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EW III
Vorlesungsmitschrift (WS 2006/2007)
Basiert vollstndig auf:
Stoft, Steven (2002): Power System Economics Designing Markets for Electricity; New York; Wiley
1.
2.
What is Electricity?................................................................................................................ 2
1.2.
1.3.
1.4.
3.
4.
5.
3.2.
4.2.
4.3.
4.4.
5.2.
5.3.
5.4.
5.5.
1.
1.1.
What is Electricity?
Electricity
water
Voltage ~
pressure
Generator
water pump
Quantity Units
Price Units
Energy
MWh
$/MWh
Power
MW
$/MWh
Capacity
MW
$/MWh
Cost
Symbol
Cost Units
Fixed
FC
$/MWh
Variable
VC
$/MWh
Average
ACK = FC + cf x VC
$/MWh
Average
ACE = FC/cf + VC
$/MWh
Ratio
Symbol
Units
Capacity factor
cf
none
Duration
none
Unit Arithmetic
Units-kilowatts, hours, and dollars-follow the normal laws
of arithmetic. But it must be
understood that a kWh means a (kW x h) and a $ per hour
means a ($/h).
Also note that 8760 hours per year has the value of 1,
because it equals (8760 h)/
(1 year), and (8760 h) = ( 1 year).
As an example, $100/kWy =
$100
1000kW
1 year
1.2.
1J 1Nm
=
s
s
J
J
x h = 106
x 3600s = 3600 MJ
s
s
MWh = 106
1.3.
Problem:
Solution:
Conversion of capacity costs through screening curves and the overnight cost of capacity.
xh
8760h
in % =
Converting OC FC/kWy
FC =
r OC
r OC
rT
1 e
1 1 /(1 + r ) T
Technology
VC
VC
OC
FC
FC
(MWh)
(/kWy)
(/kW)
(/kWy)
(/MWh)
Gas turbine
$35
$306.60
$350
$40.48
$4.62
Coal
$10
$87.60
$1050
$106.96
$12.21
Two Kinds of Average Costs: Capacitycost and Energy-cost based Screening Curves
Screening curve for capacity: average cost of using a plants capacity (D ~ average load duration)
ACK = FC + cf x VC = FC + D x VC
Screening curve for energy: fixed costs divided by cf + variable costs
ACE =
FC
FC
+ VC =
+ VC
cf
D
Overnight
Fixed
Fuel C
Capacity Cost
Cost
Cost
Heat rate
Cost
$/kW*
$/MWh
$/MBtu
Btu/kWh
$/MWh
Advanced nuclear
1729
23.88
0.40
10,400
4.16
Coal
10212
14.10
1.25
9,419
11,77
Wind
919
13.85
---
---
533
7.36
3.00
6,927
20.78
Combustion turbine
315
4.75
3.00
11,467
34.40
Type of Generator
Variable
*Overnight capacity cost and heat rates are from DOE (2001a), Table 43. Plant not labeled advanced are conventional. Rental capacity
costs are computed from overnight costs, a discount rate of 12% and assumed plant lifetimes of 40 years except for wind and gas turbines
which are assumed to be 20 years. For simplicity, operation and maintenance costs are ignored.
**integrated gasification combined cycle: GuD-Prozess mit integrierter Kohlevergasung
1.4.
Load-duration curve: measures the number of hours per year the total load is at or above any given
level of demand
Base load
Midload
Peak-load (peakers)
Figure 1-4.3: Using screening curves to find the optimal mix of technologies
2.
2.1.
Bulk Generation
competition
Balancing ~ maintaining system frequency (50Hz or 60 Hz)
in cases of generation decrease or load increase
free-rider problem:
supply:
demand:
Voltage Support
Voltage sags when too much reactive power is taken out of the system, must be injected by capacitors,
or synchronous condensers.
Black Start Capability
Ability to self-start (when the system goes down)
The System Operator Service (SO)
Coordination of ancillary services, monopoly
Independent system operator (ISO): nonprofit, independent
Trans Co: for-profit system operator
Unit Commitment
Who tells generators when to turn on, how much to produce at each point in time, and when to turn
off?
