Dynamic assessment of capacity investment in electricity market considering complementary capacity mechanisms

This paper proposes a decentralized market-based model for long-term capacity investment decisions in a liberalized electricity market. Investment decisions are fundamentally based on total revenues gained by investors. In most electricity markets, the complementary mechanisms are designed to ensure a desired level of reliability while covering investment costs of the suppliers. In such an environment, investment decisions are highly sensitive to expectation of price signals in both of energy market and capacity mechanisms. In this work, the system dynamics concepts are used to model the structural characteristics of electricity market such as, long-term firms’ behavior and relationships between variables, feedbacks, and time delays by appropriately bundling the energy market and capacity mechanisms. The market oriented capacity price as well as non-competitive capacity payments and a proposed hybrid capacity mechanism are linked with the energy market in the model. Such a decision model enables both the generation companies and the regulators gaining perfect insights into the possible consequences of different decisions they make under different policies and market conditions. In order to examine the performance of the electricity market with different capacity mechanisms, a case study is presented which exhibits the effectiveness of the proposed model.     

Dynamic model for market-based capacity investment decision considering stochastic characteristic of wind power

This paper proposes a decentralized market-based model for long-term capacity investment decisions in a liberalized electricity market with significant wind power generation. In such an environment, investment and construction decisions are based on price signal feedbacks and imperfect foresight of future conditions in electricity market. System dynamics concepts are used to model structural characteristics of power market such as, long-term firms’ behavior and relationships between variables, feedbacks and time delays. For conventional generation units, short-term price feedback for generation dispatching of forward market is implemented as well as long-term price expectation for profitability assessment in capacity investment. For wind power generation, a special framework is proposed in which generation firms are committed depending on the statistical nature of wind power. The method is based on the time series stochastic simulation process for prediction of wind speed using historical and probabilistic data. The auto-correlation nature of wind speed and the correlation with demand fluctuations are modeled appropriately. The Monte Carlo simulation technique is employed to assess the effect of demand growth rate and wind power uncertainties. Such a decision model enables the companies to find out the possible consequences of their different investment decisions. Different regulatory policies and market conditions can also be assessed by ISOs and regulators to check the performance of market rules. A case study is presented exhibiting the effectiveness of the proposed model for capacity expansion of electricity markets in which the market prices and the generation capacities are fluctuating due to uncertainty of wind power generation.     

Integrating Real Options Analysis with long-term electricity market models

In liberalized electricity markets, the investment postponement option is deemed decisive for understanding the addition of new generating capacity. Basically, it refers to the possibility for investors to postpone projects for a period while waiting for the arrival of new and better information about the market evolution. When such development involves major uncertainties, the generation business becomes riskier, and the investors' “wait-and-see” behavior might limit the timely addition of new power plants. In that sense, the literature provides solid empirical evidence about the occurrence of construction cycles in the deregulated electricity industry. However, the strategic flexibility inherent to the option to defer new power plants has not yet been rigorously incorporated to investment signals in existing market models. Therefore, this paper proposes a novel methodology to assess the long-term development of liberalized power markets based on a more realistic approach for valuing generation investments. The work is based on a stochastic dynamic market model, built upon System Dynamics simulation approach. The decision-making framework considers that the addition of new capacity is driven by the economic value of the strategic flexibility associated with deferring investments under uncertainties. Thus, the value of the postponement option is quantified in monetary terms through Real Options Analysis. Simulations confirm the cyclical behavior of the energy-only market in the long run, as suggested by the empirical evidence found in the literature. In addition, sensitivity analysis regarding some relevant exogenous variables depicts an even more fluctuating evolution of the capacity due to the combination of strong demand growth rates with large volatilities. Finally, the model validity is assessed through a formal procedure according to the scope of System Dynamics modeling approach.     

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.     

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.     

