Lecture 3: Electricity Markets: Models and Structure Flashcards
Why do we need a other marcet structure than the
Bilateral trading agreements
Bilateral trading agreements do not fulfill the requirements of power markets (Time,Transparency, Prices)
Only multilateral, central platform market institutions can offer the necessarytransparency and coordination in a timely fashion for efficient allocation of generation,
transmission and balancing actions
Bilateral trading agreements only play a role in derivatives / forward markets
Which basic market models have we learned about ? Briefly Summerize.
Pool Model
* Central market organization
* Central optimization
* Power Trading compulsory takes place
* in one market
* Generation, Transmission, Balancing is
* optimized simultaneously
Exchange Model
* Decentralized market organization
* Decentralized decisions
* Power Trading voluntary takes place in
* closely linked , interdependent but
* separated markets (Futures,
* Spot, Transmission, Balancing)
Market Models: Pool Model
Pool market is centrally organized institution where a complete trading is compulsory for participants there is a centralized manager for the Central optimization where the generation transmission balancing and optimized simmultaniosly. the Pool market Focuses on short term cost optimal allocation of resources with the use of locational marginal pricing
Market Models: Exchange Model
Exchange model is decentralized institution where trading is voluntary for participants. Because it is also possible outside of the exchange. There is no central manager and generators optimize their plan themselves. Market prices influence the desicions and investments. Is more than one market are not at the goodly coupled inefficient allocations can occur.
Evaluation: Pool Model
Advantages:
- Pool Model is good if ….
- …… cannot play an important role in
price determination
competition in the market is high.
Demand
Optimization
Evaluation: Pool Model
Challanges
Some challenges of the pool model is that we should keep in mind that the Pool market model is efficient in short-term, but not for the long term decisions. Other than that the optimization algorithms also need a high amount of information and thus high costs
Evaluation: Exchange Model
Advantages:
- Simpler Implementation
- Active Participation of …..
- Bad market design can be addressed by change to other market platform
- If coordination of interdependent markets is not so important transaction costs are lower
Exchange model
- Decentralized markets can also contribute to cost-minimal supply if expectations of market participants about allocations are correct → good forecasting is required
- Tight coupling of interdependent markets can reduce inefficiencies between generation, transmission and balancing power markets
Advantages:
The exchange model has a simpler implementation where the active participant of the demand takes place. That Market design can be addressed by change to the other market platform.
Evaluation: Exchange Model
Challanges
Challenges:
- Bad coordination between interdependent markets
can hamper market results and investment
incentives
- E.g. APX UK, where missing reference price leads
to lower trade volumes and lower transparency in
trading (no arbitrage possible)
What are the Benefits of competitive wholesale markets
Effective competition
Efficient investment and improved security of supply
Efficient operation
Efficient risk management
Efficient use and expansion of transmission infrastructure
Unsustainability of subsidies and other inefficiencies
Benefits of competitive wholesale
Effective competition
▪ reduce the entry barriers for independent generators and retailers
▪ new entrants can enter the generation and the retail markets separately
Benefits of competitive wholesale
Efficient investment and improved security of supply
▪ provide price signals for both demand and supply
▪ encourage new investment
▪ give the signals on the type of investment (e.g. base-load or peak) or choice of
technology that is most required in the market
Benefits of competitive wholesale
Efficient operation
▪ give signals to the market to dispatch low cost plant and to plan maintenance at
times with the lowest demand
▪ price signals can encourage flexible customers to reduce their demand at times of
peak consumption
Benefits of competitive wholesale
Efficient risk management
▪ allow suppliers and consumers to hedge their portfolio of electricity at a minimum volume and price risk if markets have sufficient depth
Efficient use and expansion of transmission
infrastructure
▪ provide the price signals necessary for the TSO and regulatory agencies to identify
when market participants should transmit energy from one zone to another
▪ provide price signals to identify when and where additional interconnection capacity
would be cost effective
Which wholesale market participants
With inherent physical position
Without inherent physical position
with... Generators
Retailers
without... Financial traders ->
▪ Buy and sell to exploit price
differences (arbitrage)
▪ May take speculative
positions (dis-/aggregate
purchases and sales over
different dimensions)
▪ IntermediaryTrading at OTC vs. Time of trading
OTC
* Trading directly between two parties
* Decentralized market without a central physical location
* Multiple prices for one good possible
* Risk that one contracting party does not fulfill its obligation
- E.g. forwards, futures, options
- Exchange of the goods after a predefined timespan (after contract
formation)
Trading at Exchange vs. Time of trading
Exchange
* Standardized contracts
* Clearinghouse determines the clearing price
* Clearinghouse takes the counter party risk
* Only one price exists for one good at a given time
Spot market
* Seller delivers the goods immediately
* Buyer pays “on the spot”
* Neither party can back out of the deal
