Date post: | 31-Mar-2015 |
Category: |
Documents |
Upload: | kasey-tyler |
View: | 212 times |
Download: | 0 times |
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Modelling incentives and regulation in
wholesale electricity markets
Andy PhilpottElectric Power Optimization Centre
The University of Auckland
(www.esc.auckland.ac.nz/epoc)
(with acknowlegements to Geoff Pritchard and Golbon Zakeri)
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
What is the purpose of this talk?
• New Zealand faces some huge technical challenges in energy supply and delivery.
• This needs lots of research and development into new technology which is where NERI is currently focused.
• But technology is not enough – we need to understand the economic institutions for implementing this technology.
• Our work at EPOC studies how these institutions (e.g. taxes, trading schemes, regulations etc.) work using models.
• These models try to help us design mechanisms that will induce “optimal” behaviour in the agents of wholesale electricity markets – i.e. we study incentives and how they work.
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Summary
• What is the wholesale electricity market?• Examples of incentive/regulation problems
– Generator offering– Transmission planning– Wind power– Emissions trading
• Takeaway: new energy technology is necessary but not sufficient without understanding the market mechanisms under which we expect it to be adopted.
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
NZEM is a uniform price auction (e.g. single node)
price
quantity
price
quantity
combined offer stack
demand
p
price
quantity
T1(q) T2(q)
p
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Example
Capacity 250lossless
Thermal A: 400 @ $45Wind: 100 forecast, @ $0
Thermal B: 400 @ $50Hydro: 200 @ $30, 200 @ $90
Load 500
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Least-cost dispatch
Capacity 250lossless
Thermal A: 400 @ $45Wind: 100 forecast, @ $0
Thermal B: 400 @ $50Hydro: 200 @ $30, 200 @ $90
Load 500
100
200
250
50
150
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Least-cost dispatch with nodal prices
Capacity 250lossless
Thermal A: 400 @ $45Wind: 100 forecast, @ $0
Thermal B: 400 @ $50Hydro: 200 @ $30, 200 @ $90
Load 500
100
200
250
50
150$45
$50
(1) Load pays $25000 (=$50*500)(2) Hydro makes profit $4000 and Wind makes profit $4500(3) System operator makes congestion rent of $1250(4) The dispatch has total cost $15250
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
The actual NZEM
• Generators specify supply curves defining prices at which they will generate.
• Curves fixed for each (1/2) hour• Linear programming model runs
every five minutes to determine – who produces how much– electricity flows in grid– spot price of electricity at
each grid exit point around the country (244 of these)
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
0
20
40
60
80
100
120
Wholesale electricity pricesFive Minute Wholesale Electricity Prices on 28/08/06 ($/MWh)
Time of Day
Otahuhu
Benmore
6am-9am
3am-6am
Source: comitfree
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Capacity 250lossless
Thermal A: 400 @ $45Wind: 100 forecast, @ $0
Thermal B: 400 @ $50 Hydro: 200 @ $30, 200 @ $90
Load 500
100
200
250
50
150$45
$50
$89
$89
Example 1: Dispatch with strategic bidding
(1) Load pays $19500 extra (=$39*500)(2) Hydro makes extra $7800 and Thermal B makes extra $1950(3) System operator makes extra congestion rent of $9750(4) The dispatch is exactly the same, with cost $15250
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Capacity 250lossless
Thermal A: 400 @ $45Wind: 100 forecast, @ $0
Thermal B: 400 @ $50 Hydro: 200 @ $30, 200 @ $90
Load 500
100
200
250
50
150$45
$50
Thermal A: 400 @ $45 149 @ $45
149
249
51
$50
Total cost of dispatch is $15255 which is $5 more than original cost!!
(1) Load pays no extra money(2) System operator congestion rent goes down by $1250 to $0(3) Wind makes $500 more, Thermal A makes $745 more…
Example 2: Dispatch with strategic withholding
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
• Strategic behaviour by firms can result in higher prices and a wealth transfer between agents.
• Strategic behaviour by firms can result in dispatch inefficiency.
• Prices that do not truly represent the cost of shortage can lead to inefficiencies in the wider economy.
• Dispatch inefficiency is a deadweight loss ($5 in example)
• Q: How bad can it get?
• Q: How do we prevent it?
What can we learn from this example?
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
J.F. Nash Jr., Equilibrium points in n-person games, Proc Nat. Acad. Sci. USA, 36 (1950) 48-49.
