by transmission lines. We assume that these lines are constrained during peak periods in a manner similar to Borenstein et al. (2000). We find that government intervention has a significant potential for adverse effects on grid resource adequacy and reliability. In our analysis, subsidized investment in baseload capacity is never optimal. In the short run government provision of base capacity displaces competitive base capacity, which reduces the private provision of peak capacity. In the long run, the threat of intervention imposes costs on suppliers in the form of an expected regulatory taking. As a result, resource adequacy decreases in both markets. If governments respond to this state of affairs by subsidizing further supply additions, expectations of intervention are reinforced and competitive capacity supply further diminishes. MOPR attempts to mitigate this vicious cycle by screening out non-economic bids for new capacity. To the extent market participants view MOPR as a credible policy, it succeeds in this goal. In this case, subsidized capacity additions do not perturb the efficiency of market outcomes as long as any charges to consumers to support the subsidy are lump sum in nature. In this case, subsidized resources simply succeed in capturing rents from taxpayers.     

The renewable energy targets of the Maghreb countries: Impact on electricity supply and conventional power markets

Morocco, Algeria and Tunisia, the three countries of the North African Maghreb region, are showing increased efforts to integrate renewable electricity into their power markets. Like many other countries, they have pronounced renewable energy targets, defining future shares of “green” electricity in their national generation mixes. The individual national targets are relatively varied, reflecting the different availability of renewable resources in each country, but also the different political ambitions for renewable electricity in the Maghreb states. Open questions remain regarding the targets’ economic impact on the power markets. Our article addresses this issue by applying a linear electricity market optimization model to the North African countries. Assuming a competitive, regional electricity market in the Maghreb, the model minimizes dispatch and investment costs and simulates the impact of the renewable energy targets on the conventional generation system until 2025. Special emphasis is put on investment decisions and overall system costs.     

Strategies for regional integration of electricity supply in West Africa

To improve peoples’ living conditions in West African countries national governments have to considerably reinforce the electricity supply infrastructures. Rehabilitation of the existing installations and construction of new power generation facilities and transmission lines require substantial resources which are tremendously difficult to raise due to the region's specific economical and political conditions. This paper examines the long-term prospects for integrated development of the regional electricity industry and evaluates its advantages by using PLANELEC-Pro, a “bottom-up” electricity system expansion planning optimisation model. The evolution of regional electricity market is analysed on the basis of two strategies. The “autarkical” strategy consists in adequate expansion of national power generation systems and the exchanges of electricity between the countries in sub-zones. Another approach referred to as “integration” strategy is recommended in this article. It leads to fast retirement of the obsolete power plants and the integration of new investment projects at the level of whole West African sub-region. The main finding is that the regional integration strategy is capable to bring about additional benefits in terms of reduced capital expenditures, lower electricity supply cost and the enhanced system's reliability compared to the autarkical strategy.     

Good volatility,bad volatility: What drives the asymmetric connectedness of Australian electricity markets?

Efficient delivery of network services and the electricity infrastructure to meet the long-term consumer's interests are the main objectives and the strategies of a national electricity market, while the main interests of generators are to maximize their profit through pricing strategies. Therefore, the objective of this study is to explore whether electricity prices across the four Australian States display symmetric price volatility connectedness. The study is the first attempt in the literature to make use of intraday 5-min Australian dispatch electricity prices, spanning the period December 8th, 1998 to May 5th, 2016 to quantify asymmetries in volatility connectedness emerging from good, and bad volatility. The results provide supportive evidence that the Australian electricity markets are connected asymmetrically implying the presence of some degree of market power that is exercised by generators across regional electricity markets.