Contract networks for electric power transmission

A contract network extends the concept of a contract path to address the problem of loop flow and congestion in electric power transmission systems. A contract network option provides an internally consistent framework for assigning long-term capacity rights to a complicated electric transmission network. The contract network respects the special conditions induced by Kirchoff's Laws; accommodates thermal, voltage, and contingency constraints on transmission capacity; and can be adopted without disturbing existing methods for achieving an economic power dispatch subject to these constraints. By design, a contract network would maintain short-run efficiency through optimal spot-price determination of transmission prices. Through payment of congestion rentals, the contract network makes a long-term capacity-right holder indifferent between delivery of the power or receipt of payments in a settlement system. to]Everybody talks about the weather, but nobody does anything about it.Often attributed to Groucho Marx, but earlier from Charles Dudley Warner, Hartford Courant, Editorial, August 24, 1897.     

Congestion management in power systems

In liberalized power systems, generation and transmission services are unbundled, but remain tightly interlinked. Congestion management in the transmission network is of crucial importance for the efficiency of these inter-linkages. Different regulatory designs have been suggested, analyzed and followed, such as uniform zonal pricing with redispatch or nodal pricing. However, the literature has either focused on the short-term efficiency of congestion management or specific issues of timing investments. In contrast, this paper presents a generalized and flexible economic modeling framework based on a decomposed inter-temporal equilibrium model including generation, transmission, as well as their inter-linkages. The model covers short-run operation and long-run investments and hence, allows to analyze short and long-term efficiency of different congestion management designs that vary with respect to the definition of market areas, the regulation and organization of TSOs, the way of managing congestion besides grid expansion, and the type of cross-border capacity allocation. We are able to identify and isolate implicit frictions and sources of inefficiencies in the different regulatory designs, and to provide a comparative analysis including a benchmark against a first-best welfare-optimal result. To demonstrate the applicability of our framework, we calibrate and numerically solve our model for a detailed representation of the Central Western European (CWE) region, consisting of 70 nodes and 174 power lines. Analyzing six different congestion management designs until 2030, we show that compared to the first-best benchmark, i.e., nodal pricing, inefficiencies of up to 4.6% arise. Inefficiencies are mainly driven by the approach of determining cross-border capacities as well as the coordination of transmission system operators’ activities.     

Access to Pipelines in Competitive Gas Markets

In this paper we provide the normative benchmark characterizing the optimal allocation of resources in a gas network. By duality, we determine the consumer and producer prices, at each node of the network, which decentralize this allocation with competitive actors. From the nodal prices we derive optimal transportation charges which turn out to be related to distance, but not always in a straightforward manner. We also consider the issue of pricing on secondary markets for capacity when pricing schedules for the transportation of gas consist of two terms: a capacity charge and a quantity charge. Finally, we explore the role of uncertainty in the planning of network capacity.     

Appropriate contract durations in the German markets for on-line reserve capacity

This paper explores the economic implications of different contract durations in markets for on-line (primary and secondary) reserve capacity in Germany with the crucial feature of separate markets for spot energy and reserve capacity provision. The analysis is based on an equilibrium model developed by Just and Weber (Energy Econo 30:3198–3221, 2008) for reserve markets. It reveals the implicit trade-off for the bidders and implicit interdependencies between the reserve and the spot markets. Even if the markets are not explicitly coordinated, they are interrelated through the dispatch decisions of the power plant owners. The paper concludes that the current German reserve market design is inefficient and should be improved. The results clearly show that shorter periods (with resulting lower variations in overall electricity demand) lead to more efficient dispatch and market results. Not only prices in the reserve capacity markets are expected to be lower, but also spot market prices. As these benefits can be partially reaped by owners of large generation portfolios also under longer contract durations, it discriminates against smaller generation companies and can potentially deter market participation. Further, the paper takes a broader perspective and discusses security concerns against shorter contract durations. It is shown that the opportunity costs character of the reserve market implies sufficient incentives for supplying online reserve capacity. The concerns do not appear to be predominant and it should be possible to manage them appropriately.     

