Electricity: Beyond Parer: The role of transmission in the NEM - - PowerPoint PPT Presentation

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Electricity: Beyond Parer: The role of transmission in the NEM David Newbery, Cambridge University ACCC Regulation, Industry Structure and Market Power Conference, 1 Aug 2003 http://www.econ.cam.ac.uk/electricity Transmission constraints in

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Electricity: Beyond Parer: The role of transmission in the NEM

David Newbery, Cambridge University ACCC Regulation, Industry Structure and Market Power Conference, 1 Aug 2003

http://www.econ.cam.ac.uk/electricity

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Source: Towards a Reliable European Energy Market, Presentation by B. den Ouden, APX, January 2001

Transmission constraints in Europe

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Interconnector value

what are interconnectors worth?
When are merchant interconnectors suitable?
How should access be regulated?

– Existing inter-TSO interconnectors – Merchant interconnectors

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Germ an-Dutch interconnector auction value - 4 week average

50 100 150 200 250 300 350 400 450 500 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Euros/MW/day (sum of hours)

annual average centred

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Arbitrage profits (less 1 SD) per hour, six-montly averages

5 10 15 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Hour

Euro/MWh

jan-Jun'01 Jul-Dec '01 Jan-Jun '02

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UK-NL Interconnector daily revenues - moving averages

500 1000 1500 2000 2500 3000

4-Jun-01 4-Jul-01 4-Aug-01 4-Sep-01 4-Oct-01 4-Nov-01 4-Dec-01 4-Jan-02 4-Feb-02 4-Mar-02 4-Apr-02 4-May-02 4-Jun-02 4-Jul-02 4-Aug-02 4-Sep-02 4-Oct-02 4-Nov-02 4-Dec-02 4-Jan-03 4-Feb-03

Eur/MW/day Export weekly MA Import weekly MA Total monthly MA

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Interconnector values

German-Dutch auction values:
average of hourly auction values

= 30,000-40,000 Euro/MW/yr

spot prices differences are larger
UK-NL absolute spot price differences

= 120,000-140,000 Euro/MW/yr

interconnection can be profitable

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Interconnector auctions

Must have market-based access to scarce

interconnectors ⇒ auctions attractive, but how design?

oligopolists amplify market power if they

secure import capacity ⇒ legacy import contracts bad idea ⇒ efficient arbitrage desirable ⇒ pay-as-bid bad idea - deters arbitrage

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Dutch-German interconnector

single-price auction
no netting
APX and LPX/EEX for pricing
legacy contracts
Germany vertically integrated
cap on incumbent imports
arbitrage improving
2 separate auctions not integrated with PX

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Merchant interconnectors: problems

economies of scale
market power
pre-emption of other interconnectors
impact on network - externalities
regulatory risk raises WACC

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500 1,000 1,500 2,000 2,500 3,000 3,500 500 1,000 1,500 2,000 2,500 3,000 MW LRAC (Euro/MW/mile)

Economies of scale in interconnectors

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Merchant interconnectors: benefits

Controllable DC link between jurisdictions: – can take speculative risk – which might be hard for regulators to justify

Addressing regulatory concerns:

– option on regulation after N years – initial tender for capacity demand – deep connection charge or CBA test? – use-it-or-lose it daily auctions?

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Market splitting or integrated auctions?

Major EU debate on cross-border trade
Options being promoted:

– integrated auctions – market integration or splitting as in Nordpool

Market integration: SO clears spot and T together

⇒ increases demand elasticity ⇒ mitigates market power

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Separate markets, unconstrained T

Q p1 p2 local demand Q K K= b1D2-b2D1 b1+b2

submit bid to transmission auction results from transmission auction published submit bids to energy spot markets results of energy spot markets published s e p a r a t e m a r k e t s

K K total demand +K

K,qi K pi= D1+D2 2(b1 + b2) pi = Traders arbitrage p1= D1 2b1 p2= D2 2b2 Cournot choice (complete information, no uncertainty)

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Integrated markets, unconstrained T

K

n

a l p r i c i n g

p q p q

submit bids to energy spot markets SO determines nodal prices and dispatch

local demand Q p1 p2 Q total demand Q p +D2 -q2 + b2 p1= Inverse demand: D1 -q1 b1 qi pi= D1+D2 3 (b1+b2) Cournot choice: K,pi SO allocates K K K

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Separate markets

Benefit of integration, if T unconstrained “importing elasticity”

Q p1 p2 local demand Q K K K total demand pi= D1+D2 2(b1 + b1) Q p pi= D1+D1 3(b1+b2)

Integrated markets - # generators Theorem 1: Integration increases Q and decreases P.

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Case study: Integrate Benelux

Problem: Electrabel 98% Be, 25% of NL
Proposition: If original equilibrium

unconstrained profit maximising then market integration lowers prices in both markets

But if Electrabel restrains its market power

more before integration than after, prices could rise (in NL, possibly also in Be)

Might this precipitate restructuring?

– VPP, exchange gencos across countries?

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Integrating two markets?

Dutch cannot sell in Belgium T uncon- strained (or Belgium prices capped at Dutch level)

pIntegrated < pseparated

Generators can sell everywhere

pIntegrated = pseparated

T per- manently constrained

= pIntegrated = pseparated,netting

Market power at importing node B

pB,sep, no net>pIntegrated >pN,sep, no net

Competitive importing node

psep, no net = psep,netting

Strategy determines constraint Integrated markets provide incentive to resolve constraint - resulting in higher outputs

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Cost-benefit of mitigating market power

demand elasticities low ⇒ total surplus gain may

be small

but other benefits could be large:

– avoid excessive generation investment

like England

– avoid regulatory inefficiencies

like California

But hard to formalise this to be lawyer-proof

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