Topics. Deregulation and Privatization of the Electricity Market Reasons for it Features of the Electricity Market Auction Theory and Electricity Market Uniform vs Discriminatory Auctions The problem of Interconnections The Italian Case. Deregulation and Privatization.
Competition in the production and sale has become focal in policy discussion related to electricity (Hunt 2002) and changes in the electricity arrangements would:
The overall objective was that: “trading arrangements should deliver the lowest possible sustainable prices to all customers, for a supply that is reliable in both the short and the long run” (Electricity Pool, U.K., 1998).
In general sale electricity markets are organized as multi-unit procurement uniform price auctions, run daily by Indipendent System Operators (ISOs). Typically there are two systems: Day-Ahead auctions, run daily for each hour of the following day, and real-time (adjustment) auctions, run every five minutes during the day.
Generators participate in these auctions by submitting offer curves consisting of generation levels and energy prices (and other technical constraints).
The ISO collects these offers and combines them with energy bids from load serving entities to construct the aggregate supply and demand curves it uses to clear the market in a (Offer)-Cost-Minimizing Way (typically by using an optimization algorithm). Alternatively a Payment cost minimization can be adopted, Luh et al. (2005) show that Payment cost minimization problem returns procurement costs relatively lower than those obtained under (Offer) cost minimization. A complete analysis of these problems in Shunda (2005).
The Auction mechanism at work in these markets has two components, one related to the method of final payment and one to the allocation of energy contracts among generators.
The methods of final payment most considered in literature are: Uniform prices (pay market clearing price) vs Discriminatory Prices (pay the offer price).
The British regulatory authorities believed that uniform auctions are more subject to strategic manipulation (following Klemperer opinion).
California Power Exchange goes in the opposite directions (according to Kahn, Cramton, Porter and Tabors).
It is well known among auction theorists that discriminatory auctions are not generally superior to uniform auctions. In multi unit settings the comparison is even more complex. Other Auction methods such as Vickery auctions, in such markets, have received little attention.
They are not mutually exclusive, as a result, the producer may also supply electricity to final consumers.
The Italian Case…
Peso percentuale sulla produzione di energia elettrica complessiva dei derivati del petrolio e del gas naturale
PricesSouce: GME; prices of: 24Sept 2008
Max Transmission Capacity (MWh)
A related (less studied) issue is the regulation of exchange of electricity among countries. It is a significant barrier to efficient electricity market formation. Transmission activity across markets has become increasingly important in all industrial countries. The European Electricity Market looks like a juxtaposition of individual markets rather than an integrated commodity market (Finon 2001). The Florence Forum recommends to use the implicit auction method for managing cross-border congestion. However the “Use it or lose it” principle seems to have been widely adopted.
In Italy…the import of electricity is about 70%