An integrated ant colony optimization approach to compare strategies of clearing market in electricity markets: Agent-based simulation

In this paper, an innovative model of agent based simulation, based on Ant Colony Optimization (ACO) algorithm is proposed in order to compare three available strategies of clearing wholesale electricity markets, i.e. uniform, pay-as-bid, and generalized Vickrey rules. The supply side actors of the power market are modeled as adaptive agents who learn how to bid strategically to optimize their profit through indirect interaction with other actors of the market. The proposed model is proper for bidding functions with high number of dimensions and enables modelers to avoid curse of dimensionality as dimension grows. Test systems are then used to study the behavior of each pricing rule under different degrees of competition and heterogeneity. Finally, the pricing rules are comprehensively compared using different economic criteria such as average cleared price, efficiency of allocation, and price volatility. Also, principle component analysis (PCA) is used to rank and select the best price rule. To the knowledge of the authors, this is the first study that uses ACO for assessing strategies of wholesale electricity market.     

An economic welfare analysis of demand response in the PJM electricity market

We analyze the economic properties of the economic demand-response (DR) program in the PJM electricity market in the United States using DR market data. PJM's program provided subsidies to customers who reduced load in response to price signals. The program incorporated a “trigger point”, at a locational marginal price of $75/MWh, at or beyond which payments for load reduction included a subsidy payment. Particularly during peak hours, such a program saves money for the system, but the subsidies involved introduce distortions into the market. We simulate demand-side bidding into the PJM market, and compare the social welfare gains with the subsidies paid to price-responsive load using load and price data for year 2006. The largest economic effect is wealth transfers from generators to non price-responsive loads. Based on the incentive payment structure that was in effect through the end of 2007, we estimate that the social welfare gains exceed the distortions introduced by the subsidies. Lowering the trigger point increases the transfer from generators to consumers, but may result in the subsidy outweighing the social welfare gains due to load curtailment. We estimate that the socially optimal range for the incentive trigger point would be $66–77/MWh.     

AGA (Asset Governance Assessment) for analyzing affect of subsidy on MC (Marginal Cost) in electricity distribution sector

Nowadays subsidy payments on electrical energy have to be managed and controlled to prevent any side effect particularly in developing countries. Effects of some external factors on Energy consumption and electricity distribution indices are analyzed in this paper. External factors are classified into three categories of social behavior, governance and urban planning. MC (Marginal Cost) of electricity in distribution is considered as the main index to be analyzed. Also, ANN (Artificial Neural Network) is applied to simulate effect of the mentioned factors on MC of distribution sector. Numerical investigation on the indices for a sample DISCO (Distribution Company) in Iran is made, results indicate that the more subsidies are allocated to consumers the more MC is increased. AGA (Asset Governance Assessment), which is proposed as a kind of governance decision, could improve the performance efficiency and avoid lose of activities done by DISCOs through subsidy management.     

Short- and long-run marginal cost pricing: On their alleged equivalence

The equivalence between short-run marginal cost (SRMC) and long-run marginal cost (LRMC) in a fully adjusted equilibrium has been proved over and over again. In the literature dealing with public utility pricing, this basic result has been taken to imply that it is optimal to set prices at LRMC. Important contributions to this literature are reviewed in this paper. The equivalence, however, is valid only under the very restrictive assumption that the capacity can be varied continuously. This means that indivisibilities, irreversibilities and durability of investments are ignored. Where such phenomena exist, as in electricity production and distribution, pricing according to LRMC is neither theoretically valid nor applicable. It is not surprising that it has been difficult for public utilities to define the LRMC concept operationally; average cost concepts are used as ‘approximations’. Under these circumstances we find it advisable to dispense with the LRMC concept altogether and rely on pricing based on SRMC.     

Capacity commitment and price volatility in a competitive electricity market

The long lead time required to add new capacity in the electricity generation industry means that daily demands are necessarily served by capacity already installed. However, in a competitive market, even if the installed capacity was designed to serve the projected demands, frequent surpluses and occasional full utilization inevitably lead to price volatility. This paper develops a two-stage model of the generation market in which capacity construction occurs in stage 1, before demand realization, and price determination occurs in stage 2, when the equilibrium price ensures that the realized demand does not exceed the installed capacity. We show that price volatility and price spikes are inevitable, and that while price capping can mitigate high and volatile prices, it causes unmet demands and reduction in system reliability. This paper accentuates the interdependence among generating capacity, price volatility and service reliability, a primary cause of concern in the debate on electricity market reform.     

