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An overview of electricity market reform and deregulation. C.K. Woo Department of Economics Hong Kong Baptist University. Objective. Present an overview of electricity market reform and deregulation

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an overview of electricity market reform and deregulation

An overview of electricity market reform and deregulation

C.K. Woo

Department of Economics

Hong Kong Baptist University

objective
Objective
  • Present an overview of electricity market reform and deregulation
  • Offer a list of key questions to help frame the discussion and guide the decision-making process
why should we care
Why should we care?
  • Electricity cannot be economically stored and must be supplied in real time to meet fluctuating demand
  • Real time demand can sharply spike due to extreme weather and is price insensitive
  • Electrical equipment can fail unexpectedly
  • Renewable generation (solar and wind) is as available, intermittent, and non-dispatchable
  • Reliable supply can only occur with capacity reserve and backup facilities
    • More volatile total demand, more total capacity
    • Higher failure rates, more facilities
why should we care1
Why should we care?

Electricity has no close substitutes for many end-uses (e.g., motor, lighting, cooling, electronics)

Electricity can only be produced and delivered with equipment already in place

Electricity requires capital-intensive investments with long lead time

Electricity service disruption can have large economic consequences

Though dangerous, electricity theft does occur, at times with fatal consequences (e.g., KFC thief)

transformative events
Transformative events

Electricity market reform and deregulation results in (a) competitive wholesale energy markets with hourly prices by location; (b) inter-regional trading; and (c) retail competition for customers

Large-scale renewable energy development requires flexible generation and load to accommodate intermittent, unpredictable and as-available generation (e.g., wind)

Smart grid, smart meters and smart appliances enable electricity product differentiation and responsive/flexible loads

What’s next for Israel?

what is a desirable outcome
What is a desirable outcome?

Safe, reliable, and environmentally friendly service at just, reasonable and stable rates, which requires:

  • Least-cost investment and operation
  • Diversified demand-supply mix for energy security, including reliable integration of renewable resources
  • Efficient pricing of differentiated services to meet diverse customer needs
  • Investment and pricing decisions sensitive to unpriced environmental factors
  • Recovery of reasonable risk-adjusted return on and of investments
market organization options what are the drivers for change
Market organization optionsWhat are the drivers for change?

Government ownership

Privately owned

integrated utilities

Market reform

and deregulation

Pre-reform: Europe, Ontario, China,

Australia, New

Zealand, Singapore

Rate of return

(ROR) Regulation:

North America

Performance based

Regulation (PBR):

UKand Australia

North America:

California,

Texas, PJM,

New York,

New England

Canada: Ontario and

Alberta

European Union

Australia

New Zealand

Degree of decentralized decision making

stylized model
Stylized model

Bilateral Market

Wholesale Generation Market

(Pool Structure)

Financial (Contracts) Market

Distribution Companies

Retailers

Customers

path to success
Path to success

Market

design

Design

stage

Good design

Bad design

Implementation

stage

Successful

implementation

Unsuccessful

implementation

(e.g., few sellers)

Operation

stage

Existing capacity

surplus, fast market

entry, and elastic demand

Existing capacity

shortage, slow market entry,

and inelastic demand

Gains: Lower costs, lower prices,

more choices, better reliability

Losses: Higher and more volatile prices,

capacity shortages, lower reliability

status in the us
Status in the US

Source: http://www.eia.doe.gov/cneaf/electricity/page/restructuring/restructure_elect.html

anticipated challenges
Anticipated challenges
  • Electricity deregulation is complicated, with many under-estimated challenges
  • The cost of setting up and operating an Independent System Operator (ISO) is substantial
  • Marrying competitive generation with grid operation leads to many markets: (a) energy markets (e.g., forward, day-ahead, hour-ahead, real-time); and (b) ancillary service markets (e.g., spinning and non-spinning reserves, regulation, voltage support, real power loss, energy imbalance)
  • Electricity spot prices are highly volatile due to random demand, fluctuating fuel cost, unpredictable equipment failure, and intermittent renewable generation, necessitating risk management by market participants
  • Market power abuse is common in deregulated markets
    • When supply is short, even minor capacity withholding can be highly effective and profitable, at the expense of consumers
anticipated challenges1
Anticipated challenges
  • Electricity deregulation may cause insufficient investment because price and revenue volatility discourages investment, even in the face of capacity shortage
  • Renewable energy development erodes the incentive to invest in flexible generation critically needed for reliable grid operation
  • Deregulation can jeopardize reliability: merchant generation investments do not always occur in the right place at the right time
  • Deregulation seldom reduces generation cost
    • While competition reduces labor and O&M costs, generation cost may not fall because merchant generation’s capital cost exceeds a regulated utility’s capital cost
  • Dysfunctional input markets may preclude an efficient output market because of vertical market power abuse
  • Contract breach can occur, especially when the wholesale market price explodes
c k woo ph d economics uc davis
C.K. Woo, Ph.D. (Economics, UC Davis)
  • Dr. Woo is Professor and Head of the Economics Department of HKBU and Senior Partner (now on leave) of Energy and Environmental Economics, Inc. (www.ethree.com), a consulting firm located in San Francisco
  • He specializes in energy economics and applied microeconomics. With 30 years of industry experience, he has participated in electricity market reform in California, Texas, British Columbia, Ontario, Macau and Hong Kong
  • He has co-authored 12 papers with Professor Asher Tishler on the Israeli electricity industry
  • He has over 100 papers in such scholarly journals as Energy Policy, The Energy Journal, Energy, Energy Economics, Journal of Regulatory Economics, Journal of Public Economics, and Quarterly Journal of Economics
  • Recognized by Who’s Who in America, he is (a) a senior fellow of the US Association of Energy Economics; (b) an associate editorial board member of Energy and The Energy Journal; (c) a guest editor for a special issue of Energy Policy on renewable energy