The merit-order effect: A detailed analysis of the price effect of renewable electricity generation on spot market prices in Germany

The German feed-in support of electricity generation from renewable energy sources has led to high growth rates of the supported technologies. Critics state that the costs for consumers are too high. An important aspect to be considered in the discussion is the price effect created by renewable electricity generation. This paper seeks to analyse the impact of privileged renewable electricity generation on the electricity market in Germany. The central aspect to be analysed is the impact of renewable electricity generation on spot market prices. The results generated by an agent-based simulation platform indicate that the financial volume of the price reduction is considerable. In the short run, this gives rise to a distributional effect which creates savings for the demand side by reducing generator profits. In the case of the year 2006, the volume of the merit-order effect exceeds the volume of the net support payments for renewable electricity generation which have to be paid by consumers.     

Vertical integration and market power: A model-based analysis of restructuring in the Korean electricity market

An agent-based simulation model is developed using computational learning to investigate the impact of vertical integration between electricity generators and retailers on market power in a competitive wholesale market setting. It is observed that if partial vertical integration creates some market foreclosure, whether this leads to an increase or decrease in market power is situation specific. A detailed application to the Korean market structure reveals this to be the case. We find that in various cases, whilst vertical integration generally reduces spot prices, it can increase or decrease the market power of other market generators, depending upon the market share and the technology segment of the market, which is integrated, as well as the market concentrations before and after the integration.     

A critical survey of agent-based wholesale electricity market models

The complexity of electricity markets calls for rich and flexible modeling techniques that help to understand market dynamics and to derive advice for the design of appropriate regulatory frameworks. Agent-Based Computational Economics (ACE) is a fairly young research paradigm that offers methods for realistic electricity market modeling. A growing number of researchers have developed agent-based models for simulating electricity markets. The diversity of approaches makes it difficult to overview the field of ACE electricity research; this literature survey should guide the way through and describe the state-of-the-art of this research area. In a conclusive summary, shortcomings of existing approaches and open issues that should be addressed by ACE electricity researchers are critically discussed.     

An agent-based analysis of the German electricity market with transmission capacity constraints

While some agent-based models have been developed for analyzing the German electricity market, there has been little research done on the emerging issue of intra-German congestion and its effects on the bidding behavior of generator agents. Yet, studies of other markets have shown that transmission grid constraints considerably affect strategic behavior in electricity markets. In this paper, the implications of transmission constraints on power markets are analyzed for the case of Germany. Market splitting is applied in the case of congestion in the grid. For this purpose, the agent-based modeling of electricity systems (AMES) market package developed by Sun and Tesfatsion is modified to fit the German context, including a detailed representation of the German high-voltage grid and its interconnections. Implications of transmission constraints on prices and social welfare are analyzed for scenarios that include strategic behavior of market participants and high wind power generation. It can be shown that strategic behavior and transmission constraints are inter-related and may pose severe problems in the future German electricity market.     

Competition effects of mergers: An event study of the German electricity market

This paper investigates the competition effects of the entry of Vattenfall into the German electricity market. While the competition authorities supported the entry by approving Vattenfall’s acquisition of three regional utilities, other market participants raised concerns over the emergence of an upcoming oligopoly in the German market for power generation. We contrast the efficiency hypothesis postulating pro-competitive effects of mergers with the market power hypothesis postulating anti-competitive effects. For the analysis of the two opposing hypotheses, we use an event study approach to the stock prices of Vattenfall’s competitors in the German market. While we find no empirical evidence for increased market power in the German electricity market due to Vattenfall’s mergers, there is some indication for efficiency increases. We therefore cannot oppose the view of the competition authorities predicting an overall positive effect for consumers as a result of Vattenfall’s entry into the German electricity market.     

Price formation and market power in the German wholesale electricity market in 2006

From 2002 to 2006, German wholesale electricity prices more than doubled. The purpose of this paper is to estimate the price components in 2006 in order to identify the factors responsible for the increase. We develop a competitive benchmark model, taking into account power plant characteristics, fuel and CO₂-allowance prices, wind generation, cross-border flows, unit commitment, and startup conditions, to estimate the difference between generation costs and observed market prices for every hour in 2006. We find that prices at the German wholesale market (European Energy Exchange—EEX) are above competitive levels for a large fraction of the observations. We verify the robustness of the results by carrying out sensitivity analyses. We also address the issue of revenue adequacy.     

