Market Design in Wholesale Electricity Markets

Energy Policy, 2011

The theoretical framework developed in this study allows development of a model of deregulated electricity markets that explains two familiar empirical findings; the existence of forward premiums and price-cost markups in the spot market. This is a significant contribution because electricity forward premiums have been previously explained exclusively by the assumptions of perfect competition and risk-averse behavior while spot markups are generally the outcome of a body of literature assuming oligopolistic competition. Our theoretical framework indicates that a certain premium for forward contracting is required for efficient allocation of generation capacity. However, due to the uniqueness of electricity and the design of deregulated electricity markets this premium might be substantially higher than its optimal level.

Economics Working Papers, 2006

This study of the wholesale electricity market compares the efficiency performance of the auction mechanism currently in place in U.S. markets with the performance of a proposed mechanism. The analysis highlights the importance of considering strategic behavior when comparing different institutional systems. We find that in concentrated markets, neither auction mechanism can guarantee an efficient allocation. The advantage of the current mechanism increases with increased price competition if market demand is perfectly inelastic. However, if market demand has some responsiveness to price, the superiority of the current auction with respect to efficiency is not that obvious. We present a case where the proposed auction outperforms the current mechanism on efficiency even if all offers reflect true production costs. We also find that a market designer might face a choice problem with a tradeoff between lower electricity cost and production efficiency. Some implications for social welfare are discussed as well.

European Journal of Operational Research, 2007

We compare two alternative mechanisms for capping prices in two-settlement electricity markets. With sufficient lead time, forward market prices are implicitly capped by competitive pressure of potential entry that will occur when forward prices rise above some backstop price. Another more direct approach is to cap spot prices through a performance-based regulatory intervention. In this paper we explore the implications of these two alternative mechanisms in a two-settlement Cournot equilibrium framework. We formulate the market equilibrium as a stochastic equilibrium problem with equilibrium constraints (EPEC) capturing congestion effects, probabilistic contingencies and horizontal market power. As an illustrative test case, we use the 53-bus Belgian electricity network with representative generator costs but hypothetical demand and ownership structure. Compared to a price-uncapped two-settlement system, a forward cap increases firms' incentives for forward contracting, whereas a spot cap reduces such incentives. Moreover, in both cases, more forward contracts are committed as the generation resource ownership structure becomes more diversified. keyword: OR in energy, Electricity Markets, Cournot Equilibrium, Mathematical Program with Equilibrium Constraints, Equilibrium Problem with Equilibrium Constraints.

2005

This thesis consists of three self-contained papers on the analysis of electricity auctions written over a period of twelve years. The first paper models price competition in a decentralized wholesale market for electricity as a first-price, sealed-bid, multi-unit auction. In both the pure and mixed-strategy equilibria of the model, above marginal cost pricing and inefficient despatch of generating units occur. An alternative regulatory pricing rule is considered and it is shown that offering to supply at marginal cost can be induced as a dominant strategy for all firms. The second paper analyses strategic interaction between long-term contracts and price competition in the British electricity wholesale market, and confirms that forward contracts will tend to put downward pressure on spot market prices. A 'strategic commitment' motive for selling forward contracts is also identified: a generator may commit itself to bidding lower prices into the spot market in order to ensur...

The Electricity Journal, 2003

The SMD proposal focuses on wholesale markets and transmission in isolation, not on ways to encourage a more market-based retail approach. As long as it remains so supply-focused, policy will be like one hand clapping, leading to potential overinvestment in transmission and costly future revisions of institutions.

Energy Policy, 1997

A normative structure for the European electricity industry is discussed. This model builds upon proposals and experiences in several European nations (in particular the Netherlands and the UK). Two rivalling structures (vertical integration versus open competition) are compared. Our 'open structure' is specific in not allowing TPA (third party access) to the grid, and in making the necessary distinction among 'independent generators' and Independent Generators of Own Power IGOPS. Cost economies (scale, scope and density) are related to the three major functions of a power system (generation, transport, distribution). The performance of the rival models is assessed for five criteria: sustainability, economic efficiency, regulatory efficiency, equity, and institutional feasibility.