Policy changes and the dynamics of capacity expansion in the Swiss electricity market

Capacity of supply is a crucial matter in electricity markets as it directly influences reliability of supply, price volatility and blackout risk. In this paper, we analyse the dynamics of capacity expansion in the Swiss electricity market and the impact of different policies such as nuclear phaseout and management of electricity exchanges – imports and exports – policies. This article develops the conceptualization model presented in [Ochoa, P., 2007b. Policy changes in the Swiss electricity market: a system dynamics analysis of likely market responses. Socio-Economic Planning Sciences 41 (4):336–349.]. We build a system dynamics model based on the dynamics of capacity expansion explained in the latter paper and present and analyse different scenarios. We conclude that international electricity exchanges are important for the Swiss market as they help to lower costs and to increase the income of the utility companies; however, we illustrate the need for explicit policies for managing imports and exports of electricity to avoid import dependence from neighbouring countries.     

Successful renewable energy development in a competitive electricity market: A Texas case study

The development of renewable energy in markets with competition at wholesale and retail levels poses challenges not present in areas served by vertically-integrated utilities. The intermittent nature of some renewable energy resources impact reliability, operations, and market prices, in turn affecting all market participants. Meeting renewable energy goals may require coordination among many market players.     

Optimal bidding strategy in a competitive electricity market based on agent-based approach and numerical sensitivity analysis

The objective of this study is to present a new method for determination of the optimal bidding strategies among generating companies (GenCo) in the electricity markets using agent-based approach and numerical sensitivity analysis (NSA). While agent-based approach provides for decision making, NSA can help with identifying the critical control points that lead to proper decisions to be taken by GenCos. To achieve the objective, the pricing mechanism used for settling the electricity market and determining the GenCos rewards is locational marginal pricing (LMP) and the sensitivity of each GenCo reward with respect to its bid is analyzed, then, the optimal strategy is determined. An example and a case study are used to illustrate the efficiency of the proposed method. The LMPs and allocated generations of GenCos show that the proposed method leads GenCos to learn a strategic manner and, as a result, increase prices and maximize their rewards. To validate the proposed method, the results from this study are compared with those available in the literature. The comparison of results shows an improved simulation time by 8.16 percent and total reward of market by 2.46 percent.     

Intermittently renewable energy,optimal capacity mix and prices in a deregulated electricity market

This paper assesses the effect of intermittently renewable energy on generation capacity mix and market prices. We consider two generating technologies: (1) conventional fossil-fueled technology such as combined cycle gas turbine (CCGT), and (2) sunshine-dependent renewable technology such as photovoltaic cells (PV). In the first stage of the model (game), when only the probability distribution functions of future daily electricity demand and sunshine are known, producers maximize their expected profits by determining the CCGT and PV capacity to be constructed. In the second stage, once daily demand and sunshine conditions become known, each producer selects the daily production by each technology, taking the capacities of both technologies as given, and subject to the availability of the PV capacity, which can be used only if the sun is shining. Using real-world data for Israel, we confirm that the introduction of PV technology amplifies price volatility. A large reduction in PV capacity cost increases PV adoption but may also raise the average price. Thus, when considering the promotion of renewable energy to reduce CO₂ emissions, regulators should assess the behavior of the electricity market, particularly with respect to characteristics of renewable technologies and demand and supply uncertainties.     

Efficient capacity investment and joint production agreements in an oligopolistic electricity market: The HidroAysén joint venture project

We develop a model for a power market with the characteristics of the Chilean power supply industry, which is an integrated system with a system operator (SO) with a vast authority to define the dispatch of the system. We evaluate whether a large joint power generator project made up by the two largest power generators is an anti-competitive project. Considering four investment technologies for power generation, namely, hydro, coal, diesel, and an advantageous hydro technology which can only be built in a large scale (HidroAysén) for the joint venture case, we use an oligopolistic Cournot model and a Benevolent Social Planner, both calibrated to the Chilean power industry, in order to assess the efficiency of alternative investment strategies and conditions whether the HidroAysén joint venture project can be barred to be judged as anti-competitive. Results suggest that the joint venture is an efficient investment and there is a pro-competitive behaviour on the part of the two power generators, and that there are benefit to consumers, who should expect non-increasing energy prices as a result of the advantageous hydrotechnology.     