Priority Network Access Pricing for Electric Power

We propose a priority-pricing scheme for zonal access to the electric power grid that is uniform across all buses in a zone. The independent system operator (ISO) charges bulk power traders a per unit ex ante transmission access fee. The zonal access fee serves as an access insurance premium that entitles a bulk power trader to either physical injection of one unit of energy or a compensation payment. The access fee per MWh depends on the injection zone and a self-selected strike price that serves as an insurance deductible that determines the scheduling priority of the insured transaction and the compensation level in case of curtailment. Inter-zonal transactions are charged (or credited) with an additional ex post congestion fee equal to the differences in zonal spot prices. The compensation for curtailed transactions equals the difference between the realized zonal spot price and the selected strike price (deductible level). The ISO manages congestion so as to minimize net compensation payments and thus, curtailment probabilities increase with strike price and for any particular strike price may vary from bus to bus. We calculate the rational expectations equilibrium for three-, four- and six-node systems and demonstrate that the efficiency losses of the proposed second best scheme relative to the efficient dispatch solutions are modest.     

Did the introduction of a nodal market structure impact wholesale electricity prices in the Texas (ERCOT) market?

Regression analysis suggests that zonal averages of locational marginal prices under the nodal market are about 2 % lower than the balancing energy prices that would occur under the previous zonal market structure in ERCOT. The estimates for the nodal market price effects are found after controlling for such factors as natural gas prices, total system load levels, non-dispatchable generation levels, the treatment of local congestion costs, and the treatment of the revenues received by the market from the auctioning of transmission rights. Our finding is limited to periods which are not characterized by price spikes in the wholesale market.     

Options for Electricity Transmission Regulation in Australia

The pricing of access to electricity transmission networks in Australia is currently under review. Several options have been proposed including those based on nodal pricing and the assignment of transmission rights contracts. As most of the marginal costs of transmission are recovered through wholesale electricity prices we focus on the key issue of regulation and investment incentives. We find that current options are unlikely to be adequate in terms of encouraging socially optimal levels and timing of new transmission investment. As an alternative, we propose a regulatory scheme, based on a related idea by Sappington and Sibley that can overcome this problem. Our scheme can potentially generate first best results and is readily applicable given the current institutional structure of electricity markets in Australia.     

Competition in gas markets

This paper discusses some of the current regulatory issues that arise in gas markets under perfect or imperfect competition. It first presents a benchmark model of gas transportation pricing, when all markets are competitive. Optimal prices and capacities are characterized both without and with a break-even constraint for the transportation operator. Elaborating on this framework, it then studies the appropriate dimensioning of the transportation network when an otherwise unregulated supplier exerts market power. Specifically, it points to the possibility of building up “excess” transmission capacity in order to mitigate local market power.     

Responsive pricing

We study the efficiency property of responsive pricing, a scheme that proposes to increase prices as a function of the level of capacity utilization in environments where traditional allocation schemes (e.g. competitive markets, non-linear pricing) cannot be implemented in practice. We show that although responsive pricing implements allocations that are arbitrarily close to full capacity utilization (no wasted capacity and no excess demand), these allocations are not always efficient. We identify conditions under which efficiency occurs and discuss implications for the use of responsive pricing. We would like to thank seminar participants at the LSE, Venezia, Toulouse, and Copenhagen as well as Piero Gottardi, Karel Mertens, Marco Ottaviani, Markus Poschke, Karl Schlag, and Sanne Zwart for useful comments.     

Pricing flexibility under rate-of-return regulation: Effects on network infrastructure investment

When a commodity market relies upon a regulated network service industry—e.g., telecommunications, electricity, or natural gas transmission—economic efficiency in that commodity market is a crucial consideration for regulatory design. This is because insufficient infrastructure investment relative to network demand results in congestion. The extraction of associated rents has distortionary effects on commodity spot market prices. Greater regulatory flexibility in network pricing can alleviate such issues by cultivating the incentives needed for stakeholders to invest in transmission capacity. To illustrate this effect I derive and numerically solve stylized optimality conditions for access and usage prices for a gas pipeline operator under alternative regulatory models. My results have general implications for regulation in network infrastructure industries, as energy and telecommunications markets are expected to expand considerably over the coming decades.     

