Lecture 1: Power Market Structure And Capacity Adequacy

Question 1

What is the course content? (7 bullets)

Answer 1

• Security of supply and investments in power markets
• Demand flexibilty
• Ancillary services
• Variable renewable energy in the power market
• Competition and market power
• Transmission pricing and handling of bottlenecks
• Modelling of the European power market

Question 2

What are the conditions for an effektive Market?

Answer 2

Many buyers and sellers 
Good information 
Homogenous commodities
Free flow of goods
Rational (economic) market participants
No externalities

Question 3

Natural monopolies vs competitive market

- What properties of generation economics could make it more preferable with monopoly?

Answer 3

Economics of scale

Efficiency gains from operation of multiple power plants
- a central schedule can coordinate start/stop across all power plants

Question 4

What is the regulators dilemma?

Answer 4

Competitive market

• a)hold price down to marginal cost
• b)Minimize cost

Can regulated markets do both?

• Perfect cost of service fulfills only a)
• Perfect price cap fulfills only b)

Question 5

What are the two demand-side flaws?

Answer 5

1. Lack of metering and real-time billing

2. Lack of real-time control of power to specific customers

Question 6

What is the annuity formula?

Answer 6

A = (1 - (1 + r)^-n)/r

By multiplying a yearly payment (starting in one year) with this number, you get the present value

Question 7

What is ACE an abbreviation for?

Answer 7

Average cost of energy

Question 8

What is ACC an abbreviation for?

Answer 8

Average cost of capacity

Question 9

ACE formula

Answer 9

ACE = VC + FC/cf

Question 10

ACC formula

Answer 10

ACC = FC + cf* AC

Question 11

What are the characteristics of competitive equilibrium in short run competition?

Answer 11

Price taking traders
Well behaved costs
Good information

Question 12

What are the characteristics of competitive equilibrium in long run competition?

Answer 12

Short run characteristics +
Limited economics of scale
Free entry

Long run competitive equilibrium ensures that the right investments are made

Question 13

What are the profits in the short run?

Answer 13

Revenues - short run costs

Question 14

What are the profits in the long run?

Answer 14

Revenues - minus total costs

Question 15

What will eventually happen in a market with a surplus of generating capacity

Answer 15

The most expensive generator will set the price, and therefore not be able to recover its investment cost. Therefore it will eventually have to exit the market.

Question 16

What is scarcity rent?

Answer 16

Revenue - variable operating costs

Question 17

How is the interactions between the short term and long term equilibrium?

Answer 17

The market gives energy, reserve and capacity prices

• which determines investment and retirement decisions
• which determines how much capacity is available to the market

Question 18

What are the other things that impact the market?

Answer 18

Demand side flaws

• demand elasticity
• demand fluctuations

Reliability policy

• operating reserve requirement
• price caps
• capacity reserve requirement

Outages

Question 19

What is the ‘regulatory solution’ to the problem of cost recovery for peaked power plants?

Answer 19

Build enough capacity to cover peak load

Set price to average cost

Question 20

What is the ‘optimal solution’?

Answer 20

Only add a MW of peaker capacity if it produces less cost than the value for the customer

Question 21

What is the equation for average cost of peaker energy?

Answer 21

ACE_PS= FC_peaker/D_PS + VC_peaker

PS= price spike

Question 22

What is ‘the competitive solution’?

Answer 22

In the long run, suppliers recovers their fixed costs. This is equal to the optimal solution.

Question 23

What are the characteristics of regulated electricity trade?

Answer 23

• Price is fixed by central administration or negotiations

- Different market segments may have different prices