Top PDF Investment in Electricity Markets with Asymmetric Technologies

Investment in Electricity Markets with Asymmetric Technologies

Investment in Electricity Markets with Asymmetric Technologies

to examine these incentives. There are some recent papers that have examined investment incentives in electricity markets. Murphy and Smeers [13] examine generation capacity investments in open-loop and closed-loop Cournot duopolies. Each duopolist makes investments in production ca- pacities. In the open-loop game, capacities are simultaneously built and sold in long-term contracts, in the closed-loop game, however, capacities invested in the rst stage and then they are sold in the second stage in a spot market. They nd that market outcomes (in- vestments and outputs) in the closed-loop game are in between the open-loop game and the ecient outcomes. Bushnell and Ishii [3] study a simulation model of a discrete-time dynamic Cournot game in which rms make lumpy investment decisions. They calculate the Markov perfect equilibrium investment levels in oligopoly. They nd that uncertainty in demand growth can delay investment. Garcia and Shen [7] characterize Markov perfect equilibrium capacity expansion plans for oligopoly. They nd that Cournot rms underin- vests relative to the social optimum. Garcia and Stacchetti [8] study a dynamic Bertrand game with capacity constraints with random demand growth and periodic investments. They nd that in some equilibria total capacity falls short of demand, and hence system security is jeopardized. They also nd that price caps do not aect the optimum investment levels. These papers assume symmetric technologies with constant marginal cost of pro- duction. In our paper, we assume asymmetric technologies with dierent cost structures. This is an important feature in electricity generation industry, which is the focus of this paper. We also compare dierent behavioral strategies (Markov perfect versus open-loop) that might be used by power generators before making investment decisions.
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Investment Incentives in Competitive Electricity Markets

Investment Incentives in Competitive Electricity Markets

In this study, the effect of investment incentives and different electricity markets has been examined on a generation capacity expansion criterion, as from a strategic GENCO perspective under uncertainties in a single year horizon, which is eligible for the electricity market above, such as: the energy only (EO), capacity payments (CP), firm contract (FC) and smart hybrid (SH) markets. In particular, the hybrid category is the market subjected to unique importance that includes the investment incentives of combining a co-existing capacity payment as well as a firm contract. Therefore, this is specifically considered in this study. For this purpose of consideration, the investment criterion solution is modelled as a bi-level steps’ optimization method, with the ease of expansion and adaptability to bi-level architectures, where the first and the second-level steps are related to investment problem (planning level) and operation problem (operation planning), respectively. The hierarchy of the method is divided into different levels. The first-level that includes decisions taken by a strategic GENCO who investigates installments of new generating unit in the future possible productions, in order to maximize the total profit in the planning horizon. In this criterion of markets, a strategic GENCO competes with non-strategic GENCOS (as rival GENCOs) both in investment and operation. The second-level models the above responses provided by a competitive fringe in terms of production bids, which are sorted by a market operator, who clears the market obtaining locational marginal prices (LMPs) as dual variables of the nodal balancing constraints. It is assumed here that the contractual revenues are paid to only new generating units, whereas the capacity payments are considered to be paid to all available units. In this model, demands are considered both as elastic and inelastic to price. In addition, all competitor uncertainties on offering and investment are modelled using different sets of scenarios. In addition, add-ons of reliability indicators are obtained for each year of the planning period in the proposed markets.
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Competitive Electricity Markets and Investment in New Generating Capacity

