Participating in Electricity Markets: The Generator s Perspective. D. Kirschen

Transcription

1 Participating in Electricity Markets: The Generator s Perspective D. Kirschen

2 Market Strctre Monopoly Oligopoly Perfect Competition Monopoly: Monopolist sets the price at will Mst be reglated Perfect competition: No participant is large enogh to affect the price All participants act as price takers Oligopoly: Some participants are large enogh to affect the price Strategic bidders have market power Others are price takers D. Kirschen

3 Perfect competition All prodcers have a small share of the market All consmers have a small share of the market Individal actions have no effect on the market price All participants are price takers D. Kirschen

4 Short rn profit maximisation for a price taker y : Otpt of one of the generators max y { π.y c(y) } d { π.y c(y) } dy π = dc(y) dy = 0 Prodction cost Revene Independent of qantity prodced becase price taker Adjst prodction y ntil the marginal cost of prodction is eqal to the price π D. Kirschen

5 Market strctre No difference between centralised action and bilateral market Everything is sold at the market clearing price Price is set by the last nit sold Marginal prodcer: Sells this last nit Gets exactly its bid Infra-marginal prodcers: Get paid more than their bid Collect economic profit Extra-marginal prodcers: Sell nothing Price Infra-marginal spply Extra-marginal demand Qantity Marginal prodcer D. Kirschen

6 Bidding nder perfect competition No incentive to bid anything else than marginal cost of prodction Lots of small prodcers Change in bid cases a change in stacking p order If bid is higher than marginal cost Cold become extra marginal and miss an opportnity to sell at a profit Price spply demand Qantity D. Kirschen

7 Bidding nder perfect competition If bid is lower than marginal cost Cold have to prodce at a loss If bid is eqal to marginal cost Get paid market price if marginal or infra-marginal prodcer Price spply demand Qantity D. Kirschen

8 Oligopoly and market power A firm exercises market power when It redces its otpt (physical withholding) or It raises its offer price (economic withholding) in order to change the market price D. Kirschen

9 Example A firm sells 10 nits and the market price is $15 Option 1: offer to sell only 9 nits and hope that the price rises enogh to compensate for the loss of volme Option 2: offer to sell the 10th nit for a price higher than $15 and hope that this will increase the price Profit increases if price rises sfficiently to compensate for possible decrease in volme D. Kirschen

10 Short rn profit maximisation with market power { } y i : Prodction of generator i max y i y i π (Y ) c ( y i ) d y dy i π (Y ) c( y i ) i { } = 0 π (Y ) + y i dπ (Y ) dy i = dc ( y i ) dy i Y = y 1 +L + y n is the total indstry otpt Not zero becase of market power π (Y ) 1 + y i Y Y dπ (Y ) dy i π (Y ) = dc ( y ) i dy i D. Kirschen

11 Short rn profit maximisation with market power π (Y ) 1 + ε = dy y dπ π y i Y Y dπ (Y ) dy i π (Y ) = π y dy dπ = dc ( y ) i dy i is the price elasticity of demand s i = y i Y is the market share of generator i π (Y ) 1 s i ε (Y ) = dc ( y i ) dy i < 1 optimal price for generator i is higher than its marginal cost D. Kirschen

12 When is market power more likely? Imperfect correlation with market share Demand does not have a high price elasticity Spply does not have a high price elasticity: Highly variable demand All capacity sometimes sed Otpt cannot be stored ËElectricity markets are more vlnerable than others to the exercise of market power D. Kirschen

13 Elasticity of the demand for electricity Price High elasticity good Slope is an indication of the elasticity of the demand High elasticity Non-essential good Easy sbstittion Price Qantity Low elasticity Essential good No sbstittes Low elasticity good Electrical energy has a very low elasticity in the short term Qantity D. Kirschen

14 How Inelastic is the demand for electricity? Price of electrical energy in England and Wales [ /MWh] Min Max Average Janary Febrary March Vale of Lost Load (VoLL) in England and Wales: 2,768 /MWh D. Kirschen

