Lecture 2: Electricity Markets: Basics Flashcards Preview

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Flashcards in Lecture 2: Electricity Markets: Basics Deck (29)
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1
Q

By definition “Energy markets“ are ….. markets

A

commodity

2
Q

Energy markets are often defined as commodity
markets since they have typical characteristics, e.g.
……

A

large supply and demand, low quality differentiation

3
Q

What are the Special characteristics of the Energy sector?

A

▪ 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

4
Q

What are the special characteristics of electricity as a commodity in terms of
* Substitutability
* Storage
* Physical characteristics
* Product homogeneity
* Generation diversity
* Transportation grid

A
  • 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
5
Q

What were the characteristics of the electricity markets before liberalisation?

A

▪ 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

6
Q

What were the typical problems of the monopoly structure of the electricity markets?

A

▪ 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

7
Q

Three objectives of the EU energy policy are

A
  • 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

8
Q

What were the major topics of EU Directive 2019?

A
  • 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
9
Q

There is still potential for improvement in the liberalized electricity markets.:

A
  • 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
10
Q

Explain the characteristics of the OTC Market

A
  • 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
11
Q

Explain the characteristics of the Exchanges (Boerse)

A

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

12
Q

What are Characterization Points of the Markets in neoclassical theory

A
  • 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
13
Q

The neoclassical theory assumes perfect markets

A

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

14
Q

nicht relevant fur Prufung

What is the Definition of Market Engineering

A

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

15
Q

What are the 4 key elements for the Market (engineering)

A
  • 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
  • Agent behavior
    Market structure defines a set of rules and regulations; eventual
    market outcome depends on agent behavior, influenced by a set
    of rules
16
Q

Which 3 areas of Market are benefitting from Smart Grids

A distinction can be made between market ….. and market …..

A
  1. Competitors
  2. Consumption Flexiblity
  3. Market Information

Market operation: short-term opportunities created by the Smart Grid that affect
supply and demand
Market evolution: mid- to long-term efficiency increases in the market by SG

17
Q

What is the microstructure of a Market?

A

it consists information and defines the Guidelines for
Executing systems
Trading mechanism
Information system
Market model

18
Q

What kind of trading mechanisms are there?

A

Continuous trading
− trader arrange trades whenever the market is open
Call market
− trades take place when market is called

19
Q

What kind of execution System are there?

A
  • Quote-driven systems
    − dealer arranges most quotes when trading with the customer
  • Order-driven systems
    − arranging trades by using:
    ▪ order precedence rules: match buyers to sellers
    ▪ trade pricing rules: determine price of the trade
  • Brokered trading systems
    − brokers arrange trades → help buyers and sellers to find
    each other
19
Q

What kind of execution System are there?

A
  • Quote-driven systems
    − dealer arranges most quotes when trading with the customer
  • Order-driven systems
    − arranging trades by using:
    ▪ order precedence rules: match buyers to sellers
    ▪ trade pricing rules: determine price of the trade
  • Brokered trading systems
    − brokers arrange trades → help buyers and sellers to find
    each other
20
Q

Types of Traders:

A
  • Profit-motivated traders (mostly
    informed traders)
  • Utilitarian traders (uninformed traders)
  • Futile traders (uninformed traders)
21
Q

Explain the characteristics of the
1. * Profit-motivated traders (mostly informed traders)
1. * Utilitarian traders (uninformed traders)
1. * Futile (sinnlos) traders (uninformed traders)

A
  1. Reason for trading: expect profit * Types of traders: speculators and dealers+
  2. Reason for trading: obtain benefit other than
    profits * Investors, borrowers, asset exchangers,
    hedgers and gamblers
  3. Reason for trading: Believe that they are
    profit-motivated that their expectations are not
    rational. * They have no advantages that would allow
    them to be profitable
22
Q

What is the Liquidity?

A

“Liquidity is the successful outcome of a bilateral search in which buyers look for sellers and sellers look for buyers” (Harris 2003)
“Liquidity is the ability to trade large size quickly, at low cost, when youwant to trade”

  • Liquidity is one of the most important quality measures for an exchange
  • Liquidity has the dimensions
    − Size
    − Time
    − Costs
23
Q

The four dimensions of liquidity are

A
  • Immediacy
  • Wide or Comprehensiveness
  • Deepness
  • Flexibility
24
Q

Explain the 4 Dimensions of the liquidity
* Immediacy
* Wide or Comprehensiveness
* Deepness
* Flexibility

A

Immediacy
* “Refers to how quickly trades of a given size can be arranged at a given cost” (Harris 2003).
Market orders provide immediacy.

