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Electricity Generation and Wholesale Markets

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Regulation of the Power Sector

Part of the book series: Power Systems ((POWSYS))

Abstract

The generalized worldwide process of restructuring and liberalization of the electric power sector has primarily concerned the generation activity. Although liberalization and restructuring of the power industry has not been universally adopted, it is undoubtedly the prevalent framework in most countries.

The market is not an invention of capitalism. It has existed for centuries. It is an invention of civilization.—Mikhail Gorbachev

The author wants to thank Pablo Rodilla, Michel Rivier, and Ignacio Pérez-Arriaga for their support in the development of this chapter.

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Notes

  1. 1.

    See also the textbook conditions proposed by Joskow [18].

  2. 2.

    This is a necessary condition for the full liberalization, but it is not required for the implementation of a market mechanism at generation level.

  3. 3.

    The last step, the liberalization of the retail business, is analyzed in Chap. 9.

  4. 4.

    Corporatization refers to the transformation of state assets or agencies into state-owned corporations in order to introduce corporate management techniques to their administration. Corporatization is sometimes a precursor to partial or full privatization (see more in Wikipedia).

  5. 5.

    They were called “exempt wholesale generators” in the Act.

  6. 6.

    This section is based on [8].

  7. 7.

    In the Chilean scheme generators also participated in a capacity market, whose results were similar to the capacity payments later adopted in a number of Latin American countries.

  8. 8.

    See Batlle et al. [5] for a description of the expansion of electricity systems in Latin America.

  9. 9.

    In the schemes more open to competition that are presented later, the roles of the SO and MO differ from what is presented here.

  10. 10.

    For instance, the European Commission [13] defines the tasks of the Independent System Operator stating that ‘is responsible for granting and managing third-party access, including the collection of access charges, congestion charges, and payments under the inter-TSO compensation mechanism (…) is also responsible for operating, maintaining, and developing the transmission system. (…) has full responsibility for ensuring the long-term ability of the system to meet reasonable demand through investment planning (…) is responsible for planning, including obtaining the necessary authorizations and for the construction and commissioning of new infrastructure’.

  11. 11.

    In their role of retailers of the consumers under regulated tariffs.

  12. 12.

    It was a heuristic model named GOAL, later replaced by another one that was based on Lagrangian relaxation.

  13. 13.

    This description was written by Prof. Pérez-Arriaga.

  14. 14.

    Currently NordPool (www.nordpool.com), owned by the national grid companies Fingrid, Energinet.dk, Statnett, Svenska Kraftnät, provides a marketplace for trading both physical and financial contracts in Finland, Sweden, Denmark, and Norway.

  15. 15.

    These deviations may be due to several reasons. For instance, a thermal unit could have bid expecting to produce in four consecutive hours the day after, but in the final DAM schedule it has been committed in eight hours. If the unit just counts on fuel for the expected four hours, the generator will require a way to readjust the schedule, in order to purchase the committed supply in the four hours in excess.

  16. 16.

    Default or credit risk is the risk that a counterparty will be unable to meet its obligations, i.e., the risk that the counterparty will default on its contract over the life of the obligation.

  17. 17.

    Basis risk in finance is the risk associated with imperfect hedging using futures. It may arise due to the difference between the price of the asset that is to be hedged and the asset underlying the derivative, or to a mismatch between the futures expiration date and the price of the actual selling date of the asset (www.wikipedia.com).

  18. 18.

    See for instance www.omip.pt.

  19. 19.

    As pointed out by Boisseleau [7], this model has been mainly the result of a public initiative and the participation has been usually mandatory (or highly encouraged). In some cases these markets are not strictly but de facto compulsory, since generators with capacity obligations are required to submit bids to the day-ahead market. At the time of this writing (end of 2011), some of the main compulsory pools left were the ones implemented in Ireland, Alberta, Australia, and New Zealand.

  20. 20.

    See for instance the web page of the European Power Exchange, www.epexspot.com.

  21. 21.