15 Price spikes becase of increased demand π ext $/MWh Extreme peak Normal peak π nor Small increases in peak demand case large changes in peak prices MWh D. Kirschen

16 Price spikes becase of redced spply π ext $/MWh Normal spply Redced spply π nor Normal peak Small redctions in spply case large changes in peak prices MWh D. Kirschen

17 Increasing the elasticity redces price spikes and the generators ability to exercise market power $/MWh π max π min MWh D. Kirschen

18 Increasing the elasticity of the demand Obstacles Tariffs Need for commnication Need for storage (heat, intermediate prodcts, dirty clothes) Not everybody needs to respond to price signals to get sbstantial benefits Increased elasticity redces the average price Not in the best interests of generating companies Impets will need to come from somewhere else D. Kirschen

19 Frther comments on market power ALL firms benefit from the exercise of market power by one participant Unilaterally redcing otpt or increasing offer price to increase profits is legal Collsion between firms to achieve the same goal is not legal Market power interferes with the efficient dispatch of generating resorces Cheaper generation is replaced by more expensive generation D. Kirschen

20 Modelling imperfect competition Bertrand model Competition on prices Cornot model Competition on qantities D. Kirschen

21 Game theory and Nash eqilibrim Each firm mst consider the possible actions of others when selecting a strategy Classical optimisation theory is insfficient Two-person non-co-operative game: One firm against another One firm against all the others Nash eqilibrim: given the action of its rival, no firm can increase its profit by changing its own action: Ω i (a i *,a j * ) Ω i (a i,a j * ) i,a i D. Kirschen

22 Bertrand Competition Example 1 C A = 35. P A /h C B = 45. P B /h Bid by A? Bid by B? Market price? Qantity traded? P A P B A B π = 100 D [ / MWh] C A (P A ) C B (P B ) Inverse demand crve D. Kirschen

23 Bertrand Competition Example 1 C A = 35. P A /h C B = 45. P B /h P A P B A B π = 100 D [ / MWh] Marginal cost of A: 35 /MWh Marginal cost of B: 45 /MWh A will bid jst below 45 /MWh C A (P A ) C B (P B ) B cannot bid below 45 /MWh becase it wold loose money on every MWh Market price: jst below 45 /MWh Demand: 55 MW P A = 55MW P B = 0 D. Kirschen

24 Bertrand Competition Example 2 C A = 35. P A /h C B = 35. P B /h P A P B A B π = 100 D [ / MWh] C A (P A ) C B (P B ) Bid by A? Bid by B? Market price? Qantity traded? D. Kirschen

25 Bertrand Competition Example 2 C A = 35. P A /h C B = 35. P B /h P A P B A B C A (P A ) C B (P B ) π = 100 D [ / MWh] A cannot bid below 35 /MWh becase it wold loose money on every MWh A cannot bid above 35 /MWh becase B wold bid lower and grab the entire market Market price: 35 /MWh Identical generators: bid at marginal cost Non-identical generators: cheapest gets the whole market Not a realistic model of imperfect competition D. Kirschen

26 Cornot competition: Example 1 C A = 35. P A /h C B = 45. P B /h P A P B A B π = 100 D [ / MWh] C A (P A ) C B (P B ) Sppose P A = 15 MW and P B = 10 MW Then D = P A + P B = 25 MW π = D = 75 /MW R A = = 1125 ; C A = = 525 R B = = 750 ; C B = = 450 Profit of A = R A - C A = 600 Profit of B = R B - C B = 300 D. Kirschen

27 Cornot competition: Example 1 Smmary: For P A =15MW and P B = 10MW, we have: Demand Profit of A Profit of B Price D. Kirschen

28 Cornot competition: Example 1 P A =15 P A =20 P A =25 P A =30 P B =10 P B =15 P B =20 P B = Demand Profit B Profit A Price D. Kirschen

29 Cornot competition: Example 1 P A =15 P A =20 P A =25 P A =30 P B =10 P B =15 P B =20 P B = Demand Profit B Profit A Price Price decreases as spply increases Profits of each affected by other Complex relation between prodction and profits D. Kirschen