Reliability Differentiation of Electricity Transmission

In many jurisdictions, electric utility restructuring has included the creation of an independent system operator (ISO) to dispatch generation, establish the market-clearing price, and allocate limited transmission capacity among users. This paper differentiates reliability through rate unbundling. We propose a capacity reservation tariff (CRT) to induce the users to self-select their preferred levels of reliability. Based on these self-selected reliability levels, the ISO can efficiently allocate limited transmission capacity. Our proposed CRT can be a practical solution to the transmission congestion problem faced by the California ISO in the implementation of retail access.     

A market mechanism for electric power transmission

As competition is introduced into the electric power industry, access and pricing policy for transmission will play a pivotal role in shaping future market structure and performance. The externalities associated with the loop flow phenomenon in an electric power network constitute a significant barrier to the formation of efficient markets for electricity and transmission services. In this paper, we present a new approach to the design of an efficient market mechanism for transmission access that resolves these externalities. Under a trading rule that combines the Coasian and the Pigouvian principles to resolution of externalities, property rights are defined so that a competitive market could be established for transmission services and electricity to achieve a social optimum within a power pool. We characterize a dynamic trading process which is Lyapunov stable and always converges to a competitive equilibrium. Finally, we discuss some practical applicability and long-term investment issues.The authors are indebted to Charles Clark, Shmuel Oren, Pravin Varaiya, Robert Wilson, Felix Wu, and two referees for helpful comments and suggestions and particularly to William Hogan for many incisive comments and constructive suggestions. An earlier version of this paper was presented at the Annual Meeting of International Association of Energy Economists in Washington D.C., June 20, 1995, and at the Joint LBS/IFORS International Symposium on Energy Models for Policy and Planning in London on July 18–20, 1995. This paper does not represent the views of EPRI or its members. The authors remain solely responsible for the errors in this paper.     

Price effects of independent transmission system operators in the United States electricity market

In 1996, the Federal Energy Regulatory Commission (FERC) sought to “remove impediments to competition in the wholesale bulk power marketplace and to bring more efficient, lower cost power to the Nation’s electricity consumers” through a series of market rules. A product of these rules was the establishment of regional transmission organizations (RTOs) and independent system operators (ISOs) charged with facilitating equal access to the transmission grid for electricity suppliers. Whether these changes in market structure have succeeded in achieving FERC’s goal to provide “lower cost power to the Nation’s electricity consumers” remains an open question. This paper utilizes a panel data set of the 48 contiguous United States and a treatment effects model in first differences to determine whether there have been changes in delivered electric prices as a result of the establishment of ISOs and RTOs. To avoid the confounding effects of electric restructuring, the model is estimated with the full panel data set, and then again without the states that have restructured their electric markets. This estimation shows that electricity prices fall approximately 4.8 % in the first 2 years of an ISO’s operation and that this result is statistically significant. However, this result is dependent on the presence of states that restructured their electricity markets. When these restructured states are removed from the data set the price effects of RTOs become indistinguishable from zero. The paper concludes that rate agreements are the principal source of the observed decrease in prices and that RTOs have not had the desired effect on electricity prices.     

Optimal transmission switching: economic efficiency and market implications

Traditionally, transmission assets for bulk power flow in the electric grid have been modeled as fixed assets in the short run, except during times of forced outages or maintenance. This traditional view does not permit reconfiguration of the transmission grid by the system operators to improve system performance and economic efficiency. The current push to create a smarter grid has brought to the forefront the possibility of co-optimizing generation along with the network topology by incorporating the control of transmission assets within the economic dispatch formulations. Unfortunately, even though such co-optimization improves the social welfare, it may be incompatible with prevailing market design practices since it can create winners and losers among market participants and it has unpredictable distributional consequences in the energy market and in the financial transmission rights (FTR) market. In this paper, we first provide an overview of recent research on optimal transmission switching, which demonstrates the substantial economic benefit that is possible even while satisfying standard N−1 reliability requirements. We then discuss various market implications resulting from co-optimizing the network topology with generation and we examine how transmission switching may affect locational Marginal Prices (LMPs), i.e., energy prices, and revenue adequacy in the FTR market when FTR settlements are financed by congestion revenues.     