Competitive Electricity Markets and Investment in New Generating Capacity

Questions have been raised about whether competitive wholesale and retail markets for power would produce adequate generating capacity investment incentives to balance supply and demand efficiently since the transition to competitive electricity markets began. Until 2001, the wholesale market system in England and Wales provided for additional capacity payments to be made to all generators scheduled to supply during hours when supply was unusually tight (i.e. when the loss-of-load probability was relatively high). 2 The wholesale markets created and managed by the Eastern Independent System Operators (ISOs) in the U.S. during the late 1990s have continued their traditional policies of requiring distribution companies (or more generally “load serving entities” or "LSEs" to encompass competitive retail electricity suppliers) to enter into contracts for capacity to meet their projected peak demand plus an administratively determined reserve margin. Argentina’s competitive electricity market system also included capacity payments to stimulate investment in reserve generating capacity. In Chile, distribution utilities are required to enter into forward contracts to meet forecast demand plus a reserve margin. The system in Columbia also imposes capacity
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Investment incentives and auction design in electricity markets

Investment incentives and auction design in electricity markets

Harbord (1998), who analyse a model closely related to ours but limited to the case in which firms bid in a uniform-price auction under demand certainty. They found that capacity may fall below or exceed the first best, depending upon parameter values. In order to investigate how firms adjust their capacities in response to demand growth, Garc´ıa and Stachetti (2006) introduce dynamics in a simplified version of the von der Fehr-Harbord model. They showed that there exist equilibria that involve negligible or no excess capacity along the outcome path, suggesting that additional incentives may be required for the market to deliver adequate invest- ments. Within a dynamic model based on Cournot competition in the spot market, Bushnell and Ishii (2007) found that asymmetries between firms, demand uncertainty and contractual obligations impact on investment incentives. We confirm von der Fehr and Harbord (1998)’s result that overinvestment is a theoretical possibility, but point out (in what appears to be the empirically most relevant formulation) that underinvestment is more likely, at least if the price cap is set below consumers’ willingness to pay for new capacity. We also demonstrate that investment incentives in electricity markets depend on market design, an issue that was not considered in the analyses mentioned above.
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3. Investment and Competition in Decentralized Electricity Markets: How to

3. Investment and Competition in Decentralized Electricity Markets: How to

Consistently with the previous premise, as said above, lenders have adopted the method of project financing of merchant plants without securing vertical arrangements, but confident in the net cash flow of the equipments that they (Etsy and Kane, 2001; Etsy, 2004). But as it finances the project by raising as much as debt finance as possible via non recourse debt and project financing in the individual framework of “special purpose vehicle”, this imposes the self-financial sustainability of the project by its net cash flow without backing on cross subsidy from the producer’s other generation assets in period of low price. This means that technological options were reduced to self hedged CCGT. This means also that the profitability of each project will be critically dependent of the net revenues during the price spikes of the market after the commissioning of the equipment. Conversely it will be altered dramatically by market change which alter revenues (price downturn, reduction of dispatchability period) as show the bankruptcies of all the CCGT merchant plants in the US liberalized market and in the UK in 2001 and 2002 (see for instance Joskow 2006, Michaels 2006). Since then, even if CCGT remains the technology the most in adequation with risk management as shown by existing some existing merchant plants in high prices electricity markets in Europe (see Annex), investors and producers are now convinced that pure merchant plant is not a viable business models. The approach of separated projects in separated “special vehicle” is also theoretically disputed in particular because it misses the interaction effects among equipments (Williamson 1996). In the electricity industry it ignores both the technological and industrial realities of electricity industry which gives advantages to have a portfolio of different assets related to different economic dispatchabilities on hourly markets, as well as vertical arrangements to hedge investment.
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POWER GENERATION INVESTMENT IN ELECTRICITY MARKETS

POWER GENERATION INVESTMENT IN ELECTRICITY MARKETS

Most IEA countries are liberalising their electricity markets, shifting the responsibility for financing new investment in power generation to private investors. No longer able to automatically pass on costs to consumers, and with future prices of electricity uncertain, investors face a much riskier environment for investment in electricity infrastructure. This report looks at how investors have responded to the need to internalise investment risk in power generation. While capital and total costs remain the parameters shaping investment choices, the value of technologies which can be installed quickly and operated flexibly is increasingly appreciated. Investors are also managing risk by greater use of contracting, by acquiring retail businesses, and through mergers with natural gas suppliers. While liberalisation was supposed to limit government intervention in the electricity market, volatile electricity prices have put pressure on governments to intervene and limit such prices. This study looks at several cases of volatile prices in IEA countries’ electricity markets, and finds that while market prices can be a sufficient incentive for new investment in peak capacity, government intervention into the market to limit prices may undermine such investment.
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DIMENSION A Dispatch and Investment Model for European Electricity Markets. EWI Working Paper No. 11/03.

