Transcript Diapositive 1 - Industrial Economics Institute

Ensuring the
Reliability of
Electricity Supply
Florence School of Regulation
May 11, 2006
Claude Crampes
[email protected]
•
11/05/06
Contribution to the Regulatory Round Table
on "Liberalisation and Security of Supply: a
Challenge for Regulation"
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1. What reliability means.
• North American Electric Reliability Council
(NERC) definition, www.nerc.com
– “Reliability is the degree to which the performance of
the elements of the electrical system results in power
being delivered to consumers within accepted standards
and in the amount desired”.
• Reliability encompasses two concepts:
– Security
– Adequacy.
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Security and Adequacy
• Security
– the ability of the system to withstand sudden disturbances,
such as electric short circuits or unanticipated loss of system
facilities.
– this aspect concerns short-term operations and is addressed
by ancillary services which include: voltage support,
congestion relief, regulation capacity, spinning reserves, nonspinning reserves, replacement reserves.
• Adequacy
– the ability of the system to supply the aggregate electric
power and energy requirements of the consumers at all times.
– this aspect concerns planning and investment and is
addressed by planning reserves, installed capacity, operable
capacity or available capacity.
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Occurrences in the Green Paper
SEC(2006) 317
• Security
43
+ secure
12
• Adequacy
0
+ adequate
3
• Reliability
1
+ reliable
0
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In the Green Paper
• Actually, Commission's "Security" is Ferc's
"Adequacy":
– example p. 8 of the GP: 'Liberalised and competitive markets
help security of supply by sending the right investment
signals to industry participants.'
• and Ferc's security is addressed by Commision's
'physical security':
– example p.8 of the GP: 'The physical security of Europe’s
energy infrastructure against risks from natural catastrophe
and terrorist threat, as well as security against political risks
including interruption of supply is critical to predictability.'
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However …
• Definition 28 of the Directive 2003/54/EC
concerning common rules for the internal
market in electricity:
– ‘security' means both security of supply and
provision of electricity, and technical safety;
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Why does it matter 1?
• VOLL
– lost load due to system collapse
vs.
– lost load due to inadequate supply
• see V. Costantini and F. Gracceva (2004), Social
Costs of Energy Disruptions, INDES WP n°6,
CEPS, Brussels, March.
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Why does it matter 2?
• FERC's security is a public good
– it requires public intervention.
• FERC's adequacy is a private good
– it should be supplied through market mechanisms …
even though some coordination may be required.
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2. Security
• Security is a "public good":
– each user of the grid cannot purchase his own level of
security, unlike private goods or services.
– no possibility of exclusion: once a "security charge" has been
set, an individual must either accept the risk that follows
from the charge, or choose not to use the grid.
• Yet, each individual has his own demand curve for
security:
– if individuals are different, their demand curves are different,
– as the grid's users have different valuations for security,
efficiency should require a different security price for each
user: Lindhal prices.
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Market mechanisms fail to provide security
Let zi be the resources devoted by i to security q.
Optimality commands i Ui' (q( z io ))  C '(q( z io )).
i
i
Under free subscription, there is lack of internalization:
Ui' (q( zi ))  C '(q( zi )).
i
i
In the Lindhal equilibrium :
 each consumers is charged a different price pi  Ui' (q( z io )),
 producers in charge of security receive p  i pi
 ... but consumers will cheat on Ui' (q).
i
because of free riding, security must be supplied centrally.
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Lindhal prices
p
p
p
social demand
for security
willigness to
pay of a
marginal cost
pb
pa
q°
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willigness to
pay of b
security
q°
security
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security
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security provision
• the SO (or the MO) is the surrogate for demand
– it procures electricity reserves in advance, which can be
quickly dispatched to maintain system reliability in real time.
• problems on the demand side:
– how much security (reserve capacity) to install?
– how to price it to individual generators and consumers?
• problems on the supply side:
– which grid's users will produce security?
– how to reward them?
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demand side
• in general, the optimal level of security is fixed
empirically
– technical threshold imposed by political pressure
– no clear idea of how much individual users are ready to pay
– need for systems to extract information
• consequence
– uniform price
– obvious redistributive effects: some users subsidize others.
• Nota: there is a bunch of literature on revelation
mechanisms that limit opportunistic behavior (ClarkeGroves- Vickrey, Green-Laffont).
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supply side
• standard organization in electricity markets
– the ISO assigns generating units to reserve status
through an auction separate from energy markets;
– each generator submits a two-part bid for reserve: a
capacity price and an energy price;
– the ISO ranks the bids by using some scoring rule
and makes assignment and dispatch decisions;
– all units with the reserve status receive a capacity
payment and units which are dispatched to generate
in real time receive an energy payment.
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market design
• how to fix the scoring rule and the settlement
rule without abandoning excessive rents to
generators;
• auctions mechanisms analyzed by Bushnell and
Oren (1994) and Chao and Wilson (2002); both
have two-part bids
– one part offering a price for capacity availability
– another offering a reserve price for energy called in
real-time.
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final remark on security
• security problems are exacerbated under
decentralization
 unbundling advocacy should be
systematically accompanied with proposals for
the efficient provision of security
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3. Adequacy
• Adequacy is a "private good"
• Two main references:
– C. Vásquez, M. Rivier and I. Pérez-Arriaga (2002), “A market
approach to long-term security of supply", IEEE Transactions
on Power Systems, vol 17, n°2, pp. 349-357, May
– S. Oren (2004), “Ensuring Generation Adequacy in
Competitive Electricity Markets”
www.ieor.berkeley.edu/~oren/pubs/Adequacy Paper.pdf
• Three basic approaches to ensuring adequacy
– Planning reserves requirement
– Energy only markets
– Capacity payments
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3.1. Planning reserves requirement
• US (PJM, NYPP, New England).
• Load Serving Entities are required to have a prescribed level of
reserve capacity above their peak load within a certain time
frame, or to contract with generators for the reserve.
• The reserve requirements and the capacity markets provide
generators with the opportunity to collect extra revenue for their
unutilized reserve generation capacity and provide incentives for
the building of reserves beyond the reserves that meet the short
term needs for ancillary services.
• Reserve capacity obligations are accompanied by formal or
informal capacity markets that allow trading of capacity
obligations among the LSE.
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3.2. Energy only markets
• USA (California), Nordpool, Australia (Victoria pool).
• Generators bid only energy prices.
• In the absence of constraints, all bids below the
market-clearing price in each hour get dispatched and
paid the market-clearing price.
• The primary income sources for recovery of capacity
cost is the difference between the market clearing price
and the generators' marginal costs.
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3.3. Capacity payments
• UK, Spain, Latin American countries.
• Generators are given a per MW payment based
on their availability (whether they get
dispatched or not) or based on generated energy
as an adder to the energy market clearing price.
• The capacity payments are collected from
customers as a prorated uplift similarly to other
uplift charges such as transmission charge.
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Market-based capacity payments
• Pérez-Arriaga: standard capacity payments are fixed
administratively, based on the ex ante physical
characteristics of the equipment.
• A system of marketable "calls" would protect energy
buyers against too high prices on the spot market. Selling
calls, energy producers are rewarded for the insurance
they provide. Additionally they must pay a penalty when
they fail to supply the energy they have contracted upon.
• The options are marketed by the SO or the MO through
yearly uniform price auctions.
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final remark on adequacy
• adequacy problems are exacerbated under
decentralization
 unbundling advocacy should be
systematically accompanied with proposals for
efficient coordination between production
investment and transport investment.
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