Electricity regulation and electricity market reforms in China

The electricity industry of China has been in a process of reforms since the 1980s. This paper gives a review on the three main stages of reforms in China so as to trace out key features of various reform measures including those for power investment financing, the separation between government and power enterprises, and the division between power generation firms and power grids. The findings suggest that further regulatory change in China's electricity market reform is necessary when integration of the electricity markets and increased competition are paving the way ahead for a market-oriented structure. Prospective electricity regulation in the form of a strong legal system and effective institutions that protect market competition and promote appropriate incentives for efficiency are suggested in the paper.     

Trends in prices to commercial energy consumers in the competitive Texas electricity market

To date, the price of electricity to commercial or business energy consumers has generally increased at greater rates in the areas of Texas where retail competition has been introduced than in areas that do not enjoy competition. Trends in commercial competitive prices have largely mirrored trends in residential prices. Market restructuring has tended to increase the sensitivity of retail electricity prices to changes in the price of natural gas, the marginal fuel used for generation in Texas. Consequently, the rapid increases in the commodity price of natural gas following restructuring led to increases in competitive electric rates which exceeded the increases in areas not exposed to restructuring, where the fuel component of electric rates tend to reflect a weighted average of the utilities’ fuel costs. There is some evidence that pricing behavior by competitive retailers changed when the retailers affiliated with the incumbent utilities were permitted some pricing flexibility, resulting in a reduction in prices.     

Successful diversification strategies of electricity companies: An explorative empirical study on the success of different diversification strategies of German electricity companies in the wake of the European market liberalization

Based on the EC directive 96/92, the liberalization of electricity markets is forcing electricity companies, to rethink their product and market strategy. However, neither the level of the initiated diversification efforts of former monopolies, nor their direction or their success are known or have been analyzed before. Therefore, Müller [2006. Diversifikationsstrategien von Stromversorgungsunternehmen: Handlungsempfehlungen für schweizerische Stromversorgungsunternehmen auf der Basis einer empirischen Analyse des liberalisierten deutschen Strommarktes. IIMT University Press, Fribourg] has quantitatively determined the extent and direction of the diversification efforts in the electricity sector. Additionally, based on an exploratory case study research, successful diversification strategies have been identified and incorporated into 73 observations which form the basis of a set of normative recommendations for diversifying electricity companies. Since the analyses are based on the German electricity market, which fully liberalized earlier than most of its continental European counterparts, the results may especially guide other European electricity companies in their strategic diversification decisions. This paper publishes both the quantitative analysis on the degree and extents of diversification (sample time frame 1995–2000) as well as the qualitative analysis on the success of diversification strategies (sample time frame 1995–2003). Additionally, based on the obtained explorative observations, the diversification strategy of an idealized-electricity company is firstly presented for practitioners as normative recommendation, and secondly for academics, as starting point for future quantitative analysis framework.     

Did the expiration of retail price caps affect prices in the restructured Texas electricity market?

On January 1, 2007, the Electric Reliability Council of Texas (ERCOT) market became the first restructured market in the US to completely remove caps on the prices which could be charged to residential energy consumers by the retailers associated with the traditional or incumbent utility service providers. Our analysis suggests that the expiration of the price-to-beat (PTB) price caps may have led to a reduction in the average prices charged by competitive retail electric providers (REPs).     

On the evaluation of market power and market dominance—The Nordic electricity market

This paper studies different concentration and dominance measures using structural indexes used to initially screen the competitive situation in a market. The Nordic and Swedish electricity markets are used as the empirical cases. Market concentration issues in the Nordic electricity market in general and in Sweden in particular have been, at least in initial screenings, approached by the Herfindahl–Hirschman Index (HHI). This article uses an alternative measure to HHI, which is based on market shares of the two largest firms in the market. The results shows that only the Swedish wholesale market has a firm that can be regarded as dominant, but only during very short periods. The results from a hypothetical merger between the second and third largest company in the Swedish wholesale market shows that when the dominant position of the largest firm is reduced, by increasing the size of the second largest firm, the threshold value indicates that competition actually will increase (contradicting to the HHI).     