DIMENSION A Dispatch and Investment Model for European Electricity Markets. EWI Working Paper No. 11/03.

Example 3. Let b represent a geographic region in some country, and let H(b) = {c 1 , c 2 }. For example, c 1 can be seen as a market for district heating and c 2 for process heating in this region. Demand for heat can only be served by heating plants or by cogeneration plants that are located nearby, i.e. located in b, which originally motivated the modelling approach that every heat market is connected with some unique electricity market. A flexible cogeneration plant that is located in b is defined by its electricity generation capacity c(t, a, b) =1000 MW. Moreover, let ρ(c) = 0.66 and σ(c) = 0.2. Equations (11) and (12) give that the extreme points of the set of feasible production combinations are 1000 MW electricity/0 MW heat and 715 MW electricity/1429 MW heat. The convex hull of these two points and the origin gives the set of feasible production combinations. Figure 2.4 provides a qualitative illustration.
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Investment decisions in liberalized electricity markets: A framework of peak load pricing with strategic firms

Investment decisions in liberalized electricity markets: A framework of peak load pricing with strategic firms

In the present article we thus extend the framework of investment in several technolo- gies analyzed in the peak load pricing literature for a single firm to the case of strategically interacting firms. 5 In a two stage market game firms first make their investment decisions prior to the spot market which is subject to uncertain or fluctuating demand, then firms compete at the spot market. Firms can decide to invest in many different available tech- nologies, which all differ in their cost of investment and corresponding cost of production. Firms investment decisions thus determines the precise composition of industry investment in all technologies. That is, we obtain the precise shape of industry marginal cost function. 6 Our main results can be summarized as follows: Most importantly we derive equilibrium investment of strategic firms, establishing existence and uniqueness. 7 We then compare equilibrium investment choice to the benchmark cases of perfect competition (welfare max- imization), monopoly (profit maximization) and the so called second best solution 8 derived in the peak load pricing literature. Interestingly, under imperfect competition firms have a strong incentive to invest into low marginal cost technologies in order to negatively in- fluence their competitors’ spot market outputs. We are able to establish properties under which this strategic effect is so intense that equilibrium investment in low–marginal–cost technologies in oligopoly is even above the welfare optimal level.
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Modeling Competition and Investment  in Liberalized Electricity Markets

Modeling Competition and Investment in Liberalized Electricity Markets

And last but not least also the model approach presented in Chapter 5 to analyze the regulatory incentive scheme for transmission companies is no more than a stylized representation of the real world. The application of a regulated two part tariff system to allow for a rescheduling of congestion rent and fixed cost recovery represents a complicated class of mathematical models (a MPEC) and thus is not yet applicable for large datasets. Therefore, the analysis is restricted to highly simplified market structures. In addition, the three-node example and the cost function simulations are not designed to represent a real market environment but to highlight the complexities of electricity transmission and resulting problems. So finally, how useful can such a simplified simulation prove? The effort shown in this thesis was the first necessary step to allow further research regarding practical implementation and interaction in a more flexible environment. Up to now, the regulatory approach initiated by Vogelsang (2001) has only been analyzed theoretically or without the full underlying complexity of electric power flows (Hogan et al. 2007). The results of my simulation show that the approach can prove welfare improvements given the characteristics of electricity networks and thus a major obstacle has been overcome. Whether the approach still represents a proper solution once additional real world market complexities like different ownership structures and interfering generation investments are included is subject to further research. But if these first stylized test would have shown the incapability of the approach any further analyses would be obsolete.
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Reliability and Competitive Electricity Markets

