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2004 IEEE International Conferenceon Electric Utility Deregulation,Restructuringand Power Technologies(DRPT2004)April 2004 Hong Kong

A Market Analysis and Evaluating System for Surveillance of Electricity Market

-

Liu Dun-nan, Li Rukqing, He Guang-yu, Chen Xue-qing

Abstracr--Basic: The existing and abusing of mrket power will reduce performance and efficiency of the electricity market Identify and mitigate the market power in time is very important for a healthy market So it is urgently demanding an integrated and effective evaluating system to give an impersonal judge of the market and a convincing support for the decision-making of policy makers. This paper systemically induces the definition, signification and application of the surveillance indices using in the evaluating system. It also gives a rational classification of the indices and reveals the inherent relations among them. AI last the Evaluating System is put forward, including the grade standard of each index, the score assignment and the method of calculation and integration. Examples and actual application for an electricity market in China are presented throughout the paper to illustrate the ideas.

Inah TennsSurveillance, Monitoring, Indexes, Evaluate, Market Power.

I. INTRODUCTION

healthy and efficient electricity market should be

Acompetitive.-

range of benefits: lower energy costs and increased economic output, avoidance of costly blackouts, increased revenues and profits for energy providers, healthy returns for investors, opportunities for new market entrants, and more. But studies have found evidence of market power in deregulated electricity markets or have analyzed the potential for market power. In the Shanghai Electricity Market of China, where data from competitive electric generation markets are now available, it has been found that prices have been above competitive levels at times. Analysts have been able to assess the impacts ofmarket power based on actual data from Shanghai. These studies

enough, which can provides a broad

This work was supported in pan by the

Electric Power Company.

Shanghai Municipal

Liu Dun-nan is with the Department of Electrical Engineering,

Tsinghua

University,

Beijing

10084,

China

(e-mail:

lewdonOl@163.cnm).

Li Rui-qing is with the

Shanghai Municipal Electric Power

Company, Shanghai 200025, China (e-mail: lirq@smepc.com).

He Guangyu is with the Department of Electrical Engineering,

Tsinghua

gyhe@isinghua.edu.cn).

University,

Beijing

10084,

China(e-mail:

Chen Xue-qing is with the Department of Electrical Engineering,

Tsinghua

University,

Beijing

xqchen@lsinghua.edu.cn).

10084,

China

0-7803-82374/04/$17.0002004IEEE

(e-mail:

556

suggest that generators in the market may have eamed substantial excess revenues due to market power. The abuses of market powercan cause price spikes and erode investor confidence and public support for open markets, so it’s very important to identify and evaluate the market power, which is the precondition to mitigate it. This paper focuses on the different approaches for measuring overall market competitiveness and the market power of individual market suppliers. Base on the research of the actual spot deals in Shanghai Electricity Market, an integrated evaluating system is set up to identify the market power both in the market level and in the supplier level.

11. MARKET POWER DEFINITION

The economics and antitrust literature identify two types of market power, vertical and horizontal. Vertical market power is exercised when a firm involved in two related activities, such as electricity generation and transmission, uses its dominance in one area to raise prices and increase profits for the overall enterprise. Horizontal market power is exercised when a fm profitably drives up prices through its control of a single activity, such as electricity generation, where it owns a significant share of the total capacity available to the market. [I All the “market powei‘ we focus on in this paper is the horizontal market power for a generator side market.

A. Marker Power in the Supplier Level

Market power in the supplier level can be defined as the ability of a supplier to profitably raise prices above competitive levels and maintain those prices for a significant time period. [I

B. Markel Power in the Market Level

Market power in the

market can he defined

as the

degree

of

the

actual

market’s

clearing price (MCP)

departures

from

the

clearing

price

of the perfect

competitive market.

C. Market Power Abuse

The market power existing in the supplier level does not predicate the MCP is above the competitive level all the time, hut it means the supplierhas the ability to control the price and the MCP has the substantial possibility to be risen up. So the market power in the supplier level means ability, while in the market level reflects the result of its abuses.

2004 EEE International Conference on Electric Utility Deregulation, Resrmcturing and Power Technologies (DRPT2004) April 2004 Hong Kong

111. SUMMARIZATION OF MARKET POWERINDEXES

Many electricity markets in the world have established Market Surveillance Committee (MSC) or similar institutions to monitor the market, through calculating and analyzing some indices which can reflect the status of the market or measure the market power of the suppliers. Based on the research ofthe Market Surveillance System of many Electricity Markets in the world such as in Califomia ['I, United Kingdom14],Australia ('I, New Zealand 16],etc., we picked out several effective indexes of market power and reinforce them through the practice in Shanghai Market. These indexes can he classified into five classes, Market Balance, Market Structure, Bidding Status, Bidding Strategy and Deal Outcome.