Regulatory reforms and productivity: An empirical analysis of the Japanese electricity industry

The Japanese electricity industry has experienced regulatory reforms since the mid-1990s. This article measures productivity in Japan's steam power-generation sector and examines the effect of reforms on the productivity of this industry over the period 1978–2003. We estimate the Luenberger productivity indicator, which is a generalization of the commonly used Malmquist productivity index, using a data envelopment analysis approach. Factors associated with productivity change are investigated through dynamic generalized method of moments (GMM) estimation of panel data. Our empirical analysis shows that the regulatory reforms have contributed to productivity growth in the steam power-generation sector in Japan.     

Regulatory road maps for the integration of intermittent electricity generation: Methodology development and the case of The Netherlands

The envisaged increase in the share of electricity generation from intermittent renewable energy sources (RES-E) like wind and photovoltaics will pose challenges to the existing electricity system. A successful integration of these sources requires a cost-efficient use of system flexibility. The literature on the options to improve system flexibility, and thus the costs of successfully integrating intermittent electricity generating units, is still growing but what is lacking is an overarching systematic view on when to adopt which option in particular energy systems. This paper aims to bridge this gap in literature. We use existing insights on market and network integration of intermittent electricity sources within a regulatory road map framework. The framework allows policy makers and other electricity system stakeholders to arrive at a consistent strategy in dealing with integration issues over a longer period of time. In this contribution we present and explain the framework and apply it for the case of The Netherlands.     

An approach to locational marginal price based zonal congestion management in deregulated electricity market

Congestion of transmission line is a vital issue and its management pose a technical challenge in power system deregulation. Congestion occurs in deregulated electricity market when transmission capacity is not sufficient to simultaneously accommodate all constraints of power transmission through a line. Therefore, to manage congestion, a locational marginal price (LMP) based zonal congestion management approach in a deregulated electricity market has been proposed in this paper. As LMP is an economic indicator and its difference between two buses across a transmission line provides the measure of the degree of congestion, therefore, it is efficiently and reliably used in deregulated electricity market for congestion management. This paper utilizes the difference of LMP across a transmission line to categorize various congestion zones in the system. After the identification of congestion zones, distributed generation is optimally placed in most congestion sensitive zones using LMP difference in order to manage congestion. The performance of the proposed methodology has been tested on the IEEE 14-bus system and IEEE 57-bus system.     

Competition effects of mergers: An event study of the German electricity market

This paper investigates the competition effects of the entry of Vattenfall into the German electricity market. While the competition authorities supported the entry by approving Vattenfall’s acquisition of three regional utilities, other market participants raised concerns over the emergence of an upcoming oligopoly in the German market for power generation. We contrast the efficiency hypothesis postulating pro-competitive effects of mergers with the market power hypothesis postulating anti-competitive effects. For the analysis of the two opposing hypotheses, we use an event study approach to the stock prices of Vattenfall’s competitors in the German market. While we find no empirical evidence for increased market power in the German electricity market due to Vattenfall’s mergers, there is some indication for efficiency increases. We therefore cannot oppose the view of the competition authorities predicting an overall positive effect for consumers as a result of Vattenfall’s entry into the German electricity market.     

Analysis of competition and market power in the wholesale electricity market in India

The electricity reforms were initiated in India with the objective of promoting competition in the electricity market. In order to promote competition, the Electricity Act 2003 was enacted and various policy initiatives were taken by the Government of India. Central Electricity Regulatory Commission (CERC) also facilitated competition through the regulatory framework of availability based tariff, Indian Electricity Grid Code, open access in inter-state transmission, inter-state trading and power exchanges. Despite these initiatives, electricity prices increased in the Wholesale Electricity Market in India (WEMI). This paper analyses the market structure and competitiveness in the WEMI. There are, of course, various potential reasons for the rise in the electricity price. This paper seeks to investigate, if market power was one of the reasons for increase in market prices. Concentration ratio, Herfindahl–Hirschman index, Supply Margin Assessment, and Residual Supply Index have been used to measure market power. This paper also uses the price–cost mark-up to examine, if exercise of market power led to higher margins. The analysis suggests that market power of firms may be part of the reason for the increase in electricity prices in WEMI. The study suggests various measures to increase competition in the WEMI.     

