Electricity market-clearing prices and investment incentives: The role of pricing rules

Pricing rules in wholesale electricity markets are usually classified around two major groups, namely linear (aka non-discriminatory) and non-linear (aka discriminatory). As well known, the major difference lies on the way non-convexities are considered in the computation of market prices.According to the classical marginal pricing theories, the resulting market prices are supposed to serve as the key signals around which capacity expansion revolves. Thus, the implementation of one or the other pricing rule can have a different effect on the investment incentives perceived by generation technologies, affecting the long-term efficiency of the whole market scheme.The objective of this paper is to assess to what extent long-term investment incentives can be affected by the pricing rule implemented. To do so, we propose a long-term capacity expansion model where investment decisions are taken based on the market remuneration. We use the model to determine the optimal mix in a real-size thermal system with high penetration of renewable energy sources (since its intermittency enhances the relevance of non-convexities), when alternatively considering the aforementioned pricing schemes.     

Electricity market design for generator revenue sufficiency with increased variable generation

We present a computationally efficient mixed-integer program (MIP) that determines optimal generator expansion decisions, and hourly unit commitment and dispatch in a power system. The impact of increasing wind power capacity on the optimal generation mix and generator profitability is analyzed for a test case that approximates the electricity market in Texas (ERCOT). We analyze three market policies that may support resource adequacy: Operating Reserve Demand Curves (ORDC), Fixed Reserve Scarcity Prices (FRSP) and fixed capacity payments (CP). Optimal expansion plans are comparable between the ORDC and FRSP implementations, while capacity payments may result in additional new capacity. The FRSP policy leads to frequent reserves scarcity events and corresponding price spikes, while the ORDC implementation results in more continuous energy prices. Average energy prices decrease with increasing wind penetration under all policies, as do revenues for baseload and wind generators. Intermediate and peak load plants benefit from higher reserve prices and are less exposed to reduced energy prices. All else equal, an ORDC approach may be preferred to FRSP as it results in similar expansion and revenues with less extreme energy prices. A fixed CP leads to additional new flexible NGCT units, but lower profits for other technologies.     

Market protocols in ERCOT and their effect on wind generation

Integrating wind generation into power systems and wholesale electricity markets presents unique challenges due to the characteristics of wind power, including its limited dispatchability, variability in generation, difficulty in forecasting resource availability, and the geographic location of wind resources. Texas has had to deal with many of these issues beginning in 2002 when it restructured its electricity industry and introduced aggressive renewable portfolio standards that helped spur major investments in wind generation. In this paper we discuss the issues that have arisen in designing market protocols that take account of these special characteristics of wind generation and survey the regulatory and market rules that have been developed in Texas. We discuss the perverse incentives some of the rules gave wind generators to overschedule generation in order to receive balancing energy payments, and steps that have been taken to mitigate those incentive effects. Finally, we discuss more recent steps taken by the market operator and regulators to ensure transmission capacity is available for new wind generators that are expected to come online in the future.     

The optimal fuel mix and redistribution of social surplus in the Korean power market

This paper investigates the difference between the optimal fuel mix incorporating a pre-installed generation capacity constraint and the actual fuel mix in the Korean power market. Since the restructuring of the market, the fuel mix has been determined partly by investors and partly by the Basic Plan for Long-Term Electricity Supply and Demand (BPE). Both the system marginal price (SMP), and the capacity payment (CP), which has been based on the fixed cost of a specific gas turbine generator, were intended to provide an investment incentive in the market; however, they did not bring about an optimal fuel mix in Korea. Under the circumstances of a shortage of base load generators, these generators may garner excessive profits due to a high SMP level. However, the adjustment scheme of profit between KEPCO and Gencos left scant profit for generators. This paper suggests that a contract is needed to create the appropriate profit and tax levels for these base load generators. The redistribution of profit improves equality between consumers and generators, and the proper margin creates incentives for base load technology investment in Korea.     

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.     

