Lecture 2: Electricity Markets: Basics Flashcards
By definition “Energy markets“ are ….. markets
commodity
Energy markets are often defined as commodity
markets since they have typical characteristics, e.g.
……
large supply and demand, low quality differentiation
What are the Special characteristics of the Energy sector?
▪ Primary energy resources owned by the state
▪ Governments have considerable influence (e.g., policy, regulation, ownership)
▪ Security of energy supply is a concern for most governments and economies
▪ Increasing number of countries dependent on a **small number of suppliers **(oil, gas, coal)
▪ Large-scale, capital-intensive projects with long lead times
▪ Small number of national and multinational companies with skills to carry out such projects
▪ Financing of projects is increasingly becoming an international activity
▪ Long-distance transportation of energy is a natural monopoly
▪ Major contributor to pollution
▪ Nuclear energy is dependent on technology related to nuclear weapons
What are the special characteristics of electricity as a commodity in terms of
* Substitutability
* Storage
* Physical characteristics
* Product homogeneity
* Generation diversity
* Transportation grid
- Electricity is not easily substitutable by other energy
sources (e.g., high energy density, no emissions, low
mass and volume) − Low price elasticity - Electricity storage technology is complex and
expensive − Low storage capacity - Electricity consumption and generation need to be
simultaneous
− Supply and demand need to match at all times - Electricity is a standard/homogenous product
− Low differentiation potential - Large variety of generation technologies
− Different cost structure and environmental impacts - Electricity needs lines for transport
− Difficult and time-consuming grid planning process
What were the characteristics of the electricity markets before liberalisation?
▪ Electricity supply seen also as a natural monopoly like the Grid
▪ Often state-owned companies
▪ Vertically integrated companies along the value chain
* ▪ Generation
* ▪ Transmission
* ▪ Distribution
* ▪ Supply
▪ Certain regions exclusively served
▪ Regulated prices
What were the typical problems of the monopoly structure of the electricity markets?
▪ Often poor performance of state run electricity sector
▪ High costs
▪ Inadequate expansion of electricity access
▪ Unreliable supply
▪ Inability to finance required investments or maintenance
▪ Need to remove subsidies to the sector
▪ Desire to raise immediate revenue for government through asset
sales
Three objectives of the EU energy policy are
- Achieving an efficient and competitive integrated energy sector
- Maintaining an adequate level of security of supply
- Increasing the effectiveness of environmental protection
The creation of the internal market is expected to contribute
strongly to all of these objectives
What were the major topics of EU Directive 2019?
- Repeals the 2009 Directive
- Existing customer rights are clarified and reinforced, new ones introduced
- Contains rules on retail market for electricity
- decarbonization of the energy sector and removal of barriers to cross-border trade
- Aimed to create integrated competitive consumer-centered, flexible, fair and transparent electricity markets in the EU
There is still potential for improvement in the liberalized electricity markets.:
- In many member states electricity markets continue to be concentrated,thus leaving space for creating space for incumbent operators to influence prices
- Many wholesale markets are not liquid since companies are active both in production and in the retail market, thus limiting the development of electricity wholesale markets
- Obstacles on cross-border supply of electrical energy impede the development of integrated EU energy markets
- The lack of transparency in the markets benefits incumbents and undermines the position of new entrants. Lack of transparency also aggravates mistrust
- The **lack of trust of the industry and consumers in the specific priceformation **mechanisms in energy wholesale markets, leading to significant price rise
Explain the characteristics of the OTC Market
- Bilateral trades between two parties (normally utilities and/or banks)
- Mainly standard trading products (e.g. forwards) but can also encompass any other tailored products agreed on between the two parties
- Complete freedom of individual contracts
Explain the characteristics of the Exchanges (Boerse)
Cleared trades in the exchange (e.g. EEX, APX, Nordpool)
– Market maker secures liquidity and offers prices quotes at any moment in time
– Exchange works as clearing house, requiring daily settlements (margining) eliminating credit risk
* Only standard products (e.g. futures with specific granularity, base and peak products)
* Parties need to be licensed with specific exchange and need to pay fee
What are Characterization Points of the Markets in neoclassical theory
- Neoclassical economics theory: The economic problem of society is the allocation of existing resources
- Markets are mechanisms to allocate resources where supply and demand match
- Market price emerges through the interaction of supply and demand
- Mechanism of pricing gain importance
The neoclassical theory assumes perfect markets
Benefit maximization by the consumer
* Profit maximization by the seller
* Immediate reaction of market actors
* No personal or temporal preferences
* Total market transparency
* Homogenous goods
* No transaction costs
* Full information
nicht relevant fur Prufung
What is the Definition of Market Engineering
Market Engineering comprises the structured, systematic and
theoretically founded procedure of analyzing, designing, introducing
and also quality assuring of market platforms as well as their legal
framework regarding simultaneously their market mechanisms and
trading rules, systems and platforms and media rules, and business
models and rules
What are the 4 key elements for the Market (engineering)
-
Regulatory (socio-economic and legal) environment
Market rules, traded products and participating agents needs to
comply with laws (e.g. tax and competition) and regulations;
specific rules for trading electricity - Transaction object
- Product to be traded on the designed market. On electricity
markets, typically, power or electricity as the legally tradable
physical good, but with smart grid technology also, e.g.,
demand-side flexibility resources -
Market structure
− Microstructure: determines the market rules (broadly: the
auction format)
− IT infrastructure: today, most markets are virtual
− Business structure: essentially the business model of the
system operator
-
Market structure
-
Agent behavior
Market structure defines a set of rules and regulations; eventual
market outcome depends on agent behavior, influenced by a set
of rules