Reliability and Competitive Electricity Markets

Section 2 first derives the optimal prices and investment program when there is state contingent demand, at least some consumers do not react to real time prices, but their LSE can choose any level of rationing it prefers contingent on real time prices. In this model consumers are identical, possibly up to a proportionality fac- tor, and therefore all have the same load profile. While the latter significantly constrains the nature of consumer heterogeneity considered, it is consistent with the existing literature (e.g., Borenstein-Holland, 2003). Joskow-Tirole (2004) analyzes more complex characterizations of consumer heterogeneity in the presence of retail competition. We then derive the competitive equilibrium under these assumptions when there are competing LSEs that can offer two part tariffs. This leads to a propo- sition that extends the standard, welfare theorem to price-insensitive consumers and rationing; this proposition serves as an important benchmark for evaluating a num- ber of non-market obligations and regulatory mechanisms:
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We Need for Electricity Markets?

We Need for Electricity Markets?

(And More) Problems with Feed in Tariffs (And More) Problems with Feed-in Tariffs • So-called redispatch costs are increasing (but that is only minor) So called redispatch costs are increasing (but that is only minor) • Costs for necessary network investment (both transmission and

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Reliability and Competitive Electricity Markets

Reliability and Competitive Electricity Markets

May 28, 2004 Abstract Despite all of the talk about “deregulation” of the electricity sector, a large number of non-market mechanisms have been imposed on emerging compet- itive wholesale and retail markets. These mechanisms include spot market price caps, operating reserve requirements, non-price rationing protocols, and administrative protocols for managing system emergencies. Many of these mechanisms have been carried over from the old regime of regulated monopoly and continue to be justified as necessary responses to market imperfections of various kinds and engineering requirements dictated by the special physical attributes of electric power networks. This paper seeks to bridge the gap be- tween economists focused on designing competitive market mechanisms and engineers focused on the physical attributes and engineering requirements they perceive as being needed for operating a reliable electric power system. The paper starts by deriving the optimal prices and investment program when there are price-insensitive retail consumers, and their load serving entities can choose any level of rationing they prefer contingent on real time prices. It then examines the assumptions required for a competitive wholesale and re- tail market to achieve this optimal price and investment program. The paper analyses the implications of relaxing several of these assumptions. First, it analyzes the interrelationships between regulator-imposed price caps, capac- ity obligations, and system operator procurement, dispatch and compensation arrangements. It goes on to explore the implications of potential network col- lapses, the concomitant need for operating reserve requirements and whether market prices will provide incentives for investments consistent with these reserve requirements.
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Reliability and Competitive Electricity Markets

Reliability and Competitive Electricity Markets

Section 2 first derives the optimal prices and investment program when there is state contingent demand, at least some consumers do not react to real time prices, but their LSE can choose any level of rationing it prefers contingent on real time prices. In this model consumers are identical, possibly up to a proportionality fac- tor, and therefore all have the same load profile. While the latter significantly constrains the nature of consumer heterogeneity considered, it is consistent with the existing literature (e.g., Borenstein-Holland, 2003). Joskow-Tirole (2004) analyzes more complex characterizations of consumer heterogeneity in the presence of retail competition. We then derive the competitive equilibrium under these assumptions when there are competing LSEs that can offer two part tariffs. This leads to a propo- sition that extends the standard, welfare theorem to price-insensitive consumers and rationing; this proposition serves as an important benchmark for evaluating a num- ber of non-market obligations and regulatory mechanisms:
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Electricity markets in Europe