基于电网经济效率评估的发电和输电协调规划方法研究

  目的  为了促进电力市场下发输电相互协调,提出了一种基于电网经济效率评估的发输电协调规划方法。  方法  随着电力市场改革逐步推进,发电侧的竞争更加多元化,售电侧也逐步放开,传统的电网规划的方法在电力市场环境下可能不再适用,从电源建设不确定性、系统潮流不确定性等多个方面,分析了电力市场新环境下,产生电源和电网发展不协调现象的主要原因。  结果  采用成本-效益法进行电网经济效率评估,通过对有/无该项目时的系统净收益进行计算,最终获得各项目的效益成本比BCR,并以此作为优化电源布局、电网项目决策的重要依据。  结论  建议可通过优化改进电网规划方法,建立电网经济效率评价体系,来促进电力市场下发输电相互协调。     

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.     

Short-term optimal wind power generation capacity in liberalized electricity markets

Mainly because of environmental concerns and fuel price uncertainties, considerable amounts of wind-based generation capacity are being added to some deregulated power systems. The rapid wind development registered in some countries has essentially been driven by strong subsidizing programs. Since wind investments are commonly isolated from market signals, installed wind capacity can be higher than optimal, leading to distortions of the power prices with a consequent loss of social welfare. In this work, the influence of wind generation on power prices in the framework of a liberalized electricity market has been assessed by means of stochastic simulation techniques. The developed methodology allows investigating the maximal wind capacity that would be profitably deployed if wind investments were subject to market conditions only. For this purpose, stochastic variables determining power prices are accurately modeled. A test system resembling the size and characteristics of the German power system has been selected for this study. The expected value of the optimal, short-term wind capacity is evaluated for a considerable number of random realizations of power prices. The impact of dispersing the wind capacity over statistical independent wind sites has also been evaluated. The simulation results reveal that fuel prices, installation and financing costs of wind investments are very influential parameters on the maximal wind capacity that might be accommodated in a market-based manner.     

The electricity generation adequacy problem: Assessing dynamic effects of capacity remuneration mechanisms

Following liberalization reforms, the ability of power markets to provide satisfactory incentives for capacity investments has become a major concern. In particular, current energy markets can exhibit a phenomenon of investment cycles, which generate phases of under and over-capacity, and hence additional costs and risks for generation adequacy. To cope with these issues, new mechanisms, called capacity remuneration mechanisms (CRM), have been (or will be) implemented. This paper assesses the dynamic effects of two CRMs, the capacity market and the strategic reserve mechanism, and studies to what extent they can reduce the investment cycles. Generation costs and shortage costs of both mechanisms are also compared to conclude on their effectivity and economic efficiency. A simulation model, based on system dynamics, is developed to study the functioning of both CRMs and the related investment decisions. The results highlight the benefits of deploying CRMs to solve the adequacy issue: shortages are strongly reduced compared to an energy-only market. Besides, the capacity market appears to be more beneficial, since it experiences fewer shortages and generation costs are lower. These comparisons can be used by policy makers (in particular in Europe, where these two CRMs are mainly debated) to determine which CRM to adopt.     

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.     

Investment incentives in the Korean electricity market

This paper develops a model-based analysis of the effects of various capacity incentive systems on new investment in the Korean electricity market. The restructuring process in Korea allocated power generation to six firms, competing within a wholesale market, albeit strictly on a cost basis. Because of this cost-based pool, capacity payments were also introduced to encourage new investment. However, it is an open question whether the current fixed capacity payment scheme is enough to secure resource adequacy, and consideration is being given to alternative mechanisms such as the use of LOLP. Using a detailed market simulation model, based on system dynamics, we compare these approaches in terms of how they may influence the investors’ decisions and thereby determine the system reserve margin. The simulation results suggest that there may be serious problems in staying with the current fixed capacity payments in order to achieve resource adequacy. In contrast, an LOLP-based capacity mechanism may, in the longer term, increase the reserve margin compared with a fixed capacity payment. More generally, this paper indicates how crucial the effective modeling of the investment behavior of the independent power producers is for adequate policy support, even if they only constitute a fringe in a substantially centrally influenced market.     

