Institut fr Elektrische Energiesysteme

Power System Economics

Lecture 4: Participation to electricity market

Dr. Pio Lombardi

LENA - Lehrstuhl Elektrische Netze und Alternative Elektroenergienquellen

Agenda
Consumers perspective
Retailers of electrical energy

Producers perspective
Perfect competition Imperfect competition

Hybrid participantsperspectives

Introduction
Detailed discussion how generators, consumers and other participants act on the electricity market to optimize their benefit View on the different roles of
Consumers Producers Retailers

Power/ Energy
Deadweight losses
Congesti on rent

Price

Participation in perfect and imperfect markets Short-term behavior

Consumers perspective
Consumer will increase its electricity demand up to the point at which the marginal benefit (i.e. production of goods) is equal to the electricity price.

Consumers perspective
If the costumers paid a flat rate for each kWh of electricity consumed, they would be idle to change their consumption pattern since they could receive no benefits to be active actors of electricity market

Consumers perspective
If the price of electricity fluctuates rapidly then the demand decreases in response to the price increase. However this effect is relatively small, it means that the price elasticity of the demand for the electricity is small. Reasons are: Electricity represents only a small fraction of cost of living, No willing to reduce usual comfort and convenience Electricity marketed as commodity (easy to use and always available)

Price P2

Q P

P1

Q1 Q2
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Consumers perspective-demand side management

Rather than to decrease the consumption of electricity if the price increases, customers may delay the demand until the prices are lower. A manufacture may produce during the night instead of during the day if the night time price is lower. Shifting the load is possible only if the consumer is able to store the products or the electricity.

Consumers perspective-demand side management

Price elasticity of large consumers is higher than of small consumers But: value of lost load (VOLL) >1000 /MWh because:
Price

Electricity costs are still a small fraction of P2 production costs. Lost of revenue more important than slightly lower electricity cost.
P1

Q P

High Demand Side Integration potentials

Q1 Q2 Quantity
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Small consumers (peak demand lower than a few hundred kW) do not participate directly to the wholesale market since the benefit they could gains from buying electricity at lower price are lower than the costs they have to face for participating to the market.
Benefits

Consumers perspective-demand side management

Smaller consumer prefer to purchasing on a tariff (a constant price pro kWh) rather than to adjust their consumption to the electricity price
Costs

Retailers of electricity
Electricity retailers are in business to bridge the gap between the wholesale market and the smaller consumers. They buy electricity at variable price on the wholesale market and sell it at fix price to the consumers
If for any period the aggregated amount of over all its consumers exceeds the amount that the retailer has contracted to buy then he/she has to purchase the difference (real consumption-forecasted consumption) at whatever price on spot market. Similarly if the real consumption is lower than the forecasted one he/she has to sell the difference on spot market.

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Retailers of electricity
The retailers strategy is to reduce the exposure to the risk associated to the unpredictability of spot price and to load forecast error. Therefore a retailer will aim to forecast the electricity price and load as accurate as possible.

Only what is measurable can be controlled (and optimized) retailers will incentive its consumers to install meters that record the electricity consumed in each period so that he/she can offer them more attractive tariffs if they reduce their consumption during peak price hours
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Retailers of electricity
Meteorological instruments

Hourly forecast accuracy: 1.5-2%

Meeters Forecasting tools
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Example 4.1

Flat tariff: 38,50$/MWh

Losses over 12 hours: 1154 $

Profit without forecasting error

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Example 4.1

Forecasted and actual demand

Costs and price

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Producer s perspective
Maximization of the profit

Marginal revenue

Marginal costs

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Producer s perspective-perfect competition

Perfect competition: output of unit j is very small compared to the size of the market

Marginal revenue

Electricity price

Marginal cost which includes costs of fuel, maintenance and all items that vary with the power production
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Example 4.2
Input-output Cost function Cost function (fuel price=1.3 $/MJ)

Input

If market price is 12$/MWh

100

500

Output [MW]

Output dispatched
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Example 4.3

Input

100

500

Output [MW]
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Piecewise linear cost curves

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Example 4.4

Selling at marginal costs is profitable only if the average cost is lower than the marginal costs

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Example 4.4 cont.

If the price is higher than 11,882 $/MWh is profitable to dispatch electricity

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Unit commitment by means of Lagrange method

Objective function

Lagrange multiplier

Setting the partial derivates of Lagrange function to zero the optimal solution is found, the marginal cost has to equal the Lagrange multiplier
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Example 4.7
A 300 MW load has to be covered by two thermal power plants and a hydro power plant Cost functions

Lagrange function (where L=260 MW)

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Imperfect competition
If a few Generator companies can influence the market price through their action then the market is far away to be competitive. If a Genco that owns different generator units aims to maximize the firms profit optimize the output of entire portfolio.

Maximization of firm profit

Pf=combined output of all units

controlled by the Genco
If the power sold by the Genco f depends also by the decisions of other participants and if the price may be influenced by the Genco f then the profit may be written as following:

Cf=minimal generation costs

Action of firm f

Action of other competitors

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Imperfect competition

The firm f cannot optimize its profit in isolation, bus has to consider what the other competitors done

Optimal action of other competitors

The solution of this problem (if it exits)is called Nash equilibrium. It represents the market equilibrium under imperfect competition

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Imperfect competition Bertrand model

Bertrand model: Firms are producing the same good, the firms set the price of the good and the market decides each firm sells. The price cannot be lower than the marginal costs because it would be a loss for the firm.

Each firm decides at which price sell the electricity

Firm revenue

The firm can sell as much as it want as long as its price is lower than the other competitors price

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Example 4.8
Consider two firms A and B that compete to supply electricity.

Inverse demand curve Marginal costs

Firm A set its price slightly lower than the MC of firm B its captures the whole market. At that price the demand will be 55 MWh and the profit for the firm A will be 550$

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Imperfect competition Carnout interaction

Carnout model: Firms are producing the same good, they have to decide how much produce. Each firma estimates how much the competitor will produce

Maximization of profit if there are 2 firms

Market price for an expected output y1+ye2

Carnout equilibrium: the set output of each firm depends on the output of the other competitors

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Imperfect competition Carnout interaction

Total output in the market Optimization of the profit for the firm i

Market share

Elasticity

If the market share of firm i is not negligible, it maximizes its profit by setting the output at level where its marginal costs are lower than the market price
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Example 4.8 with Carnout model

Assumptions: Firm A and B produce both 5 MWh, since the demand has to be equal to the production, with such a production the market price is 90$/MWh

Demand

Profit firm A

Profit firm B

Market price

Profits for firm A and B

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Example 4.8 with Carnout model

Nash equilibrium

No optimal solutions, because they are not the best interest of other firms

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Example 4.8 with Carnout model

How to find the Nash equilibrium?
Profits
Inverse demand function

Boundary conditions

considering

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Hybrid participants perspective

Hybrid participants are both consumers and producers (like storage plant owners). They can make profit by participating both on energy market and on ancillary services market. Some storage plant operators use also to make arbitrage (charge the storage when the electricity price is low and discharge the power when the price is high) They participate to the market is the market price is higher than their marginal costs

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Thank you for your attention

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