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
If generators offer at marginal cost
Capacity 1000lossless
Thermal A: 500 @ $50
Thermal B: 500 @ $50
Load = 500 - p
Load = 500 - p
Expect the price to be $50
a=450
b=450
Line contains no flow.
Thermals make no profit.
Load has high welfare.b
a
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
If generators withhold strategically
Thermal A: 500 @ $50
Thermal B: 500 @ $50
Load = 500 - p
Load = 500 - p
Total load = 1000-2pp = 500-(a+b)/2
A solves:max (p-50)a
B solves:max (p-50)b
b
a
(500-(a+b)/2-50)ahas maximum at a = 450-b/2
(500-(a+b)/2-50)b has maximum at b = 450-a/2
Capacity 1000lossless
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Example of Cournot-Nash equilibrium
Thermal A: 500 @ $50
Thermal B: 500 @ $50
Load = 500 - p
Load = 500 - p
300
300
$200
$200
Total load = 1000-2pp = 500-(a+b)/2
A solves:max (p-50)a
B solves:max (p-50)b
(500-(a+b)/2-50)ahas maximum at a = 450-b/2
(500-(a+b)/2-50)b has maximum at b = 450-a/2
0
100
200
300
400
500
b
100 200 300 400 500a
(300,300) Capacity 1000lossless
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Price = $200
Example of Cournot-Nash equilibrium
Thermal A: 500 @ $50
Thermal B: 500 @ $50
Load = 500 - p
Load = 500 - p
300
300
$200
$200
0
100
200
300
400
500
100 200 300 400 500a
Thermals each make profit of $45000.
Load decreases welfare by $56250.
Deadweight loss is $11250 x 2
Capacity 1000lossless
No flow in the line
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
What if the line has zero capacity?
Thermal A: 500 @ $50
Thermal B: 500 @ $50
Load = 500 - p
Load = 500 - p
Each load = 500-pp = 500-a
A solves:max (p-50)a
b
a
(500-a-50)ahas maximum at a = 225
(500-b-50)b has maximum at b = 225
Capacity 0lossless
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
What if the line has zero capacity?
Thermal A: 500 @ $50
Thermal B: 500 @ $50
Load = 500 - p
Load = 500 - p
Each load = 500-pp = 500-a
A solves:max (p-50)a
225
225
(500-a-50)ahas maximum at a = 225
(500-b-50)b has maximum at b = 225
$275
$275
Capacity 0lossless
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Price = $275
What if the line has zero capacity?
Thermal A: 500 @ $50
Thermal B: 500 @ $50
Load = 500 - p
Load = 500 - p
225
225
$275
$275
0
100
200
300
400
500
100 200 300 400 500a
Thermals each make profit of $50625.
Deadweight loss is $25312.50 x 2
Capacity 0lossless
The transmission line has significant value in encouraging competition even though it might never transport any electricity.
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Does this matter in practice?
Clause 10 of the Grid Investment Test states:
“Competition Benefits may be included in the market benefits of a proposed investment or alternative project if the Board reasonably considers this appropriate, provided the competition benefits can be separately identified and calculated”
NZ Electricity Commission 2006, Grid Investment Test.
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
AKL
CNI
SI
Northland/AucklandDemand
2010 – 2288 MW2015 – 2631 MW2020 – 2987 MW
Strategic GeneratorsHuntly + E3P (1413 MW)Otahuhu B (390 MW)
Lower North Island and South IslandDemand
2010 – 3211 MW2015 – 3492 MW2020 – 3721 MW
Strategic GeneratorsTaranaki CC (365 MW)Waitaki Hydro (2718 MW)Clutha Hydro (1000MW)
Central North IslandDemand
2010 – 1794 MW2015 – 1954 MW2020 – 2109 MW
Strategic GeneratorsWaikato Hydro (776 MW)
New Zealand example (Downward 2007)
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Minimum Transfer Capacities (CNI - SI)
0
100
200
300
400
500
600
700
800
2010 2015 2020
Year
Capacity (MW)
Required CapacityFlow In Equilibrium
Minimum Transfer Capacities (AKL - CNI)
0
200
400
600
800
1000
1200
1400
1600
2010 2015 2020
Year
Capacity (MW)
Required CapacityFlow In Equilibrium
New Zealand example
Source: Anthony Downward, EPOC
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Incentives for wind generation
Capacity 250lossless
Thermal A: 400 @ $45Wind: 100 forecast, @ $0
Thermal B: 400 @ $50Hydro: 200 @ $30, 200 @ $90
Load 500
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Least-cost dispatch
Capacity 250lossless
Thermal A: 400 @ $45Wind: 100 forecast, @ $0
Thermal B: 400 @ $50Hydro: 200 @ $30, 200 @ $90
Load 500
The best solution, on the assumption that the wind forecast is accurate.