Start-up costs, no-load costs
Two approaches:
Some examples:
Pool Co:
Nodal pricing:
Bilateral:
Service
bulk generation
balancing service
Competition
Regulation/Centralization
Hybrid
x
supply
demand
voltage support
supply
demand
black-start
supply
demand
(frequency)
capability
system operator
service
unit commitment
transmission congestion
bilateral
nodal, pool
TRs
management
risk management
electricity
transmission/distribution
retail supply
3.
3.1.
Definitions
Agents act competitively, have well-behaved costs and good information, and
free entry brings the economic profit level to zero.
Act Competitively
To take the market price as given (be a price taker).
Well-Behaved Costs
Short-run marginal cost increases with output and the average cost of
production stops decreasing when a suppliers size reaches a moderate level.
Good Information
Market prices are publicly known.
Allocative efficiency:
Productive efficiency: Production costs have been minimized given total production.
Overall efficiency:
Figure 1-5.2 Total surplus equals the area between the demand curve and the marginal cost curve.
3.2.
Economic tells us to set price at marginal costs, but what is marginal cost?
Aggregate supply curve ~ horizontal sum of individual generators supply curves
Figure 1-6.2: Adding individual supply curves horizontally to find the market supply curve. If B is continuous, A + B is also.
The costs of producing one unit additional may be different from the
savings of production one unit less.
Definitions:
Result:
2.
3.
2.
3.
4.
MCLH is the savings from producing one unit less. MCRH is the cost of production one unit more and is
considered arbitrarily high, or infinite, if another unit cannot be produced.
11
4.
4.1.
The issue:
Create sufficient incentives for generators to invest in installed capacity (ICap), which the market
may not provide.
Figure 2-1.1: The structural core of a power market determines reliability, price spikes, and investment
Two Cases:
a)
0 Demand elasticity
P
D
S
Q
no equilibrium
the market does not provide adequate reliability
solution: planned load-shedding, VOLL-pricing (value-of-lost-load)
12
Fallacy 2-4.1
b)
D2
S
D1
P2
P1
Q1
Q2
Result
13
4.2.
Fallacy 2-2.1
Figure 2-2.1: Continuous marginal costs and a nearly flat (elastic) demand curve for one supplier.
Revenue R=P x Q
Short-run profit ~ scarcity rent ~ producer surplus ~ inframarginal rent:
Scarcity rent = R Total variable costs.
14
4.3.
Weaker version of the fixed-cost fallacy: long-run forces will assure that fixed costs are covered, but
this may lead to a short all in generation capacity under competitive pricing and varying demand.
Technology
Peaker
$6
$30
Base
$12
$18
Figure 2-2.2: Two technology screening curves showing capacity factors for which each technology is optimal.
15
Demand side:
6 / DPS + 30 = 1000
16
Figure 2-2.4: The load-duration curve flattened by high prices when load is limited.
17
Figure 2-2.6: The load-duration curve flattened by high prices when load is limited.
Result
FC peak = Rspike
In our example:
DPS = 0,62%
D * pea ker = 0,5
base-load capacity: 6 GW
peaker capacity: 1975 MW
18
Result:
4.4.
This section shows that the optimal level of installed capacity should not be such as to satisfy
demand all of the time, but that some level of load shedding is efficient. The installed capacity is
found to be optimal when the duration of load shedding is given by the fixed cost of a peaker divided
by the value of lost load (VOLL). The latter is a highly controversial concept.
Secondary reserve
19
Planning reserve
security:
adequacy:
Security
The ability of the electric system to withstand sudden disturbance such as
electric short circuits or unanticipated loss of system elements (NERC, 1996).
Adequacy
The ability of the electric system to supply the aggregate electrical demand and
energy requirements of the customers at all times, taking into account scheduled
and reasonably expected unscheduled outages of system elements (NERC,
1996)
load will never be shed unless it exceeds the amount of operable generation capacity
K [MW]:
g [MW]
generation outages
L [MW]
Lg [MW]:
Operating reserves:
OR K g L = K - Lg
It is assumed that excess interruptions are not correlated with the level of operating reserves
Load shed (lost load): load can exceed supply lost load (LL) and served load:
LL = max (Lg-K , 0) = max (-OR, 0)
20
Assumption:
Average cost of serving load: AC = FC peak + DLS xVC peak because DLS is small
(0.03%), the second term can be ignored
As K increases DPS decreases. For Low values of K, VLL x DLS will be greater than FCpeak, and it will
cost less to increase K than will be saved by the reduction in lost load. For high values of K the reverse
is true, and at the optimal K, the cost saved equals the cost of installing another megawatt of peak
capacity. The condition for optimal K is
21
A reliability policy that induces investment when, and only when, DLS < FC peak / VLL will be
optimal, at least according to the Simple Model of Reliability.