    The discussion that follows is based on Rodilla et al. [29].

  22. 22.

    Turn Down Ratio is defined as the ratio of economic maximum MW to economic minimum MW.

  23. 23.

    It can also be observed how in this market at that time a 180 EUR/MWh price cap was in force.

  24. 24.

    The term “discriminatory” should not have here any derogatory interpretation; it just means that the pricing rule results in different charges or payments for the several agents.

  25. 25.

    A very closed-related technique is the alternative one proposed by O’Neill et al. [26]. This approach entails considering start (and other non-convex) costs as additional commodities different from energy, and thus, needing to be priced independently from this latter.

  26. 26.

    These prices in the vast majority of cases correspond to the variable fuel cost of the most expensive unit committed in each time interval.

  27. 27.

    http://www.mercatoelettrico.org

  28. 28.

    Part of this discussion is taken from ERGEG [11].

  29. 29.

    See UCTE [38] for a collection of operating principles and rules for transmission system operators in continental Europe.

  30. 30.

    As explained in Chap. 1, electric power systems have regulation mechanisms to keep frequency within an acceptable range around the nominal value. The aim of such controls is to maintain the equilibrium between the mechanical power delivered to the generators and the electric power demanded by the system.

  31. 31.

    Tertiary reserve is sometimes classified under a different heading, “balancing energy”. Its inclusion in the upper hierarchical level of the process that controls system frequency is believed to be preferable, for this also avoids confusion with the balancing market explained below.

  32. 32.

    As we shall see later, interventionist changes in the market rules—i.e., new rules that limit the freedom of the market agents, like a price cap—do mitigate market power. But this happens in detriment of the freedom of the market that it was intended to promote, in the first place.

  33. 33.

    Take for instance the case of France, in which EDF remains under the Government control and whose market share in the French wholesale market can be qualified as huge, above 85 % according to Eurostat [14], and the case of Vattenfall, still state-owned and whose market share is larger than 40 % in Sweden according to the same source, Needless to say that these market shares cannot be only judged in the context of the national market. The Nordpool in which Vattenfall is embedded turns to be a rather competitive and liquid regional market while the interconnection capacity of the French system with its neighboring markets is still far from being enough to deter the local market power of EDF.

  34. 34.

    The market share of Enel in Italy, still under the control of the Government (who owns more than 30 % of the shares) has evolved from 70 % in 1999 (the year in which it sold 15 GW) to below 30% [14], In Belgium, the market share of Electrabel, owned by GDF Suez, is above 75 %, while in Chile the market share of Enersis, bought by Endesa now part of the Enel group, as for 2010 was around 35 %.

  35. 35.

    An excellent review of market power issues in the US is provided by Helman [16]. An easy to read, tutorial text is authored by Rose [30]; another useful reference is The Brattle Group [35]. FERC Order 697-A establishes the conditions to allow market-based rates, depending on market power mitigation issues. Although very technical in legal terms, this document illustrates the terminology and the issues involved when examining market power in actual systems.

  36. 36.

    See The Brattle Group [35] and Adib and Hurlbut [1] for two good descriptions of the role and function of market monitoring units, mostly from the US perspective.

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Authors and Affiliations

  1. Institute for Research in Technology, Comillas Pontifical University, Sta. Cruz de Marcenado 26, 28015, Madrid, Spain

    Carlos Batlle

  2. MIT Energy Initiative, MIT, Cambridge, MA, USA

    Carlos Batlle

  3. Florence School of Regulation, European University Institute, Florence, Italy

    Carlos Batlle

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Correspondence to Carlos Batlle .

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  1. Universidad Pontificia Comillas, Instituto de Investigación Tecnológica, Alberto Aguilera 25, Madrid, Spain

    Ignacio J. Pérez-Arriaga

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Batlle, C. (2013). Electricity Generation and Wholesale Markets. In: Pérez-Arriaga, I. (eds) Regulation of the Power Sector. Power Systems. Springer, London. https://doi.org/10.1007/978-1-4471-5034-3_7

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