100
200
250
50
150
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Wind above forecast
Capacity 250lossless
Thermal A: 400 @ $45Wind: 120 actual, @ $0
Thermal B: 400 @ $50Hydro: 200 @ $30, 200 @ $90
Load 500
100
200
250
50
150
spill 20
Wind is spilled – cheap energy is lost.
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Wind below forecast
Capacity 250lossless
Thermal A: 400 @ $45Wind: 80 actual, @ $0
Thermal B: 400 @ $50Hydro: 200 @ $30, 200 @ $90
Load 500
Wind shortfall is made up with expensive water.
80
220
230
50
150
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Are better forecasts needed?
Electricity Commission WGIP report June 2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
A flexible dispatch
Capacity 250lossless
Thermal A: 400 @ $45Wind: 100 forecast, @ $0
Thermal B: 400 @ $50Hydro: 200 @ $30, 200 @ $90
Load 500
100
175
225
100
125
• Spare capacity on transmission line.• Spare capacity in cheap hydro offer.
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Wind above forecast
Capacity 250lossless
Thermal A: 400 @ $45Wind: 120 actual, @ $0
Thermal B: 400 @ $50Hydro: 200 @ $30, 200 @ $90
Load 500
120
155
245
100
125
Surplus wind is matched to hydro decrease.
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Wind below forecast
Capacity 250lossless
Thermal A: 400 @ $45Wind: 80 actual, @ $0
Thermal B: 400 @ $50Hydro: 200 @ $30, 200 @ $90
Load 500
80
195
205
100
125
Lack of wind is matched by hydro.
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Optimizing dispatch as a stochastic LP
Generators offer to sell quantities qi , ask prices pi ,regulation margins ri
We find dispatches xi and Zi to
minimize (pi xi + Epi riZi xipi riZi xi )
(expected cost of power, at offered prices, including re-dispatch)
so that– demand is met (at both 1st and 2nd stages)– transmission network is operated within capacity
– (xi , Zi ) satisfy plant constraints
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Example
Hydro 2: 40 @ $40 (+/- $5)
Wind: capacity 40, @ $0scenarios 0, 10, 20, 30probabilities 0.5, 0.2, 0.2, 0.1
Load 60
• Ensemble forecast for wind. Most likely scenario is 0. • Hydros compete on both energy and regulation.• What to dispatch?
Hydro 1: 40 @ $39 (+/- $2)
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Optimal hedged dispatch (initial)
Hydro 2: 40 @ $40 (+/- $5)
Wind: capacity 40, @ $0scenarios 0, 10, 20, 30probabilities 0.5, 0.2, 0.2, 0.1
Load 60
• Hydros dispatched “out of order” to keep regulation cost down.
Hydro 1: 40 @ $39 (+/- $2)10
30
20
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Optimal hedged re-dispatch
Hydro 2: 40 @ $40 (+/- $5)
Wind: capacity 40, @ $0scenarios 0, 10, 20, 30probabilities 0.5, 0.2, 0.2, 0.1
Load 60
• Hydro 1 wins the regulation business.
Hydro 1: 40 @ $39 (+/- $2)0, 10, 20, 3040, 30, 20, 10
20
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Initial dispatch prices
• – the marginal cost of an additional unit of load in the initial dispatch.
• This is an appropriate price at which to trade energy, where that energy was present in the initial dispatch.
• Applies to:– inflexible load and generation– some flexible and intermittent generation
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Re-dispatch prices
• R – the marginal cost of an additional unit of load in a re-dispatch.
• This is an appropriate price at which to trade energy, where that energy was added in a re-dispatch.
• Applies to:– some flexible and intermittent generation (both hydro & wind)
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Example: initial dispatch prices
Hydro 2: 40 @ $40 (+/- $5)
Wind: capacity 40, @ $0scenarios 0, 10, 20, 30probabilities 0.5, 0.2, 0.2, 0.1
Load 60
• Marginal additional load would be met by Hydro 2.
• The quantities xi are sold @ $40; load pays $40.
