Contracts and Market Power in Price-regulated Power Industries

Transcription

1 Conracs and Marke Power in Price-regulaed Power Indusries M. Soledad Arellano Pablo Serra School of Governmen Deparmen of Economics Universidad Adolfo Ibáñez Universidad de Chile Sepember IAEE

2 Moivaion Parial liberalizaion of power indusries in Lain America since mid 1980s Full compeiion seemed unrealisic a he ouse Cenralized cos-based meri order dispach Price for small consumers are regulaed In he las years, dissaisfacion wih price regulaion riggered a new reform wave Discos have o aucion long erm conracs o cover heir regulaed cusomers presen and fuure needs

3 Moivaion Brazil esablished in 2004 a cenralized mechanism o aucion 5-15 year conracs for delivery one year ahead and 5-30 year conracs for delivery 5 years ahead. Since 2005, Chilean disribuion companies mus bid ou heir projeced demand a leas hree years ahead Peru, in 2006, adoped he Chilean decenralized approach, bu afer a few unsuccessful aucions, in 2008 urned o de Brazilian scheme. In December 2006 Colombia replaced he exising capaciy paymen wih call opions mechanism called Firm Energy Obligaions, which are cenrally aucioned.

4 Moivaion Wha is he expeced effec on regulaed and non regulaed consumers of he laes reform wave in Lain American counries? Wha is he bes long-erm conrac aucion design? Our purpose is o provide a formal answer o his quesions, hough qualified by a number of srong assumpions

5 Lieraure Marke power leads o welfare losses in price regulaed markes Von der Fehr and Harbord 1997, Arellano and Serra 2007 Forward conracing and marke power wih a price deregulaed spo marke Makes he spo marke more compeiive: Allaz & Vila 1993, Powell 1993, Newberry 1998 Need no lead o more compeiive oucomes when agens inerac repeaedly: Liski & Monero 2006, Green & Le Coq 2006

6 Agenda Model assumpions Equilibrium wihou long-erm conracs Equilibrium wih long-erm conracs Policy Implicaions Fuure Work

7 Model assumpions Saic and deerminisic Two linear-cos generaion echnologies Baseload b and peaking p Capaciy cos per MW: f b > f p ; f = f b f p > 0 Operaion cos per MWh: c b < c p ; c = c p c b > 0 Dispach Cenralized, cos-based, and mandaory Peak-load pricing in he spo marke

8 Model assumpions Demand Price inelasic load demand curve q: consumpion a he h highes consumpion hour is he inverse of q, wih <0 T q m q

9 Welfare-maximizing soluion Cenral dispacher minimizes he sysem s cos Min k { } k T M f k + f q " k + c q " k d + c k k c q d b p p + b b 0 k q M : sysem's peak demand k: baseload capaciy k: number of hours in which peaking plans operae. k p q & ' f * = Min$, T % ' c # " k b * T

10 Peak-load pricing Marginal-cos peak-load pricing in he spo marke leads a compeiive Indusry o he welfare maximizing soluion Viner-Wong heorem Capaciy charge = f p Peaking plan is marginal plan Energy charge = c p Baseload plan is marginal plan Energy charge = c b q k 2 k b * T

11 Courno Duopoly w/o conracs Peak-load pricing peaking plans never have profis and complee demand Firms decide over baseload capaciy k j Profi maximizaion problem of firm j Max k j [ c k k " f k ] j j Courno soluion c c = 2eq + e c 1 2 q

12 Courno Duopoly w/o conracs Sric concaviy of he profi funcion * < c and k* > k c Peaking Plans se he price of energy for a longer period of ime a larger average spo price Courno producer over invess in Peaking Technology

13 Model wih long-erm financial conracs: assumpions A fixed share of oal energy demand is aucioned in advance Capaciy charge is se equal o marginal cos of increasing capaciy The conrac goes o he firm ha bids he lowes energy price Invesmen decisions are aken afer long-erm conrac is awarded Generaors rade energy and non-conraced cliens purchase a he spo price

14 Courno equilibrium wih conracs Sage 1: Firms compee for he share of load curve aucioned The conrac price p c is deermined Sage 2: Firms make heir invesmen decisions k 1 and k 2 Sage 3: Meri order dispach, independenly of posiion in conrac marke Ses he cos-based spo energy price p s

15 Sage 3: Spo Marke Equilibrium k 1 α + k 2 α =kα kα kα c p c b Spo marke price p s c p for < kα c b for > kα kα

16 Sage 2: Invesmen Decisions Firm 1 s profi funcion T c s p $ p q d " 1 = $% f k1 + % c k1 k + # 0 S 1 C 1 Firm 2 s profi funcion # 2 = " f k2 + c k2 k

17 Sage 2: Invesmen Decision FOC s: k + k # $ k " k = 1 [ ] Firm1 k 1 +k 2 =k If k + k " k = 2 k k k " k 3" > " # k 1" = + k 1" ; = 2 k 2 dk d > 0 Firm 2

18 Sage 1: Long-erm conrac aucion Firms compee for he financial conrac " # = " " = k c k S C $ % % % d q c p d q c p T k b c k p c c 0 1 " # # $ + $ =

19 Sage 1: Long-erm conrac aucion d q k c k d q d q c d q c p T T T k b k p c " # " + = $ Weighed average spo price of energy P r Δ > 0

20 Sage 1: Long-erm conrac aucion Moreover: r p " < 0 Average regulaed price decreases wih α Small consumers benefi from conrac marke " < 0 # The price differenial ha benefis large consumers decreases wih α c p " < 0 Conrac price falls wih α

21 Main resuls The larger he share of demand ha is aucioned: The lower is he spo price The lower is he conrac price Conrac price is below he regulaed spo marke price

22 Policy Implicaions Promoe forward conracing. Design feaures o preven marke power Simulaneous aucioning Endogenously deermined α Regulaor s role: Require reail suppliers o aucion supply Require long-sanding conracs May play a coordinaing role

23 Fuure Work Assumpions o be relaxed Deerminisic world Inelasic demand Formalize enry barriers Repeaed ineracion