30 Let s play the Cornot game! P A =15 P A =20 P A =25 P A =30 P B =10 P B =15 P B =20 P B = Demand Profit B Profit A Price Eqilibrim soltion! A cannot do better withot B doing worse B cannot do better withot A doing worse Nash eqilibrim D. Kirschen

31 Cornot competition: Example 1 Demand P B =15 Profit of B P A = Profit of A Price C A = 35. P A /h C B = 45. P B /h Generators achieve price larger than their marginal costs The cheapest generator does not grab the whole market Generators balance price and qantity to maximise profits D. Kirschen

32 Cornot competition: Example 2 C A = 35. P A /h C B = 45. P B /h C N = 45. P N /h P A P B P N... A B N C A (P A ) C B (P B ) C N (P N ) π = 100 D [ / MWh] D. Kirschen

33 Cornot competition: Example Total prodction of other firms Prodction of firm A Prodction of another firm Nmber of Firms D. Kirschen

34 Cornot competition: Example Price Demand Nmber of Firms D. Kirschen

35 Cornot competition: Example Profit of firm A Total profit of the other firms Profit of another firm Nmber of Units D. Kirschen

36 Other competition models Spply fnctions eqilibria Bid price depends on qantity Agent-based simlation Represent more complex interactions Maximising short-term profit is not the only possible objective Maximising market share Avoiding reglatory intervention D. Kirschen

37 Conclsions on imperfect competition Electricity markets do not deliver perfect competition Some factors facilitate the exercise of market power: Low price elasticity of the demand Large market shares Cyclical demand Operation close to maximm capacity Stdy of imperfect competition in electricity markets is a hot research topic Generator s perspective Market designer s perspective D. Kirschen

38 Participating in Electricity Markets: The consmer s perspective D. Kirschen

39 Options for the consmers By at the spot price Lowest cost, highest risk Mst be managed careflly Reqires sophisticated control of the load By from a retailer at a tariff linked to the spot price Retailers acts as intermediary between consmer and market Risk can be limited by placing cap (and collar) on the price Interrptible contract Reasonable option only if cost of interrption is not too high Savings can be sbstantial D. Kirschen

40 Options for the consmers By from a retailer on a time-of-se tariff Shifts some of the risk to the consmer Need to control the load to save money By from a retailer at a fixed tariff Lowest risk, highest cost Two components to the price: average cost of energy and risk premim D. Kirschen

41 Choosing a contract Best type of contract depends on the characteristics of the consmer: Cost of electricity as a proportion of total cost Risk aversion Flexibility in the se of electricity Potential savings big enogh to jstify transactions cost D. Kirschen

42 Bying at the spot price Mst forecast prices Mch harder than load forecasting becase price depends on demand and spply Spply factors are particlarly difficlt to predict (otages, maintenance, gaming, locational effects) Good accracy for average price and volatility Predicting spikes is mch harder Mst optimize prodction taking cost of electricity into accont Complex problem becase of: Prodction constraints Cost of storage (losses, loss of efficiency in other steps, ) Price profiles D. Kirschen

43 Participating in Electricity Markets: The retailer s perspective D. Kirschen

44 The retailer s perspective Sell energy to consmers, mostly at a flat rate By energy in blk Spot market Contracts Want to redce risks associated with spot market Increase proportion of energy boght nder contracts Mst forecast the load of its cstomers Regional monopoly: traditional top-down forecasting Retail competition: bottom-p forecasting Difficlt problem: cstomer base changes Mch less accrate than traditional load forecasting D. Kirschen

45 Participating in Electricity Markets: The hybrid participant s perspective D. Kirschen

46 Example: pmped storage hydro plant D. Kirschen

47 Example Energy Price Energy Consmed Energy Released $/MWh MWh Period D. Kirschen

48 Example Energy cycle in a pmped storage plant is only abot 75% efficient Difference between high price and low price periods mst be large enogh to cover the cost of the lost energy Profit is nlikely to be large enogh to cover the cost of investments Pmped hydro plants can also make money by helping control the system D. Kirschen