Cycles in deregulated electricity markets: Empirical evidence from two decades

In this article, we discuss the “cycle hypothesis” in electricity generation, which states that the introduction of deregulation in an electricity system might lead to sustained fluctuations of over- and under-capacity. The occurrence of cycles is one of the major threats for electricity markets as it affects the security of supply, and creates uncertainty in both the profitability of electricity companies and in consumer prices. We discuss the background for these cycles using analogies with other capital-intensive industries, along with evidence from the analysis of behavioral simulation models as well as from experimental electricity markets. Using data from the oldest deregulated markets we find support for the hypothesis in the case of the English and Chilean markets, based on an autocorrelation analysis. Evidence from the Nordpool market is more ambiguous, although we might be observing the first half of a cycle in generation capacity. Comparing a simulation of the English market performed in 1992 with the actual performance we can observe that the qualitative behavior of the model is consistent with the actual evolution. Finally, we discuss possible mechanisms for damping cycles in electricity generation, such as mothballing, capacity payments, and reliability markets.     

Screening instruments for monitoring market power — The Return on Withholding Capacity Index (RWC)

While markets have been liberalized all over the world, incumbents often still hold a dominant position, e.g. on energy markets. Thus, wholesale electricity markets are subject to market surveillance. Nevertheless, consolidated findings on abusive practices of market power and their cause and effect in these markets are scarce and non-controversial market monitoring practices fail to exist. Right now, the Residual Supply Index (RSI) is the most important instrument for market monitoring. However, a major drawback of this index is its focus on just one specific aspect of market power in wholesale electricity markets whereas different consequences of market power are possible. Hence, markets could be distorted in several ways and we propose the “Return on Withholding Capacity Index” (RWC) as a complementary index to the RSI. The index is a measure of the firms' incentive to withhold capacity. The benefits and practicability of the RWC are shown by an application on data for the German-Austrian electricity wholesale market in 2016.     

A real option-based simulation model to evaluate investments in pump storage plants

Investments in pump storage plants are expected to grow especially due to their ability to store an excess of supply from wind power plants. In order to evaluate these investments correctly the peculiarities of pump storage plants and the characteristics of liberalized power markets have to be considered. The main characteristics of power markets are the strong power price volatility and the occurrence of prices spikes. In this article a valuation model is developed capturing these aspects using power price simulation, optimization of unit commitment and capital market theory. This valuation model is able to value a future price-based unit commitment planning that corresponds to future scope of actions also called real options. The resulting real option value for the pump storage plant is compared with the traditional net present value approach. Because this approach is not able to evaluate scope of actions correctly it results in strongly smaller investment values and forces wrong investment decisions.     

Welfare implications of capacity payments in a price-capped electricity sector: A case study of the Texas market (ERCOT)

The aim of this paper is to analyze the welfare consequences of introducing capacity compensation payments in restructured and liberalized electricity markets. For that purpose, we set up a two-stage framework in which two kinds of electricity generators, peak load and base load generators, choose their capacity investment levels first and then compete on the basis of bids in a centralized market to sell electricity to consumers. We use data from the Texas ERCOT to evaluate consumers' welfare. We find that the introduction of capacity payments has two countervailing effects. On the one hand, it increases the wholesale electricity price. On the other hand, it reduces price volatility and increases the reliability of the system. We find that capacity payments are more beneficial for consumers in a perfectly competitive market than in the presence of certain degree of market power.     