Result 2-3.1:
Value-of-Lost-Load-Pricing
Attention:
This is an area where engineers and economist disagree plainly. We present the
material Stoft, but will discuss several criticism of the concept from an
economic point of view.
Model of Reliability described in Section 2-3.3. Even with these restrictions, the result provides a
basis for a more realistic analysis and explains why paying more than VLL, as suggested by no-pricecap advocates, is counterproductive.
Definition of VOLL
Conceptually, if the system could be operated for many years with its present pattern of load and its
present installed capacity, then the total loss of value to consumers (loss of consumer surplus) divided
by the accumulated MWh of lost load would equal average VOLL. But this average value is slightly
different from the marginal definition of VOLL that is needed for pricing policy. Marginal VOLL
measures the decrease in lost value divided by the decrease in lost load when installed capacity is
increased bay the small amount.
Definition:
Markets give optimal outcomes when they are competitive and have demand curves that truly reflect
consumer preferences. Because of the first demand-side flaw power-market consumers do not express
heir true demand and so the system operator needs to buy power on their behalf. This precludes the
optimal outcome promised by Adam Smith and modern economics for competitive markets, but the
use of VOLL pricing proves to be the best strategy given the limitations of the markets structure. This
23
result can be understood by investigating the relationship between VOLL and the true consumer
demand curve.
Most customers cannot respond to daily price fluctuations, so the short-run demand curve is
unobservable. If consumers were charged real-time prices and could respond to them without
transaction costs, they would use much less power at sufficiently high prices. As a crude
approximation of this unobservable demand curve, assume that demand for power is zero at
$30.000/MWh and increases linearly to 20.000 MW at the retail price of power (see Figure 2-5.1). The
area under this curve measures the total value of power to consumers, the consumer surplus, in the
sense that consumers would pay that value for power but no more1. When the variable cost of power is
subtracted, the result is the total surplus of producing and consuming that power. When load is shed
there is a reduction in total surplus.
When load is shed, customers are disconnected without regard for the value thy place on power.
Consequently, the best assumption is that the demand curve of those remaining on the system is a
scaled-back version of the complete market demand curve. As an example, Figure 2-5.1 shows the
demand function scaled back 10%. Since demand of every value is called back 10%, the total
reduction in net social value is $30.000.000/h. Dividing this by the 2000 MW of load shedding gives
the (net social) value of lost load, which is $15.000/MWh2. Because consumer surplus is so much
greater than the variable cost of power, and because consumer surplus is such an uncertain value, the
distinction between consumer surplus and total surplus can be ignored.
The reduction in consumer surplus caused by 1 MWh of shed load is VLL . When load shedding is
optimal, a reduction of installed capacity would cost consumers as much in lost value as would be
saved by the reduction in capacity. According to Equation 1-3.2, the average cost of supplying peak
energy during the period of load shedding is AC E = FC peak / DLS + VC peak . Given the approximate
nature of the present calculation and the smallness of VC peak relative to FC peak / DLS , the variablecost term can be ignored. Thus, the condition for optimal load shedding is
Lost consumer surplus = savings from reduced capacity
V LL = FC peak / DLS
To obtain this revenue from customers, it would be necessary for a perfectly discriminating monopolist to set
price at different levels for different MWh of power. This revenue is the most consumers would pay voluntarily.
2
This is not a long-run calculation but represents the consumer surplus relative to a sudden disconnection.
24
Solving for DLS gives the condition for optimal load shedding
D * LS = FC peak / VLL
which is exactly Result 2-3.1
Is the Market Equilibrium Optimal?
Having characterized the optimal duration of load shedding, the market equilibrium under VOLL
pricing must now be examined to see how it compares. Result 2-2.2 gives the long-run equilibrium
condition for investment in peakers as
FC peak = Rspike
The right side is the price spike revenue, which in this case is V LL DLS .Solving for the equilibrium
duration of load shedding gives D e LS = FC peak / V LL , so equilibrium and optimal load shedding are
the same.
Figure 2-5.1: The market demand function and the value of lost load.
