Session 5

Question 1

Why is power/electricity a commodity & what are consequences?

Answer 1

• grid bound
• > trades happen via injecting to and extracting from grid
• > electricity flows follow physics, not buyers & sellers locations on grid
• not economically & large scale storable
• > trades have to balance in real time if benefits from trade shall be exploited, injections & extractions have to occur simultaneously
• > when injection does not match extractions system is in stress

–> real time trades have to be managed by central entity possessing all relevant information

Question 2

What is the institutional setup for the power market?

Answer 2

System Operator: manages grid in real time, balances supply and demand on real time spot market

Power Exchanges: provide trading plattform before SO takes over, hand over trading positions & info to SO

Supply: generating companies, decentralized

Demand: local, final consumers, retailers that market to final consumers

Question 3

What models for energy trading exist?

Answer 3

• bilateral trading
  
  • involves two parties
  • directly bargained (short or longterm)
  • alternatively, trading via exchange
• pool
  
  • anonymous trading
  • market solves via auction
• both require spot balancing market run by SO
• US pool, EU bilateral

Question 4

How does trading on the EEX work?

Answer 4

• pool trading at day-ahead time
• continuous trading opens during delivery day & stops 30 mins before delivery
• EEX informs network operators on scheduled trades

Question 5

What is merit order?

Answer 5

• Supply curve (aggregated supply bids in pool).
• Intersection with demand constitutes market price.
• Depending on demand level, different tech is running (Baseload: high fixed cost, low variable cost; Peaker: low fixed cost, high variable cost)
• bids submitted to market based on marginal cost
• merit order effect: investment in low-marginal cost tech pushes higher cost tech out of market

Question 6

What is a screening curve?

Answer 6

• plots fixed + variable costs
• x axis: capacity factor = duration where tech is used (max 1)

Question 7

How do we get from Screening Curves to Investment into different energy generation operations?

Example:

Baseload (fixed cost 12$/MWh, variable 18$/MWh)

Peaker (f6, 30)

Demand uniformly distributed between 4 & 8 GW

Answer 7

• Screening Curves -> proportions of different techs
• demand & capacity -> cap
• load duration curve (duration at which demand at or above certain value minus possible cap) -> show distribution of baseload & peakers
• determine cap value
  
  • fixed costs peaker = profit during price spike ((cap price - variable costs) * time demand is rationed)
  • cap = upper demand border - lower demand border * time demand is rationed

Question 8

How to determine profit of baseload tech?

Answer 8

• Baseload has positive margin during time when peakers run & therefore set the price
• earnings = (variable cost peaker - variable cost baseload) * relative time peakers run + profit during rationing (= fixed costs peaker)

Question 9

The merit-order effect crowds out conventional energy sources due to cheaper renewables, how can we guarantee scarcity rent?

Answer 9

• allow for very high prices in limited number of hours where renewable generation is low
• maintain low prices, but pay conventional sources for being online