Competition in the national electricity market Christopher Short - - PDF document

Competition in the national electricity market

Christopher Short

Overview

• Market power in the NEM
• Energy only design
• Mitigation issues

What is a competitive market?

• The first objective of the NEM!
• Economically efficient outcomes.
• Economist: Minimising the cost of producing

goods.

What is market power?

• Competitive behavior = price taker
• Market power = ability to influence price
• Identify market power by observing deviations

from the expected competitive price

Identifying the competitive price

• Competitive price determined from SRMC

bidding

• SRMC estimated by
• Use of bidding data
• Lowest positive envelope for each turbine
• Adjusted for
• Outages
• Transmission losses

Identifying market power

• SRMC uncertainty requires inference procedure
• Calculate Lerner index
• take median for month
• Declare a month as non-competitive if median > 0.3
• Equivalent to inflating the competitive price by 43%

and requiring that 720+ prices to exceed adjusted competitive price in a month

Median Indexes, 1999

May Jun Jul Aug Sep Oct NSW

! ! ! ! " "

VIC

! ! " ! ! "

SA

? ? ? ? ? ?

QLD

" " " " " "

!= non competitive " = non competitive

Median Indexes, 2001

Dec Jan Feb Mar Apr May NSW

! ! ! ! ! !

VIC

" ! " ! ! "

SA

" " " " " "

QLD

! ! ! ! ! !

!= non competitive " = non competitive

Average monthly prices

20 40 60 80 100 120 140 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02

$/MWh

NSW Qld SA Vic Jun-02

Median Indexes, 2002

Jan Feb Mar Apr May Jun NSW

" " ! ! ! !

VIC

" " ! ! ! !

SA

" " " " " "

QLD

! ? " " ! !

!= non competitive " = non competitive

What has been demonstrated…

• Market power is exercised frequently in

Australia

• That the source of this is a structural issue
• But that’s too easy…

Policy failure…

• Market power is a problem fundamental to all

electricity markets

• when demand approaches capacity, every supplier has the

ability to raise prices above competitive prices

• It is not dependent on structural issues
• Though these will exacerbate the problem
• Rebidding debate – a sideshow?

Policy choice?

• Market monitoring is only half the issue
• Mitigation measures are required

Energy only design

• Generators only receive only for energy

delivery

• Selected reliability level determines VOLL
• $10 000/MWh
• Implies that also selected reliability level

determines investment pattern

Energy only design

• Disproportionate investment recovery occurs at price

spikes

• Firms bidding at marginal cost gives correct

investment pattern!

• Competitive behavior leads to the efficient outcome!
• Requiring prices spikes does not imply that price

caps or cost based bidding rules are inappropriate

Mitigation issues

• Market power requires mitigation procedures
• Price caps
• Cost based bids
• Getting it wrong can be more costly than the

problem

• To be used in conjunction with trigger device

Future directions…

• Reconsider design to include mitigation

measures

• Develop appropriate monitoring process for

identification of market power

• Use mitigation in conjunction with monitoring