Dynamic competition in electricity markets under uncertainty

We study discrete-time infinite-horizon imperfect competition between asymmetric firms producing from different technologies. Specifically, one firm produces from hydroelectric units and the others operate thermal generators. This type of structure is common in some electricity markets. What makes this research interesting is that firms have different types of constraints, face different kinds of uncertainties, need to allocate their resources over time, and yet produce strategically. For the renewable energy holder, the key issue is how to allocate water between current and future electricity generation given the thermal firms' strategic actions along with demand and/or water inflow uncertainties. We analyze equilibrium outcomes (e.g., the price distribution) and market inefficiencies stemming from both production constraints and imperfect competition. We show that equilibrium price volatility and skewness are generally lower than optimal, although average price is higher than optimal. The hydro producer under-utilizes the available water, which leads to more water being available to smooth price fluctuations. However, in the extreme case of water inflows so plentiful that the hydro firm is never constrained, prices can be more volatile than optimal. We also demonstrate that the lack of social optimality of the market outcome is tempered by the capacity constraints: the welfare loss under the oligopoly market structure is much less than would occur in the absence of water and capacity constraints. These results are demonstrated using numerical simulations of the infinite horizon game, one of which is calibrated to match the characteristics of the Ontario wholesale electricity market.     

The impact of the North Atlantic Oscillation on electricity markets: A case study on Ireland

The North Atlantic Oscillation (NAO) is a large-scale atmospheric circulation pattern driving climate variability in north-western Europe. As the deployment of wind-powered generation expands on electricity networks across Europe, the impacts of the NAO on the electricity system will be amplified. This study assesses the impact of the NAO, via wind-power generation, on the electricity market considering thermal generation costs, wholesale electricity prices and wind generation subsidies. A Monte Carlo approach is used to model NAO phases and generate hourly wind speed time-series data, electricity demand and fuel input data. A least-cost unit commitment and economic dispatch model is used to simulate an island electricity system, modelled on the all-island Irish electricity system. The impact of the NAO obviously depends on the level of wind capacity within an electricity system. Our results indicate that on average a switch from negative to positive NAO phase can reduce thermal generation costs by up to 8%, reduce wholesale electricity prices by as much as €1.5/MWh, and increase wind power generators' revenue by 12%.     

Distributed generation integrated with thermal unit commitment considering demand response for energy storage optimization of smart grid

This paper deals with an optimal battery energy storage capacity for the smart grid operation. Distributed renewable generator and conventional thermal generator are considered as the power generation sources for the smart grid. Usually, a battery energy storage system (BESS) is used to satisfy the transmission constraints but installation cost of battery energy storage is very high. Sometimes, it is not possible to install a large capacity of the BESS. On the other hand, the competition of the electricity market has been increased due to the deregulation and liberalization of the power market. Therefore, the power companies are required to reduce the generation cost in order to maximize the profit. In this paper, a thermal units commitment program considers the demand response system to satisfy the transmission constraints. The BESS capacity can be reduced by the demand response system. The electric vehicle (EV) and heat pump (HP) in the smart house are considered as the controllable loads of the demand side. The effectiveness of the proposed method is validated by extensive simulation results which ensure the reduction of BESS capacity and power generation cost, and satisfy the transmission constraints.     

Optimizing biogas plants with excess power unit and storage capacity in electricity and control reserve markets

Increasing shares of intermittent power sources such as solar and wind will require biomass fueled generation more variable to respond to the increasing volatility of supply and demand. Furthermore, renewable energy sources will need to provide ancillary services. Biogas plants with excess generator capacity and gas storages can adapt the unit commitment to the demand and the market prices, respectively. This work presents a method of day-ahead unit commitment of biogas plants with excess generator capacity and gas storage participating in short-term electricity and control reserve markets. A biogas plant with 0.6 MW annual average electric output is examined in a case study under German market conditions. For this biogas plant different sizes of the power units and the gas storage are compared in consideration of costs and benefits of installing excess capacity. For optimal decisions depending on prices, a mixed-integer linear programming (MILP) approach is presented.The results show that earnings of biogas plants in electricity markets are increased by additional supplying control reserve. Furthermore, increasing the installed capacity from 0.6 MW to 1 MW (factor 1.7) leads to the best cost–benefit-ratio in consideration of additional costs of excess capacity and additional market revenues. However, the result of the cost–benefit-analysis of installing excess capacity is still negative. Considering the EEG flexibility premium, introduced in 2012 in the German renewable energy sources act, the result of the cost–benefit-analysis is positive. The highest profit is achieved with an increase of the installed capacity from 0.6 MW to 2 MW (factor 3.3).     

