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 ! = non competitive " = non competitive May Jun Jul Aug Sep Oct NSW ! ! ! ! " " VIC ! ! " ! ! " SA ? ? ? ? ? ? QLD " " " " " "

Median Indexes, 2001 ! = non competitive " = non competitive Dec Jan Feb Mar Apr May NSW ! ! ! ! ! ! VIC " ! " ! ! " SA " " " " " " QLD ! ! ! ! ! !

Average monthly prices 140 NSW 120 Qld SA 100 Vic $/MWh 80 60 40 20 0 Jun-02 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02

Median Indexes, 2002 ! = non competitive " = non competitive Jan Feb Mar Apr May Jun NSW " " ! ! ! ! VIC " " ! ! ! ! SA " " " " " " QLD ! " " ! ! ?

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