Modeling methods for GenCo bidding strategy optimization in the liberalized electricity spot market-A state-of-the-art review

The electricity market has since 1980s been gradually evolving from a monopoly market into a liberalized one for encouraging competition and improving efficiency. This brings the opportunity for generation companies (GenCos) to make more profits while embracing more risks of not being dispatched. Therefore, it has become a core interest for the GenCos to develop optimal bidding strategies to maximize the profits and minimize the risks while participating in such a competitive market. The literature pertaining to this issue has grown rapidly in recent years, and many different modeling approaches, such as mathematical programming, game theory, and agent-based models, have been investigated under the liberalized market environment. Meanwhile, along with the increasing penetration of renewable energy, the electricity market is facing more complexity and stochasticity from both uncertain generation and dynamic demands. The intermittent and unsteady nature of these renewable power sources motivates the GenCos to further optimize their bidding strategy by considering the new constraints. This paper presents a comprehensive literature analysis on the state-of-the-art research of bidding strategy modeling methods.     

The impact of climate change on the electricity market: A review

Climate change will impact electricity markets through both electricity demand and supply. This paper reviews the research on this topic. Whereas there is much that remains unknown or uncertain, research over the last few years has significantly advanced our knowledge. In general, higher temperatures are expected to raise electricity demand for cooling, decrease demand for heating, and to reduce electricity production from thermal power plants. The effect of climate change on the supply of electricity from non-thermal sources shows great geographical variability due to differences in expected changes to temperature and precipitation. Whereas the research frontier has advanced significantly in the last few years, there still remains a significant need for more research in order to better understand the effects of climate change on the electricity market. Four significant gaps in the current research are regional studies of demand side impacts for Africa, Asia, the Caribbean and Latin America, the effects of extreme weather events on electricity generation, transmission and demand, changes to the adoption rate of air conditioning, and finally, our understanding of the sensitivity of thermal power supply to changes in air and water temperatures.     

Potential of trading wind power as regulation services in the California short-term electricity market

A short-term electricity market is usually composed of the energy market and ancillary service market. However, wind power is not allowed to be traded in ancillary service markets although it has been proven technically feasible to be regulation services. This paper aims to explore the market potential of trading wind power as regulation services in the California electricity market. A model for wind power trade in the day-ahead (DA) market is established considering the uncertainties of market prices and wind power. An optimal trading strategy for wind power producers is derived by using an analytical algorithm. Trading wind power as regulation is tested by using actual data and the impacts of market control on the market outcome are discussed. The results show that, based on the current framework of the California electricity market, wind power producers can earn much more money if they bid in the DA energy and regulation markets than if they only bid in the DA energy market. The results also show that the potential to enhance profit for wind power producers is larger in the regulation down market than in the regulation up market.     

A decision support tool for the analysis of pricing,investment and regulatory processes in a decentralized electricity market

After the liberalization of the electricity generation industry, capacity expansion decisions are made by multiple self-oriented power companies. Unlike the centralized environment, decision-making of market participants is now guided by price signal feedbacks and by an imperfect foresight of the future market conditions (and competitor actions) that they will face. In such an environment, decision makers need to better understand long-term dynamics of the supply and demand sides of the power market. In this study, a system dynamics model is developed, to better understand and analyze the decentralized and competitive electricity market dynamics in the long run. The developed simulation model oversees a 20-year planning horizon; it includes a demand module, a capacity expansion module, a power generation module, an accounting and finance module, various competitors, a regulatory body and a bidding mechanism. Many features, singularities and tools of decentralized markets, such as; capacity withholding, enforced divestment, long-term contracts, price-elastic demands, incentives/disincentives, are also incorporated into the model. Public regulators and power companies are potential users of the model, for learning and decision support in policy design and strategic planning. Results of scenario analysis are presented to illustrate potential use of the model.     

An integrated ant colony optimization approach to compare strategies of clearing market in electricity markets: Agent-based simulation

In this paper, an innovative model of agent based simulation, based on Ant Colony Optimization (ACO) algorithm is proposed in order to compare three available strategies of clearing wholesale electricity markets, i.e. uniform, pay-as-bid, and generalized Vickrey rules. The supply side actors of the power market are modeled as adaptive agents who learn how to bid strategically to optimize their profit through indirect interaction with other actors of the market. The proposed model is proper for bidding functions with high number of dimensions and enables modelers to avoid curse of dimensionality as dimension grows. Test systems are then used to study the behavior of each pricing rule under different degrees of competition and heterogeneity. Finally, the pricing rules are comprehensively compared using different economic criteria such as average cleared price, efficiency of allocation, and price volatility. Also, principle component analysis (PCA) is used to rank and select the best price rule. To the knowledge of the authors, this is the first study that uses ACO for assessing strategies of wholesale electricity market.     