Electricity markets in Europe

The International Energy Agen cy‟ s annually published World E nergy Outlook includes projections of energy demand, production, trade and investment, fuel by fuel and region by region. In the 2010 edition, three different scenarios were presented. “Current policies” scenario serves as a baseline sc e- nario, “New Policies Scenario” anticipates future actions by governments to meet the commitments they have made to tackle the climate change and growing energy insecurity, and “450 Scenario” is a pathway with the objective of limiting the global temperature increase under 2 C. Figure 1 illustrates fossil fuel price projections for the period from 2009 to 2035 in the “New Policies Scenario”. Accor d- ing to this scenario, the prices of crude oil and natural gas will go up in fairly close tandem, partly because of indexation clauses in long-term gas contracts and indirectly because of the fuel substitution possibility. Coal prices are much more stable, which is explained by larger reserves. Coal demand is also expected to flatten out by 2020 in this scenario.
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The Economics of Wholesale Electricity Markets

The Economics of Wholesale Electricity Markets

However, short run price elasticity of demand is very low in electricity markets. It has been pointed out that the demand side determines the price whenever a binding capacity limit is reached. The low price elasticity of demand leads to excessive price spikes during these hours. Kahn (2002) discusses this problem extensively. He concludes that prices of 6000 USD/MWh might be necessary to cover investment costs for peaking units. 9 We agree with Kahn that the solution to this problem should not be averaging prices above longer periods of time. High prices indicate the scarcity of electricity at peak hours. Consuming electricity at times of scarcity should be expensive since the corresponding costs for additional electricity are very high. However, people will only react on these price signals when they are confronted with them. Hence, Kahn proposes real time metering. Real time metering can be expected to increase the price elasticity of demand. This would soften the price spikes during periods of scarcity. Such a change of electricity pricing seems to be necessary, since the public seems to be highly sensitive to price spikes driving both politicians and regulators to act on their prevention. Investors will be reluctant to invest if they fear that
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Electricity Markets Working Papers

Electricity Markets Working Papers

1 Introduction Within the next decades, energy markets around the world face a multitude of challenges. Markets formerly characterized by imperfect competition are in the process of being restructured to competitive industries. Carbon emissions need to be reduced for a sustainable future. Long term investments need to be stimulated in order to guarantee security of supply of energy commodities. Already challenging tasks in isolated markets, the interaction of energy markets further complicates these processes. Electricity markets serve as a linkage between different fuel markets as in the long run fuels can substitute one another. Consequently, decisions regarding the future development on electricity markets such as the projected ENTSO-E Ten-Year Network Development Plan will have a direct impact on the upstream fuel markets. Likewise, the imposition of carbon regulation favors the use of less carbon intensive fuels and, in turn, stipulates demand for these fuels. On the other hand, market or investment decisions on fuel markets – such as the projected increase in LNG import capacities in Europe – have a direct impact on the downstream electricity market as they influence the availability of fuels and change the price levels. This interaction is further complicated by the fact that most fuel markets rely on some kind of network infrastructure (pipeline, sea routes, and railways) to distribute their commodity. Similarly, electricity markets are grid-bounded and have to take account of physical power flow laws. The different networks are characterized by a substitution relationship. For example, electricity can be produced and sold in Germany using a gas-fired power plant requiring pipeline transport of the natural gas to Germany. Likewise, electricity can be produced in the Netherlands and sold in Germany using the electricity grid. However, this substitution is bounded by the capacity of the transmission grid. Therefore, congestion effects typical for grid-bounded transportation need to be taken into account when analyzing the interaction of energy markets and the energy system as a whole.
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ASYMMETRIC INFORMATION AND SECURITY OF SUPPLY: AN APPLICATION OF AGENCY THEORY TO ELECTRICITY MARKETS

ASYMMETRIC INFORMATION AND SECURITY OF SUPPLY: AN APPLICATION OF AGENCY THEORY TO ELECTRICITY MARKETS

The aim of the regulator is to ensure the security and reliability of the electric system at minimum cost. In order to do that, it contracts with generators to incite them to invest in generation capacity. We focus in this paper on two incentive mechanisms. First we study the capacity payment given by the regulator to the generators that have declared available generation capacity. Considering two types of generators, the capacity payment can be modelled as a menu of incentive contracts. With capacity payments indeed, in England and Wales, but also in Spain and in Italy, generators get paid in exchange for installed generation capacity, whether this capacity is effectively used to produce energy or not. The more generation capacity one has, that is to say the more the generator previously invested, the more capacity payments it receives. Capacity payments vary therefore according to the investment effort of generators (which depends on the relative ease of the generator to access
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Essays on electricity markets