Smart house-based optimal operation of thermal unit commitment for a smart grid considering transmission constraints

This paper presents a smart house-based power system for thermal unit commitment programme. The proposed power system consists of smart houses, renewable energy plants and conventional thermal units. The transmission constraints are considered for the proposed system. The generated power of the large capacity renewable energy plant leads to the violated transmission constraints in the thermal unit commitment programme, therefore, the transmission constraint should be considered. This paper focuses on the optimal operation of the thermal units incorporated with controllable loads such as Electrical Vehicle and Heat Pump water heater of the smart houses. The proposed method is compared with the power flow in thermal units operation without controllable loads and the optimal operation without the transmission constraints. Simulation results show the validation of the proposed method.     

考虑低谷调峰限制和环境成本的发电容量规划

提出一种考虑低谷调峰限制的含可再生能源电力系统发电容量规划模型,该模型能确保通过运行调度最优发电容量组合满足规划年中每一天的低谷调峰限制,然后结合筛选曲线法和拉格朗日松弛法进行求解。而且,为了研究环境成本对发电容量规划和系统调峰性能的影响,在发电成本中增加CO₂排放成本。最后,算例分析验证所提方法的合理性和有效性,结果表明了在高渗透率可再生能源电力系统发电容量规划中综合考虑低谷调峰限制和环境成本的必要性。     

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.     

Cost versus emission minimization in thermal electricity generation: A case of so2 emissions reduction from the indian power system

There is a trade-off between cost and emission minimizing objectives for electricity generation because of the measures needed to reduce emissions. For SO₂ emissions reduction these are adjustment within the system which involve deviation from the least-cost generation schedule, changing power mix for future capacity and installation of abatement equipments, e.g. flue gas desulfurization unit. The linear programming modelling framework (INGRID) presented here brings out the nature of this trade-off for SO₂ emissions reduction from the Indian power system for existing capacity and future capacity addition. The adjustment within the existing system can take place through integrated optimal operations of various electricity utilities by substituting generation of more polluting plants by less emitting efficient plants as long as the cost of reduction is lower than that of flue gas desulfurization.     

Retail price effects of feed-in tariff regulation

The feed-in tariff regulation is the widest spread instrument used to promote electricity generation from renewable energy sources in the EU, with the costs of resources devoted to this promotion usually being borne by final consumers. Two components of the electricity retail price are expected to be influenced by the feed-in tariff regulation: the incentive to those firms producing electricity from renewable energy sources and the wholesale price of electricity. In this study we analyze the effects that the feed-in tariff regulation has on the electricity retail price for industrial consumers. We estimate the relative intensity of the impact of the cost of support electricity generation under the feed-in tariff and the electricity wholesale price on the Spanish industrial retail price. Special attention is devoted to technology-specific considerations, as well as short and long run effects. The results show that there is not a strong link between the retail and wholesale market for Spanish industrial consumers. Moreover, the results indicate that an increase of solar generation leads to a higher increase in the industrial retail price than in the case of a proportional increase of wind generation. This suggests that, when evaluating the feed-in tariff regulation impact on the retail price, the cost of incentives effect prevails over the wholesale price effect, and this is stronger for solar than for wind generation.     

Optimal over installation of wind generation facilities

This paper evaluates the economic benefits to over-installing turbines on capacity-constrained wind farm sites in order to capture more energy at low wind speeds. Although this implies curtailment at high wind speeds, we show that over installing generation facilities can increase returns to investors and reduce system costs. A detailed model-based analysis is developed using British data, with variations in the range of over installation, the renewable policy support systems (fixed feed-in tariffs or green certificate premia to wholesale energy prices) and the extent of replacement of fossil generation in the technology mix with wind. In the cases of premia to market prices, we use agent-based, computational learning and risk simulation to model market prices. Not only is over installation beneficial under fixed feed-in tariffs, but is more so under premia to market prices and increasingly so as wind replaces fossil generation.     