Efficient mechanisms for access to storage when competition in gas markets is imperfect

Scarce storage capacity and distortions in access to storage can lead to market foreclosure in liberalized gas markets. We consider rules currently adopted in Europe for storage allocation, and discuss efficient rationing mechanisms as based on the value of storage, when other flexibility inputs are partially available. We initially analyze productive efficiency issues, without explicitly considering vertical restraints. We then assume imperfect competition in the downstream market for gas supplies, given the availability of storage capacity upstream, and analyze strategic behavior in a two-stage model. In this framework we compare regulated storage tariffs — coupled with a centralized rationing mechanism — with storage auctions. Finally, we consider the allocation of storage that arises from welfare maximization by a benevolent social planner. We find that it is usually optimal to maximize the amount of storage capacity allocated to new entrants in liberalized gas markets. Storage auctions deviate from the optimal mechanism, but still afford greater efficiency than do rules that allocate storage capacity independently of its value. Furthermore, storage allocation appears to be a powerful mechanism with which to improve competition and efficiency in gas markets.     

Regulation and development of the Argentinean gas market

Gas markets are becoming increasingly important around the world and the long-term evolution of these markets is of strategic importance for many countries. This makes it essential to understand how regulation and intervention in these markets affects the long-term prospect for the secure supply of gas. We use Argentina as a case to illustrate some of the issues and consequences of gas regulation. Argentina is a country that has had a significant increase in the use of gas over the years, and where a potential gas deficit looms large in the present and the future. Based on a simulation model developed to understand the supply of gas in Argentina, we discuss how regulation will influence the long-term supply of gas in both Argentina and surrounding countries. Using the model, we develop a series of scenarios to highlight the consequences of different current and possible future interventions in the market by the Regulator. Finally, we discuss short-term regulatory options to reduce the impact of a gas deficit, and the possibility of securing the long-term supply of gas in Argentina.     

Is teamwork the smart solution?

One of the most formidable tasks facing humanity at the moment is how to solve the problems associated with energy supply and utilization. The issues are complex, to be sure, and they're compounded by seemingly conflicting objectives involving cost, sustainability, reliability, environmental soundness, free markets, and an energy supply that is accessible to all--anytime. Because there?s special interest in enhancing the sustainability of a modern lifestyle, one approach to the problem is to use renewable resources--mainly solar and wind--to power the world economy. Some renewable resources have the added benefit of low environmental impact, especially in greenhouse gas production. There's also great interest in restructured energy and power markets that are called "free" or "liberalized" in some parts of the world and "deregulated" in the United States. The deregulation of the electric power industry in many venues has resulted in a new science and engineering of power marketing. There are complex basic challenges in solving the problems that are related to an unfettered power market that results in an environmentally sound production of electric power and also a reliable and low-cost solution.     

Development of a virtual power market model to investigate strategic and collusive behavior of market players

In this paper, a virtual power market model is proposed to investigate the behavior of power market players from regulator's point of view. In this approach, strategic players are modeled in a multi-agent environment. These agents which are virtual representative of actual players forecast the prices and participate in the markets, exactly the same as real world situation. In addition, the role of ISO is encountered by using security constraint unit commitment (SCUC) and security constraint economic dispatch (SCED) solutions. Moreover, the interaction between market players is modeled using a heuristic dynamic game theory algorithm based on the supply function equilibria (SFE). In addition to the collusive behavior, using the proposed model, the short-term strategic behavior of players, which their effects will appear in long-term, can be simulated.The proposed model enables the market regulators to make decision before implementing new market rules with the confidence of their results. To represent the effectiveness of the proposed method, a case study including wind power plants is considered and the impact of various market rules on players’ behavior is simulated and discussed. Numerical studies indicate that simulating the strategic and collusive behavior prior to any change in the market rules is necessary.     

考虑多时间尺度电力交易市场下的配电网最大供电能力模型

为研究多时间尺度电力交易下配电网的最大供电能力,首先从中长期+现货交易模式入手,将多时间尺度下的交易转变为单时间尺度交易;其次,建立考虑多时间尺度电力交易市场下的配电网最大供电能力双层模型,并运用原始对偶内点法和改进的重复潮流算法求解;最后通过算例,对中长期+现货交易模式下的配电网最大供电能力进行计算分析。结果表明,考虑多尺度电力交易下的配电网最大供电能力得到了提升,且随着现货交易的深入,提升得越明显。研究成果可为电力市场环境下提升配电网最大供电能力提供参考。