An Oligopolistic Oligopolistic Electricity Market Model Electricity - - PowerPoint PPT Presentation

Yihsu Chen Benjamin F. Hobbs

• Dept. Geography & Environmental Engineering

Whiting School of Engineering The Johns Hopkins University Baltimore, MD USA

An An Oligopolistic Oligopolistic Electricity Market Model Electricity Market Model with Tradable NO with Tradable NOx

x Permits

Permits

Outline Outline

• I. Overview of Questions
• II. Model Structure and Computation Approach
• III. Application

Interaction of PJM Electricity and USEPA NOx Budget Program

• a. Background
• b. Assumptions
• IV. Results

Comparison of perfect competition with different scenarios

• a. Price
• b. Social Welfare
• c. Productive and NOx Trading Efficiency
• d. Strategy Rationale
• V. Conclusion

THIS SLIDE SHOULD BE OMITTED IN A THIS SLIDE SHOULD BE OMITTED IN A 10 MINUTE TALK, WILL TAKE TOO 10 MINUTE TALK, WILL TAKE TOO LONG (YOU SHOULD PRACTICE YOUR LONG (YOU SHOULD PRACTICE YOUR TALK TO SEE WHICH SLIDES CAN BE TALK TO SEE WHICH SLIDES CAN BE DONE QUICKLY AND WHICH SEEM LIKE DONE QUICKLY AND WHICH SEEM LIKE DISTRACTIONS DISTRACTIONS

What might be the effect of policies concerning…

– Generation structure (mergers, ownership, distributed resources, entry…) – Transmission investment (new lines …) – Market rules

• Transmission pricing (taxes, congestion pricing, counterflows, zonal …)
• Access (retail load, generators, arbitragers …)
• Environmental markets (green certs., CO2 trading …)

…upon…

– Economic efficiency (allocative & productive efficiency) – Income distribution (TSO revenues, profits, consumer surplus) – Emissions

…considering generator strategic behavior?

– Bidding – Capacity withdrawal – Manipulation of transmission (deliberate congestion, decongestion) – Manipulation of emissions markets (withholding of allowances)*****

II.

• II. Model Structure and Computational Approach:

Model Structure and Computational Approach: Direct Solution of Equilibrium Conditions Direct Solution of Equilibrium Conditions

• 1. Derive first-order conditions for each player
• 2. Impose market clearing conditions
• 3. Solve resulting system of conditions (complementarity problem)

Choose gen & Choose gen & sales to sales to maximize profit maximize profit s.t. capacity s.t. capacity ⇒ ⇒ 1 1st

st order

• rder

conditions conditions Producer A Producer A Market Clearing Conditions Market Clearing Conditions

ISO: Choose Transmission Flows to Max Value of Network ISO: Choose Transmission Flows to Max Value of Network

s.t. transmission constraints s.t. transmission constraints⇒ ⇒ 1 1st

st order conditions

• rder conditions

Choose gen & Choose gen & sales to sales to maximize profit maximize profit s.t. capacity s.t. capacity ⇒ ⇒ 1 1st

st order

• rder

conditions conditions Producer B Producer B Consumers: Max Value Consumers: Max Value -

• Expenditures (Demand Curve)

Expenditures (Demand Curve)

III.

• III. Application Background

Application Background PJM Market and USEPA NO PJM Market and USEPA NOx

x Program

Program

PJM Market USEPA NOx Program Need to give credit for Figure …

Model Assumptions Model Assumptions

• Network and Load

– Load duration curve (LCD) approximated by 5 blocks – Only 500 kV line 14 nodes, 18 arcs – No transmission losses – Power Transfer and Distribution Factors (PTDFs)

• Producers

– 791 generators – 6 largest producers (capacity share: 4% to 18%)

• Cournot strategy in electricity market
• Conjectured pricing in NOx market

– Remaining produces price takers (3 producers)

• Consumer

– Linear demand Curve

• ISO
• Importer

NO NOx

x Conjectured Pricing

Conjectured Pricing

NCPf = 0.1 [($/ton)/ton]

qnox (tons) pnox ($/ton) + Buy

• Sell

qNOx: Net Position in NOx permit market Sell (-) and Buy (+) Producer’s belief regarding its action on NOx price

Scenarios Investigated Scenarios Investigated

• A. Perfect competition (COMP)

– Price-taking behavior in power & allowances markets

• B. Oligopoly in electricity market (CONOURT)

Cournot strategy for 6 largest in electricity market

– No Conjectured NOx Pricing

• C. Oligopoly in both markets (CONOURT+NOx )

– For 6 largest producers: Cournot strategy in electricity market plus Conjectured NOx Pricing in NOx market

• NCP2,3,5,6,7 =0.1 [($/ton)/ton]
• NCP4 = 1.5 [$/ton)/ton] The largest producer with a long

position in the NOx market

IV.