Economy supervision mode of electricity market and its incentive mechanism

The analysis of a supervision environment is the first step for a company to enter the new electricity market. Transmission and distribution assets are the main investment targets of a company. The overseas power market belongs to the regulated industry; whether it is a stock M&A project or a green land bidding project, the regulatory environment determines the assets. The level of return and investment risk that guides the operation strategy of existing overseas assets, has a significant impact on the investment and operations of international companies. A comprehensive and rapid assessment of the regulatory environment can help the project teams of international companies understand the macroenvironment of the target electricity market within a short period, quickly identify investment risks, qualitatively analyze the return level of the underlying assets, shorten the decision time, capture investment opportunities, and enhance the team. Efficiency and quality of work are factors of great importance.     

Cross-border integration in the European electricity market. Evidence from the pricing behavior of Norwegian and Swiss exporters

This paper examines the electricity market integration process in two European areas based on the pricing behavior of Norwegian and Swiss exporters. The aim is to gain evidence for the period after the adoption of the “Second Legislative Package” (2003). The pricing behavior of Norwegian exporters indicates that the wholesale markets for Denmark and Sweden are highly integrated. Moreover, results are fully compatible with the existence of a very competitive marketplace for electricity. This clearly contrasts with the evidence provided by Swiss exporters. In this last case, analysis revealed differences in pricing-to-market behavior between Italy, France and Germany, which indicates that exporters take advantage of international market segmentation and divergences between market structures. This outcome provides a reasonable explanation as to why price differences between countries cannot be fully attributed to transmission costs, as has been claimed in previous research. We also found cross-country convergence in levels of markups and in pricing-to-market behavior of the Swiss exporters for the first part of the period that was analyzed. The evidence is fully consistent with an initial impulse toward market integration originated by reforms implemented at the beginning of the last decade.     

Pros and cons of exposing renewables to electricity market risks—A comparison of the market integration approaches in Germany,Spain, and the UK

The article examines how renewable electricity (RES-E) producers are integrated into the electricity market under the support legislations and regulatory frameworks of Germany, Spain, and the UK. Focus is on wind power, which faces the highest market integration challenge of all RES-E. The analysis shows that the three countries follow contrasting approaches of exposing RES-E producers to the market risks of forward electricity markets, balancing markets and system planning requirements. Risk exposure is highest in the UK and lowest in Germany. From a policy maker's perspective, there is a trade-off between a “high risk” and a “low risk” approach. When RES-E face high market risks, a higher level of financial support is required to stimulate RES-E development than in a low risk environment, but the exposure to market risks may also give an incentive to make efficient use of the respective market, thus limiting the indirect costs to society. The special characteristics of wind energy, however, put natural limits to the response of wind power plants to market prices and locational price signals and will increasingly influence electricity markets and grid infrastructure. These interdependencies should be recognised in the design of RES-E policies and market regulations.     

Optimal bidding strategy in a competitive electricity market based on agent-based approach and numerical sensitivity analysis

The objective of this study is to present a new method for determination of the optimal bidding strategies among generating companies (GenCo) in the electricity markets using agent-based approach and numerical sensitivity analysis (NSA). While agent-based approach provides for decision making, NSA can help with identifying the critical control points that lead to proper decisions to be taken by GenCos. To achieve the objective, the pricing mechanism used for settling the electricity market and determining the GenCos rewards is locational marginal pricing (LMP) and the sensitivity of each GenCo reward with respect to its bid is analyzed, then, the optimal strategy is determined. An example and a case study are used to illustrate the efficiency of the proposed method. The LMPs and allocated generations of GenCos show that the proposed method leads GenCos to learn a strategic manner and, as a result, increase prices and maximize their rewards. To validate the proposed method, the results from this study are compared with those available in the literature. The comparison of results shows an improved simulation time by 8.16 percent and total reward of market by 2.46 percent.