Hydro 1: 40 @ $39 (+/- $2)10
30
20$40
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Example: re-dispatch prices
Hydro 2: 40 @ $40 (+/- $5)
Wind: capacity 40, @ $0scenarios 0, 10, 20, 30probabilities 0.5, 0.2, 0.2, 0.1
Load 60
• 1st scenario: Wind buys back 10 @ $41; Hydro 1 sells 10 @ $41• 2nd scenario: no re-dispatch• 3rd scenario: Wind sells 10 @ $37; Hydro 1 buys back 10 @ $37• 4th scenario: Wind sells 20 @ $37; Hydro 1 buys back 20 @ $37
Hydro 1: 40 @ $39 (+/- $2)0, 10, 20, 3040, 30, 20, 10
20
$41, $41, $37, $37
10 30
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Average selling prices
Hydro 2: 40 @ $40 (+/- $5)
Wind: capacity 40, @ $0scenarios 0, 10, 20, 30probabilities 0.5, 0.2, 0.2, 0.1
Load 60
Hydro 1: 40 @ $39 (+/- $2)0, 10, 20, 3040, 30, 20, 10
20
$41, $41, $37, $37
Average selling price achieved
= (expected revenue) / (expected generation)
• Wind: $38.11• Hydro 1: $40.55• Hydro 2: $40
Source: Geoff Pritchard, EPOC WW2007
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
A price for uncertainty
• Prices earned by less predictable wind generation are lower on average.
• Prices earned by flexible generation are higher on average.
• Prices paid by less predictable loads are higher on average.
• New wind generation that decreases variation will increases price for all.
• Revenue adequate dispatch model means that wind backup can be suitably rewarded.
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Emissions trading
• NZ ETS is a cap-and-trade scheme.• How can generators act strategically in this setting?• Little work done here, but see e.g. Chen, Hobbs et al 2007.• Example conjecture: withholding generation decreases
emissions so that emission permits become cheaper, and so are acquired by competitive firms who will increase output in equilibrium.
• Alternative is a carbon tax.• Example conjecture: A $20/MWh carbon tax on thermal plant
just increases the consumer’s price by $20/MWh with windfall to hydro.
• Try this out with a very stylized example…
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Example: Least-cost dispatch
Capacity 1000lossless
Thermal A: 500 @ $50
Hydro B: 500 @ $50
Load = 500 - p
Load = 500 - p
Expect the price to be $50
a=450
b=450
Line contains no flow.
Thermals make no profit.
Load has high welfare.b
a
$50
$50
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Least-cost dispatch with CO2 tax
Hydro B: 500 @ $50
Load = 500 - p
Load = 500 - p
Thermal A: 500 @ $50plus $20 CO2 tax
Capacity 1000
500
360
70
$70
$70
Price increases by $20. The carbon tax has been transferred to consumers. Hydro B makes $10000 profit.
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Cournot-Nash equilibrium
Thermal A: 500 @ $50
Hydro B: 500 @ $50
Load = 500 - p
Load = 500 - p
300
300
$200
$200
Total load = 1000-2pp = 500-(a+b)/2
A solves:max (p-50)a
B solves:max (p-50)b
(500-(a+b)/2-50)ahas maximum at a = 450-b/2
(500-(a+b)/2-50)b has maximum at b = 450-a/2
0
100
200
300
400
500
b
100 200 300 400 500a
(300,300) Capacity 1000lossless
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
Cournot-Nash equilibrium with CO2 tax
Thermal A: 500 @ $50plus $20 CO2 tax
Hydro B: 500 @ $50
Load = 500 - p
Load = 500 - p
$206.66
$206.66
Total load = 1000-2pp = 500-(a+b)/2
A solves:max (p-50+20)a
B solves:max (p-50)b
(500-(a+b)/2-70)ahas maximum at a = 430-b/2
(500-(a+b)/2-50)b has maximum at b = 450-a/2
Capacity 1000
0
100
200
300
400
500
b
100 200 300 400 500a
(273,313)
313
273
20
Price increases by only $6.66.
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
The takeaways
• Markets are intended to provide incentives for agents to make optimal decisions.
• Understanding these is essential to formulating energy policy.
• For a poor market design, strategic behaviour might make decisions inefficient.
• Regulation is intended to restore some efficiency.• Nash equilibrium models are indispensible in
understanding whether incentives and or regulation will deliver the desired outcomes.
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
The last word is incentives
Robert Aumann Nobel Prize LectureDecember 8, 2005
NERI Conference, November 22, 2007E
P
O
C
E
P
O
C
The End