A. Market Balance

Market Balance indices measure the balance between market supply and demand, which are the essential attribute ofthe markets. There are two typical indexes in this class. 1. SupplyDemand Ratio (SD)

s/~=.&, where Qsis the max supplied power (the

QD

total usable capacity of all suppliers) and QDis the total load demand in a particular point ['I.

more

sufficient, the market gets more competitive. When SID decreases near to I, the market goes tomonopoly.

2. Bid Sufficiency Index (BSI)

BSI =i4j / D , where qj is the bid power of supplier j,

As

SID

increases,

the

market

supply

gets

j=I

and D is the total demand. The difference between BSI and S/D are the numerators, usually the total bid power is less than the total capacity. Qsis the maxsupplied power in theory, and

is the actual supply in the market.

,=I

B. Market Structure Market Structure indices measure the constitution and concentration of the market suppliers, which are correlative closely with the market power. It contains two main indexes. 1. Hefindahl-Hirschmann Index (HHI)

v

HHf =~(l0O*~,)~,wheres,isthemarketshareof

/i,

supplier i. HHI is a widely used measure of market concentration. In a perfect monopoly," in which one supplier supplies 100percent of the market, the maximum value of the HHI is at the maximum level of 10,000. In extremely competitive markets, in which hundreds of suppliers each hold a fraction of 1 percent of the market, the HHI value approaches zero. The Horizontal Merger Guidelines issued jointly by the US.Department of Justice and the Federal

Trade Commission use the HHI as a primary screening tool to identify whether markets are likely to have enough competitors to be workably competitive following a proposed merger. Markets with an HHI value helow 1000 are presumed to be not concentrated, while markets with an HHI of 1800 or more are considered to be highly concentrated. For markets with an HHI of I800 or above, the antitrust agencies consider that a merger increasing the HHI by as little as 50 points has the potential to raise significant competitive concerns. Is' 2. Top-mSuppliers Share (Top-m Share) Top-m Share index defined as the market share oftop m supplien in the market.Ia1A Top4 Share index is commonly used for many industries. As Top-mSbare increases, the concentration ofget higher, the market gets less competitive.

C. Bidding Status

Supplier Status indices compare the capacity of different market supplier and demand, reflect the weightiness and status of the suppliers. It contains foul representative indexes in this class. 1. Market Share

A supplier's Market Share is his proportion in all the suppliers. When one's Market Share gets large enough, he will have the ability to execute market power. 2. Residual Supply Index(RS1)

bid power of supplierj, and D is the total demand. The Residual Supply Index for supplieri, which measures the percent of residual supply left in the market after taking out supplier 3maximum share of supply When residual supply is greater than loo%, suppliers other than supplier ihave enough capacity to meet the demand of the market, andsupplieri has less influence on market clearing price. On the other hand, if residual supply is less than 100 percent of demand, supplieri is needed to meet demand, and is therefore a pivotal player in the market. As a pivotal player, supplier ihas complete control of the MCP and can set the price as high as the price cap

3. Must-Run Ratio (MRR) Must-Run power of a supplier equals to the market shortage when the market is without the supplier itself. The Must-run Ratio is the proportion of one's Must-Run power over his usable capacity, can he calculated as follows:

M,p& =Mar(

D- i.Y,

l=l.'*'

c,

,O)

, where D is the market

demand, qj is the hid power of supplierj (other suppliers). MRR ranges from 0 to 1. When one's MRR is 0, means he is not indispensable, his market power is weak or

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2004 IEEE lntemationalConferenceon Electric Utility Deregulation,Restructuring and Power Technologies(DWT2004) April 2004 Hong Kong

inexistence. But if one's MRR is larger than 0, even if very small, for example 2%, it still indicates that he has considerable market power.

D.Bidding Strategv Bidding Strategy inde%?s appraises the

and

tendency of the suppliers, including the policy of Price and declared capacity, the subjective factors of the market business. It contains two main indexes in this class. I. Capacity Strategy

The main index of Capacity

Strategy is Reserved

Capacity Ratio (RCR),defined as, RCR=l-Bid PowerNsable Capacity Usually the hid power of a supplieris less than his total usable capacity: The Reserved Ratio reflects how much capacity is not hid in the market, ranges from 0 to 1. A supplier's RCR is very high means his capacity is sufficient and has the possibility to by influence the MCP by limiting the bid power.

2. High Bid Price Ratio (HBP)

High Bid Price Ratio can be defined as the proportion of the times when the bid price is close to the price cap over the all the times. This index can be applied to measure both the market and the individual suppliels through selecting different subject.

Ifa supplier's HBP is very high, reflects that the

supplier prefer to take the risk of lost market

strong confident of his status, usually those suppliers are with strong market power and willing to ahuse them.