• IV. Results: Price Comparison

Results: Price Comparison

• Price of electricity goes up

as producers restrain output

• Peak period electricity price

increase by 37% and 34% compared with COMP COMP for COURNOT COURNOT and COURNOT+NO COURNOT+NOx

x ,

respectively

• Price of NOx decreases as a

result of producers reducing energy output, suppressing NOx permit demand

• Producer 4 drives up NOx

permit price if strategic in emissions market (HOW??)

1595 2557 2174

500 1000 1500 2000 2500 3000

NOx Permit Price ($/ton)

COMP COURNOT COURNOT+NOx

32.7 40 40 5 10 15 20 25 30 35 40 45

Sale-Weighted Electricity Price($/MWh)

COMP COURNOT COURNOT+NOx

Welfare Analysis: Welfare Analysis: Compared to

Compared to Competitive Scenario Competitive Scenario

8931 8086 8096 PS, 2520 PS, 3267 PS, 3261 IMP, 142 IMP, 171 IMP, 171 ISO, 67 ISO, 24 ISO, 26 2000 4000 6000 8000 10000 12000 14000 A B C CS PS IMP ISO

• SW (social welfare)

declines by 112 and 106 [M$/yr] for Cournot solutions

• PS (producer

surplus) goes up as producers exercise market power

• IMP (Importer)

revenue goes up as electricity prices go up

• ISO revenue goes

down as less power being transferred

Can’t see total welfare (should show) What is 8931? (Label as CS) Units?

82.6 15.2 79.1 10.3 16.3 10 20 30 40 50 60 70 80 90 Production Efficiency [M$] Trading Volume [10^3 tons] COMP COURNOT COURNOT+NOx

Efficiency Comparison Efficiency Comparison

Compared to Competitive Scenario Compared to Competitive Scenario

Definition of measurement:

• a. Productive Inefficiency

= (GCi –GCCOMP|load*)[M$]

• b. NOx Trading Inefficiency

=(TradeNOx

i – TradeNOx COMP)

[10^3 tons]

Market power leads to:

• a. A 8.0% and 7.7% of

productive inefficiency for COUNOT COUNOT and COURNOT+NO COURNOT+NOx

x

• b. A 6.8% and 36.5% decrease

in NOx trading volume

Player Strategies in NOx Market Player Strategies in NOx Market

• PECO: Compare with COMP

COMP – Restrain output and sell more NOx permits in COURNOT COURNOT price falls from $2,557 to $1,595 – Expand output and sell fewer NOx permit in COURNOT+NO COURNOT+NOx

x

Price falls only to $2,174

• Connectiv: Compare with COMP

COMP – Increase output by 84% due to higher electricity prices in COURNOT COURNOT become net buyer in NOx market – Shrink output by 6% in COURNOT+NO COURNOT+NOx

x compared with

COURNOT due to higher costs associated with NOx permits

• 7.8
• 12.6
• 6.2

28.6 25 27.2

• 15
• 10
• 5

5 10 15 20 25 30 35 COMP COURNOT COURNOT+NOx PECO qNOx [10^3 tons] PECO Total Sale [10^6 MWh]

2.20 1.83 1.9

• 0.66

3.3 3.5

• 1

1 2 3 4 COMP COURNOT COURNOT+NOx Connectiv qNOx [10^3tons] Connectiv Total Sale [10^6 MWh]

(Net Sale of Permits (Net Sale of Permits -

• qNOx [tons]:

Sell (-)/Buy(+))

V.

• V. Conclusion

Conclusion

• Interactions between electricity and NOx market can be

investigated by Cournot and conjectured NOx pricing assumptions in a large-scale model

• Detailed representation of market allows a variety of

welfare and efficiency analyses, and to gain insight on players’ strategy

• The model is capable of answering various policy

questions, such as:

– “What would the NOx price be if the CAP is imposed over entire year?” This is not an exciting conclusion to end with. Have more questions pointing to future research (e.g., optimal manipulation of NOx market)