Price formation and market power in the German wholesale electricity market in 2006

From 2002 to 2006, German wholesale electricity prices more than doubled. The purpose of this paper is to estimate the price components in 2006 in order to identify the factors responsible for the increase. We develop a competitive benchmark model, taking into account power plant characteristics, fuel and CO₂-allowance prices, wind generation, cross-border flows, unit commitment, and startup conditions, to estimate the difference between generation costs and observed market prices for every hour in 2006. We find that prices at the German wholesale market (European Energy Exchange—EEX) are above competitive levels for a large fraction of the observations. We verify the robustness of the results by carrying out sensitivity analyses. We also address the issue of revenue adequacy.     

The impact of electricity market liberalization in Turkey: “Free consumer” and distributional monopoly cases

Electricity sector has grown substantially in Turkey since the early 1960s as a result of rapid industrialization and urbanization. The vertically integrated state-owned company had a legally established monopoly on the generation, transmission and distribution of electricity in Turkey. With the support and encouragement of international organizations like the World Bank, Turkey has initiated a comprehensive program to liberalize and privatize the electricity market in 2001. The liberalization of the electricity market in Turkey started in the distribution side of the market. The distribution network was divided into 21 distribution regions and in each of these, separate – initially state-owned – distribution companies have been authorized to distribute and sell electricity. The plan envisaged to complete privatization of all distribution companies until the end of 2006. This study compares the welfare implication of privatization of the distribution networks by comparing two extreme cases, a pure regional distributional monopoly case and a representative pure “free” consumer case, with a benchmark case of administered price regulation. For this purpose, we develop a simulation model of the Turkish electricity system, and use the data on generation and distribution costs. Our simulation analysis shows that substantial welfare losses occur if the distributional companies behave as regional monopolists. Our findings reiterate the importance of regulation and market design.     

Vertical integration and market power: A model-based analysis of restructuring in the Korean electricity market

An agent-based simulation model is developed using computational learning to investigate the impact of vertical integration between electricity generators and retailers on market power in a competitive wholesale market setting. It is observed that if partial vertical integration creates some market foreclosure, whether this leads to an increase or decrease in market power is situation specific. A detailed application to the Korean market structure reveals this to be the case. We find that in various cases, whilst vertical integration generally reduces spot prices, it can increase or decrease the market power of other market generators, depending upon the market share and the technology segment of the market, which is integrated, as well as the market concentrations before and after the integration.     

The futures and forward price differential in the Nordic electricity market

This note investigates price differentials between electricity forwards and portfolios of short-term futures with identical delivery periods at the Nordic Power Exchange (Nord Pool). Since both contracts are traded at the same exchange, there is no influence of, for example, different market microstructure and default risk when examining the effect of the marking-to-market of futures on the price differential. Although the prices of the futures portfolios are, on average, below the corresponding forward prices, these price differentials are, on average, not statistically significant and not economically significant when taking transaction costs into account. Given the characteristics of the electricity contracts under observation, this is consistent with the predictions of the Cox et al. (1981) model and indicates efficient pricing in the Nord Pool forward market in contrast to previous results.     

Characteristics of the prices of operating reserves and regulation services in competitive electricity markets

In this paper, characteristics of the prices of reserves and regulation services in the Ontario, New York and ERCOT electricity markets are studied. More specifically, price variability, price jumps, long-range correlation, and non-linearity of the prices are analyzed using the available measures in the literature. For the Ontario electricity market, the prices of 10-min spinning, 10-min non-spinning, and 30-min operating reserves for the period May 1, 2002 to December 31, 2007 are analyzed. For the New York market, prices of the same reserves plus regulation service are studied for the period February 5, 2005 to December 31, 2008. For the ERCOT market, we analyze the prices of responsive reserve, regulation up and regulation down services, for the period January 1, 2005 to December 31, 2009. The studied characteristics of operating reserve and regulation prices are also compared with those of energy prices. The findings of this paper show that the studied reserve and regulation prices feature extreme volatility, more frequent jumps and spikes, different peak price occurrence time, and lower predictability, compared to the energy prices.