E. Deal Outcome

Deal Outcome indexes synthetically study the deals, the result of the game, which are the final embodiment of the market status and suppliersperformance 1. Bid Markup Index(M1) ["I It uses marginal cost (MC) as the hasis for measuring bid markup:

share and has

MI = (Bid Price - MC) / MC

2. Lerner Index (LI), which uses price as the hasis for

calculating bid markup: I'' LI = (Bid Price - MC) /Bid Price For a perfectly competitive supplier, the competitive price level is that supplier's marginal cost. The Lemer Index attempts to measure classical market power directly by subtracting a supplier's marginal cost from its price, and then dividing the result by the supplier's price. Lemer

ratios range from 0 to 1. Suppliels that lack market power show ratios close to zero. As the ratio increases from zero to one, it is more likely that the supplier possesses significant market power. 3. High Market Clearing Price Ratio (HMCP) Similarwith the High Bid Price Ratio, the High MCP Ratio measures the ratio of the times MCP closes to the price cap over all the times. But this index can only applied to market level, if the HMCP is high, the average market price is also in high level, which means the market is far from perfect competitive. ["I

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4. Successful Bid Ratio (SBR) A bid is successful one must satisfy two conditions: the bid price is high enough to close to the price cap, and the deal power is close to the bid power. Then we define the SBR as the ratio of successful bid times over all the times. The supplier with high SBR means he has the ability to raise the price and win the deal, which is the evidence of market power abuse,

IV.SYSTEMATISM OF INEXES

The five classes of indexes introduced above are the basic elements of the evaluating system. This part will penetrate with the internal relation between the 5 classes and find out the place of each class in the deal procedure.

A. Constitution oflndex Classes

*

 

Bidding

-

 

cost

Declared

Capacity

I

Usable

I

Capacity

1

Total

L

Demand

Market

Share

Supplied

 
 

number

Strategy

Capacity

Strategy

L

Market

Biddine

.-3l1'

=-.'ut7 J

Structure

I

Deal

Fig. 1. The place of five classes in the deal procedure

The above chart reveals the construction of the five classes of indexes, and the interaction between them. We can see the following information from the chart:

The no arrow real lines in the chart reflect the inclusion relation and constitution relation: According to the different objects, the basic factors get from the electricity market can be reduced to supplier factors, market factors and deal factors; The five indexes classes are all derived from the basic factors,; As the arrowhead real line shows, Market Balance and the Capacity Strategy of suppliers determine the Bidding Status of each supplier, Market Balance, Market Structure and Bidding Strategy determine the Deal Outcome together. As the arrowhead broken line shows, the Bidding Status of suppliers logically determine their Bidding Strategy, the necessary condition is the suppliers are reasonable and realize the full information. Deal Outcome is the final and most direct reflection of the market deals and market power in both levels; Bidding

2004 IEEE International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong

Status does not determine the outcome directly, but appraise the abilities of the suppliers, so it is most correlative with market power in supplier level; the other classes have important influence on the finalresult; all of the five classes should he considered while analyzing the market power.

B. Internal Relation of Index Classes

I

I

I

ImpersonalFactors

SubjectiveFactors

Fig. 2. lntemal relation ofthe five index classes

As Fig2 shows, the factors of market level and supplier level determine the Deal Outcome together; Indexes of Market Balance and Market Structure are applicable to analvze the market Dower of market level. while Biddine Status and Bidding Strategy are fit for supplier level; Indexes in Bidding Strategy appraise the subjective factors

-

Structure and Bidding Status are impersonal and stable in a period oftime.

C. Time Serial of Index Classes

I

I

Classificatio

Market Balance

Market Structure

j j

i i

Before the

Deal

Bidding Status

Bidding Status

I I

Bidding Strategy 1

Bidding Strategy 1

j

Dealoutcome

I

 

~

~~

During the

Deal

Afterthe

Deal

Time

Fig. 3. Time serial ofthe five index classes

Real time monitoring the bidding procedure and identify the market power as soon as possible are administer to mitigate the power. The son order of time serial is according to the order of the five classes in the deal procedure. For a particular market, Market Balance and Market Structure are stable in a time period, so we can evaluate them before the deal; Bidding Status are influenced by market factors and other suppliers’ strategy, so we can’t

appraise them before the bid power declared; The position ofBidding Strategy and Deal Outcome are evident.

v. EVALUATING SYSTEM FOR SURVEILLANCE OF

ELECTRICITY MARKET

This part will introduce a practical evaluating system running in Shanghai Electricity Market.

A. Evaluating Objects

The evaluating system for surveillance of electricity market has two main objects, Market Competitiveness and the Suppliers’ Market Power, in another word, the market power both in market level and supplier level.