**Wide or Comprehensiveness
*** “Refers to the costs of doing a trade of a given size” (Harris 2003)
* A market can be labeled as wide/comprehensive, if there are many orders close to the current
market price.

Deepness
* “Refers to the size of a trade that can be arranged at a given cost”
(Harris 2003)
* A market can be labeled as deep, if there are large orders close to the current market price.

Flexibility
* “Refers to how quickly prices revert to former levels after change in response to large order
flow imbalances initiated by uninformed traders” (Harris 2003)

25
Q

“Volatility is the tendency for prices to unexpectedly change” (Harris 2002)
* Price changes in response to:
− New information about values
− In response to demands of impatient traders for liquidity

A
  • Fundamental volatility: unanticipated changes in instrument values
  • Transitory volatility: due to trading activity by uninformed traders
26
Q

expected benefits from Smart Grids to the Markets

  • The Smart Grid as a layer of communication infrastructure that creates the opportunity to ….. market participants
  • Efficient investment decisions in the system by ….these market signals
  • ….. demand and supply curves through these signals by allowing different actors to participate in the energy market
  • Market operation and market evolution ….. from the Smart Grid
  • Market operation describes the ….. created by the Smart Grid that affect supply and demand in operation
  • Market evolution encapsulates the ….. in the market
A
  • The Smart Grid as a layer of communication infrastructure that creates the opportunity to communicate signals in real-time between market participants
  • Efficient investment decisions in the system by analyzing these market signals
  • Influencing demand and supply curves through these signals by allowing
    different actors to participate in the energy market
  • Market operation and market evolution benefit from the Smart Grid
  • Market operation describes the short-term opportunities created by the Smart
    Grid that affect supply and demand in operation
  • Market evolution encapsulates the mid-to long-term efficiency increases in the market
27
Q

expected benefits from Smart Grids to the Markets

*The impact of the Smart Grid on the …. by allowing new actors to participate in the market
* Aggregating and control of small generators, storage units or electric vehicles through signals communicated via the Smart Grid which ……
* leading more competitive behavior causing a ……
* Enabling the …… to react to price signals through automated energy
agents that operate storage capacity, heat pumps or electric vehicles
* Changes of market information in the long run can cause consumers to switch their supplier contracts to …..
* Consumers might invest in distributed storage units or PV panels because they are able to estimate the effects of (the preferred) self-consumption easily

A

*The impact of the Smart Grid on the supply side by allowing new actors to participate in the market
* Aggregating and control of small generators, storage units or electric vehicles through signals communicated via the Smart Grid which increases competition
* leading more competitive behavior causing a more efficient market outcome
* Enabling the demand side to react to price signals through automated energy agents that operate storage capacity, heat pumps or electric vehicles
* Changes of market information in the long run can cause consumers to switch their supplier contracts to time variable tariffs
* Consumers might invest in distributed storage units or PV panels because they are able to estimate the effects of (the preferred) self-consumption easily

28
Q

*The purpose of markets always is the ….. through signals.
* In the long run, these markets are intended to the investment in resources that can increase the efficiency of the market.
* On the electricity market, an increasing demand might cause …. prices. This might lead to energy efficiency measures causing some people to be able to share their PV generation with their neighbors.
* Online platforms can help in finding tariffs that reward ….. or such (P2P) platform can connect neighborhoods into microgrids that share their generation.
* In the medium term, this price signal would cause private households to install more PV capacity on residential roofs or to invest in storage capacity to maximize preferential self-consumption.

A

*The purpose of markets always is the coordination of supply and demand through signals.
* In the long run, these markets are intended to incentivize the investment in resources that can increase the efficiency of the market.
* On the electricity market, an increasing demand might cause increasing prices. This might lead to energy efficiency measures causing some people to be able to
share their PV generation with their neighbors.
* Online platforms can help in finding tariffs that reward off-peak electricity use or such (P2P) platform can connect neighborhoods into microgrids that share their
generation.
* In the medium term, this price signal would cause private households to install more PV capacity on residential roofs or to invest in storage capacity to maximize preferential self-consumption.