2015

Traditionally, electricity suppliers charge their customers, in the most cases, through a bionomial function. One part is related to the consumed electric energy while the other part refers to the (usually maximum) power recorded (or contracted) at consumer’s metering point during a certain period. At the beginning of the liberalization era in the electricity markets, it was proposed that energy-only markets would be sufficient to attract the necessary investments because, through the marginal pricing of the energy, medium and peak load generators would cover their fixed costs by receiving higher-than-variable-cost revenues from the market at times of scarcity [1]. Indeed, energy-only market have been the main market design in the first years of the market liberalization and remains so in many regions worldwide. However, the original assumption about the sufficiency of the energy-only markets has been

11th International Conference on the European Energy Market (EEM14), 2014

Electricity market designs that allow multi-part bids and consider the technical characteristics of the generation units are characterized by non-convexities. Such market designs, when operated under marginal pricing, may result in losses for the market participants, and for this reason they are usually supplemented by some sort of side payments or uplifts, as they are often called. In this paper, we study pricing mechanisms that generate revenues to the market participants that are adequate to cover any losses arising from the non-convexities without the need for external uplift payments. We provide the formulations for a stylized Unit Commitment and Economic Dispatch problem, and we introduce a new pricing mechanism, which we call "Minimum Zero-sum Uplift". We compare the different schemes on a common numerical example and study their behavior. The findings allow us to obtain useful insights on the performance and the mechanics of each mechanism.

Land Economics, 1976

A framework is developed which facilitates comparisons of alternative pricing schemes: declining block, high tailed, and rate inversion. A givenaggregai~demand is assumed to be composed of six different comb~nations of three individual demand curves. Each individual curve is a faction of the constant elasticity aggregate q"e man d ..~The ,,,;c 0 mbin a t ion s /h ave ditferent standard deviations 'arid varying oegrees of skewness. We examine the impact of the pricing schemes on total quantity demanded, consumers surplus, and total revenue; the relative contributions from and benefits to each of the components of the aggregate demand are also explored.

The Energy Journal, 2016

We analyse vertical integration between generators and retailers in electricity markets and we discuss the implications for price decisions of the presence of asymmetric (cost) information in a simple P-A framework. We analyze a situation in which generators post supply bids taking into account the profit of the entire vertically integrated group they belong to. We then discuss the way in which the degree of vertical integration affects this bidding strategy. Using Italian electricity auction data we show how bid prices posted by a pivotal producer are significantly influenced by variables incorporating vertical integration into the econometric model.

2003

The standard economic model of efficient competitive markets relies on the ability of sellers to charge prices that vary as their costs change. Yet, there is no restructured electricity market in which most retail customers can be charged realtime prices (RTP), prices that can change as frequently as wholesale costs. We analyze the impact of having some share of customers on time-invariant pricing in competitive electricity markets. Not only does time-invariant pricing in competitive markets lead to outcomes (prices and investment) that are not first-best, it even fails to achieve the second-best optimum given the constraint of time-invariant pricing. We then show that attempts to correct the level of investment through taxes or subsidies on electricity or capacity are unlikely to succeed, because these interventions create new inefficiencies. In contrast, increasing the share of customers on RTP is likely to improve efficiency, though surprisingly, it does not necessarily reduce capacity investment, and it is likely to harm customers that are already on RTP.

IDEI/GREMAQ Working Paper, 2001

This paper analyses o¤er prices and capacity choice by two asym-metric and capacity-constrained rms competing in a spot market for electricity with uniform auctions. We nd that the scope for Bertrand competition is limited to the case of very low demand levels. For higher levels ...

System Sciences, 2005. …, 2005

We compare two alternative mechanisms for capping prices in two-settlement electricity markets. With sufficient lead time and competitive entry opportunities, forward market prices are implicitly capped by competitive pressure of potential entry that will occur when forward prices rise above a certain level. Another more direct approach is to cap spot prices through regulatory intervention. In this paper we explore the implications of the two alternative mechanisms in a two settlement Cournot equilibrium framework. We formulate the market equilibrium as a stochastic equilibrium problem with equilibrium constraints (EPEC) capturing congestion effects, probabilistic contingencies and market power. As an illustrative test case we use the 53bus Belgian electricity network with representative generator cost but hypothetical demand and ownership assumptions. When compared to two-settlement systems without price caps we find that either of the price capping alternatives results in reduced forward contracting. Furthermore the reduction in spot prices due to forward contracting is smaller.

Research Papers in Economics, 2020

Increasing shares of intermittent renewable energies challenge the dominant way to trade electricity ex-ante in forward, day-ahead, and intraday markets: Coal power plants and consumers cannot react to the stochastic element of renewables, whereas gas turbines can. We use a theoretical model to analyze consumer behavior and incentives of perfectly competitive firms to invest in different types of technologies under ex-ante pricing. Curtailed consumers need to get subsidized in high of their disruption cost. Coal power firms recover cost. Renewables and gas turbine firms fail to do so. We identify imperfections that arise from the delay in price setting and market clearing. Do real-time prices induce an efficient outcome? Consumers need to get taxed in high of rationing cost. Support is redundant for gas turbine firms, but renewables firms still fail to recover cost because they cannot ensure against their price risk.

SSRN Electronic Journal, 2019

Highlights  Develop a new market design for wholesale electricity competition  Document the design's solution for missing money and price manipulation  Document the design's efficient planning, pricing and operation  Document the design's practical implementation  Recommend the design for reliability differentiation and market competition