Essays on electricity markets

Comments on the role of the market framework as to giving incentives for achieving long-run efficient investments, however, seem to indicate that the market itself to a large extent does give adequate signals for investment based on economic considerations alone. A main conclusion of Econ Pöyry (2007b) is that the Energy Act seems to provide a better framework for socially rational and efficient investments, than other realistic alternatives: Market-based prices reflect the value of new power, and not only provides an important benchmark for assessing the profitability of new investments, but also induces an important flexibility on the supply side as well as the demand side, and also with respect to international trade. Econ Pöyry (2007b) notes that projects with a low environmental impact in fact seem to be carried out without undue delay if they are profitable, while the most important explanation if such investments have not been carried out, is that of lacking profitability. Also Amundsen et al. (2006) conclude that there is little support for the view that generators have not seized on profitable investment opportunities, thus indicating that prices are sufficient to attract investor interest. As to the current status of the security of supply Econ Pöyry (2007b) notes that the Nordic market may be characterized as a market with a satisfactory balance both with respect to power capacity and energy. Though the Norwegian power balance has deteriorated, new transmission capacity to other countries has been built, also adding flexibility to the market There is, however, a problem of regional energy imbalances in parts of Norway, due to a combination of increased (industrial) demand, constrained network capacity, and low investments in generation capacity and/or network capacity to the areas.
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Asymmetric Adjustments in the Ethanol and Grains Markets

Asymmetric Adjustments in the Ethanol and Grains Markets

The long-run equation (1) is estimated for each of the nine pairs of spot and futures markets, and the resulting residual from the estimation of this equation is used to estimate the respective thresholds, using the Enders-Siklos (2001) procedure, as in equation (2). The results for the estimated thresholds and cointegration hypotheses are provided in Tables 3-A to 3-C and their asymmetric adjustment paths are displayed in Figure 1. The estimated thresholds for the three ethanol types, three agricultural commodities and three ethanol/commodity hybrids are relatively small, with that for New York Harbor ethanol (Spot 2) being the highest. This empirical evidence may suggest that there are greater fiction and transaction costs at the NYH ethanol market than at the other markets. Among the three ethanol types, the estimated thresholds for the two American ethanol pairs that contain the Chicago and New York Harbor are much larger than for the pair that includes the Western European (Rotterdam) ethanol. This finding may indicate that there is greater friction in the two American markets than in the Western European market. Thus, it may reflect differences in liquidity, thinness and contract specifications between the American and European ethanol spot markets.
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Asymmetric dependence in international currency markets

Asymmetric dependence in international currency markets

Over the last decade, emerging markets have been a magnet for global investors. Even pension funds and sovereign wealth funds have increased their allocations to emerging market assets in order to take advantage of the world’s fastest growing economies. However, the global financial crisis which began in developed countries during 2008 and quickly spread to emerging markets, deteriorated the environment for capital flows and triggered deep sell offs in emerging economies (see also Alsakka and Gwilym, (2012)). Motivated by the lack of evidence that macroeconomic fundamentals serve as the determinants of co-movements in international markets as documented by Fair (2002) and later by Baur (2012) among others, we examine how external shocks, such as the 2008 credit crisis, affect the behavior of the most liquid and fastest growing international currency markets. These studies find unequal responses from foreign exchange markets to sovereign credit signals and to macroeconomic developments. In contrast, we propose four new channels via which emerging currencies are sensitive to global credit, liquidity and commodity conditions. An additional innovation is that, we employ copula theory which allows high degree of asymmetric coefficient variability among the proposed channels and the foreign exchange markets.
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