Result:
VH
dH
decrease in H
dVH
the increase in VH
installed capacity
25
VLL = d VH / dH
optimal solution for the Simple Model of Reliability: will induce competitive suppliers to invest
in an optimal level of generating capacity
value that consumers place on not being cut off: determined by the intersection of supply and
demand setting this price (whenever load is shed, i.e. for D*LS) is VOLL pricing
(regulatory!)
drawbacks:
- average pricing
- difficult to estimate
-
price risk
market power:
2 price caps:
supplier S:
2,000 MW
AVCS:
$ 50/MWh
p*:
$ 100/MWh
suppose S can push the price to the cap by withholding 1,900 MW 3 and
produces 100 MW:
a)
b)
VOLL pricing provides strong incentives for the exercise of market power!
because the actual load of 18,200 MWplus his capacity of 2,000 MW equals/ exceeds the available
load in the system (20,000 MW), so the price cap will be paid to supplier
26
Technical Supplement
Misestimating VLL may cause a relatively small decrease in the overall efficiency of the power market.
To demonstrate this, assume that VLL has been estimated to be $15.000/MWh and consider two
possibilities: (1) actual VLL could be $1500/MWh, or (2) it could be $15.000/MWh. How much
inefficiency is associated with each possibility?
Using $6/MWh for the fixed cost of a peaker as in previous examples and the three values of VLL ,
three optimal load-shedding durations may be calculated using Equation 2-5.1.
Table 2-5.1: Results of Errors in Estimation of VOLL
VOLL
Duration, D * LS
K in MW
Comment
$150.000/MWh
D * LS = 0.35 h/year
55.000
$15.000/MWh
D * LS = 3.50 h/year
50.000
Assumed value
$1.500/MWh
D * LS = 35.04 h/year
45.000
These optimal durations must be translated into installed capacities using a load-duration curve. The
steeper that curve, the greater the error in the installed capacity level and thus the greater the resulting
inefficiency. PJMs load-duration curve will be used for this example after exaggerating its steepness
enough to prevent any chance of underestimation. The installed capacity levels corresponding to the
calculated duration are shown in Table 2-5.1.
If the true value of VLL is $150.000, then 5000 MW too little capacity would be installed with the
result that too much load would be shed. From Figure 2-5.2 it can be seen that excess load shedding
would be less than one third of 3.5h x 5000 MW, or about 7000 MWh. Using the true VLL of
$150.000 and dividing by 8760h/year gives a reliability cost of $120.000/h. If the true value of VLL is
$1.500, then 5000 MW too much capacity would be installed with an excess fixed cost of $6/MWh x
5000 MW which equals $30.000/h.
Returning to the first possibility, the cost of the extra lost load is partially compensated for by the
reduced cost of installed capacity, again $30.000/h. So the net excess reliability cost in this case is
$90.000/h. The total cost of serving load in PJM is about $30/MWh x 30.000/h, or $900.000/h. If VLL
was actually $150.000, while VOLL pricing was based on an estimated VLL of $15.000, the resulting
excess reliability cost would be 10% of the total cost of power. Because the steepness of this loadduration curve has been exaggerated, the actual cost of such a mistake in PJM might be considerably
less.
27
engineering suggests appropriate levels for operating reserves but how to determine prices?!
sets prices at a relatively modest level when the system is short of capacity rather than to high
VOLL prices
required level of operating reserves ORR is set arbitrarily (external given by engineering)
28
29
5.
Market Power
5.1.
Definitions:
Economic:
The ability to alter profitability prices away from competitive levels. (MasCollel et. al. 1995, 383)
Regulatory:
Market power to a seller is the ability profitably to maintain prices above
competitive levels for a significant period of time. (DOJ, 1997)
FERC (2000):
Market Power is defined as the ability to withhold capacity or services, to
foreclose input markets, or to raise rival firms costs in order to increase prices
to consumers on a sustained basis without related increases in cost or value.
The basic strategy of withholding and the price-quantity outcome. Stoft (2002), p. 320.
Definitions
The decrease in output, Q*-Qe, below its competitive level caused by the
exercise of monopoly power (<< Q*(Pe) Qe).
Monopoly price distortion Qdistort:
The increase in price, Pe -P*, above its competitive level caused by the exercise
of monopoly power.