B. EvaluafingIndexes System

TABLE I

INDEXES SYSTEM FOR MARKET COMPETITIVENESS EVALUATING

(30 scores)

(30 scores)

3. Deal Outcome (40 scores)

Class

Bidding Sufficiency (15 scores)

Top4 Share (10 scores)

MIiLI (25 scores) High MCP Ratio (15 scores)

Basic Indexes

1. Bidding Status (50 scores)

Market Share (15 scores) Residual Supply Index (15 scores) Must Run Ratio (20 scores)

2. Bidding Strategy (10 scores)

Reserved Capacity Ratio (5 scores) High Bid Price Ratio (5 scores)

3. Deal Outcome

LI

(20 scores)

(40 scores)

Successhl Bid Ratio

(20 scores)

with the evaluating obiect and all the particular indexesare effective enough and available. The score distribution is what actually applied and framed based on the statistic of history data.

C. Evaluating Rules and Methods

TABLE Ill

THE FORMATOF BENCHMARKTABLEOFINDEXES

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2004 IEEE InternationalConference on Electric Utility Deregulation, Restructuringand Power Technologies (DRPT2004)April 2004 Hong Kong

Index.”

I A,

I BN

I C,

I DN

I E.w

The above table eives the benchmark of each index in different grade, while grade A is the best and grade e is the worst. To be pointed out that the value of the benchmarks depend on the calculation method of each indexes and various for different evaluating objects. To get the appropriate benchmark, analyzing the long-time data is necessary. According to TABLE IIand the real value of the indexes, scores can he obtains through interpolation. When the real value ofindex ; hemeen the benchmark ofGrade High and Grade Low, while Grade High border upon Grade Low, the sore can he calculated as follow,

Score of

Benchmark of Grade Low)/( Benchmark of Grade High- Benchmark ofGrade L~~)(score of~rade~i~h-scoreof Grade Low). Then, according to TABLE I or TABLE 11, the total score of evaluating object is calculated as follow,

Total Score=x (Score of Index 3 X (Weight of Index in

the system), where Weight ofIndex can be obtained from TABLE I or TABLE 11.

I

Index

= Score of Grade Low f (Index

-

VI. FUNCTIONS OF THE EVALUATING SYSTEM

The evaluating system of Market Competitiveness and Supplier’s Market Power benefits the market operators of Shanghai through these aspects:

A. Monitor and Give Alert

The evaluating system can monitor and score the market power of the whole market and each supplier in the market, set the guard lines and alert, all of which will help to mitigate the market power before market crisis.

B. Dig Out the Causation

Through calculate the five classes of indexes, the system can not only give the evaluating result, hut also reveal the causation of it which help to have a comprehensive understand of the market power.

C. Uniform Standard and Comparison

The evaluating system gives a mapping from the Value of particular index to the understandable centesimal scores,

which also provide a uniform standard to compare the

present perfomance ofthe market or each supplier history, or horizontally compare the different suppliers.

D. Trend Analysis and Prediction

The scores data also useful to analysis the trend and make predictions, through data mining or other statistic methods.

E. Enhanced Decision Making

its

The evaluating results are useful for policy makers to

establish fair standards to identify

implement policies to remedy or prevent market power

market power and

560

abuses.

W. ACKNOWLEDGMENT

The authors gratefully acknowledge the contributions of Guo Jia-chun, Wang Zhi-hua, Zhao Yan and Wang Zheen and for their work on the construction of the original version of this document.

[I]

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[4]

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[8]

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PDFDown.htm1

2004 IEEEInternational Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong

K. BIOGRAPHIES

Liu Dun-man was born in Beijing, China, on July 2, 1979. He is a postgraduate far PhD in the Department of Electrical Engineering in Beijing Tsinghua University. His research area includes Surveillance of Electricity Market, Load Forecasting and the application of data mining

Li Rui-qing was born in Shanghai, China, on September, 1968. He graduated from the Department of Electrical Engineering of Zhejiang University, Zhejiang China, in 1990. He is the senior engineer and the manager of the Dispatching Center of Shanghai Municipal Electric Power Company. He engages in the dispatching of electric system and the operation of electricity market for many years.

He Guang-yu was born in Pingjiang Hunan Province, China, in 1972. He graduated and got degree of PhD. from the Department of Electrical Engineering of Tsinghua University, Beijing China. He is the instructor in the Department of Electrical Engineering of Tsinghua University, Beijing China. His research area includes the application of optimization theory, theory and application of Electricity Market, Load Forecasting.

Chen Xue-qing was born in Shanghai,

She graduated from the

Department of Electrical Engineering of Tsinghua University, Beijing China. She is the professor and engages in

the teaching and researching in the Department of Electrical Engineering of Tsinghua University, Beijing China. Her research area includes the application of Optimization theory, economic dispatch of electric system, theory and application of Electricity Market.

China, in 1939.

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