Competitive Neutrality in Access Pricing

This article examines the notion of competitive neutrality when setting access prices for vertically integrated bottleneck networks. In contrast to the claims of regulated firms (for example, Telstra), it is not possible to argue that access charges that involve unit prices in excess of short‐run marginal cost reflect competitive neutrality. That is, we demonstrate that in general models of downstream oligopoly, upstream prices that differ from marginal cost are not competitively neutral in the sense of placing integrated and non‐integrated firms on an equal basis.     

Price transmission and local market power: empirical evidence from the Austrian gasoline market

We analyse the impact of local market power on price margins and different dimensions of price adjustment dynamics (speed and asymmetry of price transmission) using data for a large number of individual gasoline stations in Austria. Specific attention is paid to threshold effects in price adjustment. Our results clearly suggest that the speed of price transmission between the Brent crude oil index and retail diesel prices is higher in a more competitive environment. While evidence on the relationship between local market power and asymmetries in the speed of price adjustment is mixed, our findings regarding asymmetries in price thresholds are clear: in regions where competition from neighbouring rivals is weak and/or consumers’ price elasticity of demand is low (stations located on the highway), positive thresholds significantly exceed negative ones, which corresponds to the ‘rockets and feathers phenomenon’. As expected, we observe that prices are lower in more competitive local markets.     

Pure numbers effects, market power, and tacit collusion in posted offer markets

This paper studies the effects of seller concentration and static market power on tacit collusion in extensively repeated laboratory posted-offer markets. Contrary to the implications of some earlier research, we find that tacit collusion does not become pervasive with extensive repetition. In a ‘strong no-power’ design persistently competitive outcomes are observed in markets with three or four sellers. Even duopolies are frequently competitive in this design. Unilateral market power raises prices, as predicted. However, static Nash predictions fail to organize outcomes across power treatments, because tacit collusion moves inversely with concentration. Excess capacity appears to explain observed tacit collusion levels.     

Pricing the ecosystem and taxing ecosystem services: A general equilibrium approach

In an integrated dynamic general equilibrium model of the economy and the ecosystem humans and other species compete for land and prey biomass. Each submodel exhibits a price-driven competitive allocation mechanism, and the endogenously determined habitat is either openly accessible or privately owned. In both scenarios specific corrective taxes or subsidies are needed to internalize ecosystem externalities. An open access habitat causes additional inefficiencies through diverging prices for biomass and land in both subsystems. Values of all ecosystem components are determined in an efficient steady state clarifying the role and the interplay of ecosystem prices and economic prices.     

ELECTRIC POWER DEREGULATION: BACKGROUND AND PROSPECTS

The incentive failures of rate-of-return regulation are well known and thus raise the question of whether to deregulate electric power. The development of long-distance transmission and of alternative power sources in networks has spawned several institutions that would or could allow markets to substitute for such regulation. These include long-term contract sales, spot power exchange, contract power pooling, shared facility ownership, and economic dispatch. Because of the current surplus of power, the existence of such institutions has caused increasing competition in the electric power market and has catalyzed the movement to deregulate generators from state authority and to restructure utility assets. By encouraging this movement, regulators can further the discipline that markets already exert on prices and costs. By making counterproposals to the utilities, regulators can influence asset restructuring so that some of the capital gains inherent in such restructuring can be shared with consumers in the form of rate relief. Finally, for the future, the cotenancy agreement—which is antitrust supervised and competitively ruled—has promising possibilities for deregulating transmission and distribution.