The Markup, Pm:
Markup equals Pe - P*(Q), which is the gap between the marginal cost of
competitive suppliers supplying market quantity Qe, and the actual price in the
monopolistic equilibrium.
An exercise,
Quantity withholding
Financial withholding
In most cases, these are equivalent strategies; appearances are important. (raising bidding price from
$35/MWh to $40/MWh vs. shutting down half of output)
Stage 2: Price- Quantity Outcomes (see above)
Stage 3: Social Consequences of Market Power.
Profit (not just for the exerciser but for all suppliers)
Wealth Transfer (transfer from consumers to producers)
Dead-weight Welfare Loss (inefficiency resulting from monopoly power)
31
Stage: An Exercise
Stoft (2002), p. 322
Strategy of Withholding:
Producing less than would be profitable, assuming all output could be sold at the market price. Not
acting as a price taker. This strategy may be executed financially by bidding high or physically by
curtailing output.
Wealth transfer and dead-weight loss caused by the exercise of monopoly power.
Stoft (2002), p.333.
32
33
Exercising monopsony power by withholding demand and by generating at a cost above the market
price. Stoft (2002), p.328.
5.2.
35
Barriers to entry: not created by market participants and would not fit under any definition of market
power. Cost of barrier is passed through to customers.
CR(m) = i =1
m
ai
m
= i =1 s i
y
36
According to EU Commissions Directorate-General for Competition, with an H below 0,1 the market
concentration can be characterized as low, between 0,1 and 0,18 as moderate and above 0,18 as high.
2
a
m
CR(m) = i =1 i = i =1 s i
y
m
Gini-coefficient
F=
N 2V
2N
V = i =1 v i 0,5
N
Fmax =
N 1
2N
I G max = 2Fmax =
N 1
N
m=
p GK p p(1+ 1/ xp )
1
1
=
=
=
p
p
xp
x/x
p/p
37
Criticism of Indicators
Standard wisdom holds that HHIs below 1000 are certainly save- they are not. The HHI accounts for
only one factor, concentration, out of five key economic factors, that determine the extent of market
power
Four Factors that HHI ignores:
Demand elasticity (HHI of 1000 indicates Lerner Index of 10% if demand elasticity is 1)
The style of competition (Cournot competition is only one possible style of competition)
Forward contracting
The geographical extent of the market
Why the Lerner Index is unreliable
It compares price to marginal cost but measures both after the exerci3es of market power. In most
markets, marginal cost remains relatively constant when market power is exercised, and Lx increase
almost entirely because the price increases.
The effect of changes in marginal cost on the Lerner index depends on the relative steepness of the
supply and demand curves at the market-power equilibrium. If they are equally steep, then
withholding will lower marginal cost as much as it raises price.
Furthermore the Lerner index can be negative. Producing extra can raise marginal cost above the
market price and gives the utilities a negative index.
38
5.4.
5 suppliers
Loads in
Long-term obligations: one reason market power is more of a problem during peak hours
Finding residual demand for suppliers other than S1. Stoft (2002), p.352.
40
When one supplier bids a supply curve instead of a fixed quantity, it reduces the market power of the
other suppliers (residual demand). The reduced slope of the residual demand curve relative to the
original demand curve indicates that it is much more price sensitive (elastic) than the true demand
curve. It may be possible for a market designer to take advantage of supply-curve biddings by
requiring bidders to submit a single price schedule for the entire day. This schedule should be used for
the day ahead market, the hourly market, and the RT market.
(q qF ) Q dP MC (q )
=
Q
P dq
P
ss
1
MC
=
1
e
P
Spot share plays the same role in the determination of LX as market share s played previously. IF all
load is under forward contract, then the sum of over al suppliers is zero instead of one. Also note that
because can be negative, the Lerner index of the corresponding Cournot competitor will be negative.
This indicates that it will overproduce, causing its marginal cost to rise above the market price. These
producer are net buyers , and they exercises market power in order to push the price down.
5.5.
The trick to market monitoring is to ignore vague definitions and rigorously apply the economic
definition of market power.
41
If a supplier would profit (in expectation) from the sale of an additional unit,
assuming the market price would not change and th3 supplier chooses not to
sell, it has exercised market power.
It is necessary to show that the supplier profit from withholding. There are three
approaches to proving profitability:
Accounting
Statistics
42