Off-grid electricity generation with renewable energy technologies in India: An application of HOMER

Renewable energy-based off-grid or decentralised electricity supply has traditionally considered a single technology-based limited level of supply to meet the basic needs, without considering reliable energy provision to rural consumers. The purpose of this paper is to propose the best hybrid technology combination for electricity generation from a mix of renewable energy resources to satisfy the electrical needs in a reliable manner of an off-grid remote village, Palari in the state of Chhattisgarh, India. Four renewable resources, namely, small-scale hydropower, solar photovoltaic systems, wind turbines and bio-diesel generators are considered. The paper estimates the residential, institutional, commercial, agricultural and small-scale industrial demand in the pre-HOMER analysis. Using HOMER, the paper identifies the optimal off-grid option and compares this with conventional grid extension. The solution obtained shows that a hybrid combination of renewable energy generators at an off-grid location can be a cost-effective alternative to grid extension and it is sustainable, techno-economically viable and environmentally sound. The paper also presents a post-HOMER analysis and discusses issues that are likely to affect/influence the realisation of the optimal solution.     

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.     

The Spanish intraday market design: A successful solution to balance renewable generation?

The increasing penetration of renewable energy sources in Europe requires market mechanisms which allow an efficient balancing of these sources. This paper analyzes the participation of renewable generators in the Spanish intraday market. First, the organization of the intraday market and the short-term market mechanisms influencing intraday trading are described. After that, day-ahead and intraday market prices, as well as intraday trading volumes, are used to study the behavior of market agents in the Spanish intraday market. Regarding renewable generators, the influence of support schemes on the behavior of these agents in the intraday market is also analyzed. This paper shows that the Spanish intraday market has effectively contributed to renewable generation balancing. Despite this, market distortions have incentivized some renewable generators to arbitrate between the day-ahead and intraday markets, giving rise to higher system costs. Based on the presented analysis, it is argued that these distortions need to be removed from short-term markets to incentivize market parties, especially intermittent generators, to reduce forecast errors over time, improving economic efficiency and avoiding the use of costly balancing actions performed by the System Operator.     

How much wind energy will be curtailed on the 2020 Irish power system?

This paper describes a model of the 2020 Irish electricity system which was developed and solved in a mixed integer programming, unit commitment and economic dispatch tool called PLEXOS^®. The model includes all generators on the island of Ireland, a simplified representation of the neighbouring British system including proposed wind capacity and interconnectors between the two systems. The level of wind curtailment is determined under varying levels of three influencing factors. The first factor is the amount of offshore wind, the second is the allowed limit of system non-synchronous penetration (SNSP) and the third is inclusion or exclusion of transmission constraints. A binding constraint, resulting from the 2020 EU renewable energy targets, is that 37% of generation comes from wind. When the SNSP limit was increased from 60% to 75% there was a reduction in wind curtailment from 14% to 7%, with a further reduction when the proportion of wind capacity installed offshore was increased. Wind curtailment in the range of SNSP limit of 70–100% is influenced primarily by the inclusion of transmission constraints. Large changes in the dispatch of conventional generators were also evident due to the imposition of SNSP limits and transmission constraints.     

The dark side of the sun: How solar power production affects the market value of solar and gas sources

Using daily data for the Italian wholesale day-ahead power market over the period 2008–2013, we assess the impact of solar production on the market value of solar and gas sources, defined using the concepts of value factor and unit revenues. We find that, on average, solar generation negatively affects the solar source market value, causing a departure from the grid parity condition and mining their competitiveness once public incentives are removed. This negative relation is not constant over time and becomes stronger for increasing solar penetration in the energy mix. Interestingly, the opposite is found when looking at gas. While the relation between solar production and the gas market value is negative or not significant when the former is low, it turns positive for higher levels of solar production. This is the result of a change in gas producers' bidding strategies. Indeed, in the Italian power market the highest hourly price has shifted from the peak daytime, when solar production is concentrated, to the off-peak nighttime, when solar is absent from the market and gas can exploit temporary market power.