1 / 18

ECON 4925 Autumn 2007 Electricity Economics Lecture 10

ECON 4925 Autumn 2007 Electricity Economics Lecture 10. Lecturer: Finn R. Førsund. Hydro and thermal. Thermal plants aggregated by merit order to a convex group marginal cost function Total capacity is limited Static problem: no start-up costs, no ramping constraints or minimum time on – off

soyala
Download Presentation

ECON 4925 Autumn 2007 Electricity Economics Lecture 10

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. ECON 4925 Autumn 2007Electricity EconomicsLecture 10 Lecturer: Finn R. Førsund Market power

  2. Hydro and thermal • Thermal plants aggregated by merit order to a convex group marginal cost function • Total capacity is limited • Static problem: no start-up costs, no ramping constraints or minimum time on – off • Hydro power plants aggregated to a single plant Market power

  3. Monopoly problem with hydo and thermal plants Market power

  4. Solving the optimisation problem • The Lagrangian function (eliminating total consumption) Market power

  5. Solving the optimisation problem, cont. • The Kuhn – Tucker conditions Market power

  6. Interpreting the optimality conditions • Assumption: both hydro and thermal capacity is used • Flexibility-corrected price equal to water value equal to marginal thermal costs (plus shadow value on the capacity constraint) • Same amount of thermal capacity used in each period Market power

  7. Monopoly and extended bath-tub Period 1 Period 2 p2M p1M λM c’ c’ a c A D C B d Hydro energy Thermal extension Market power

  8. Hydro with competitive fringe • Thermal fringe modelled by a convex marginal cost function with limited capacity • The fringe is a price taker and sets market price equal to marginal cost • The dominant hydro firm must take fringe reaction into consideration • Market power is reduced due to the fringe • Conditional marginal revenue curve closer to demand curve due to market share less than 1 and fringe quantity adjustment Market power

  9. The optimisation problem of the dominant hydro firm Market power

  10. The reaction of the competitive fringe • Finding the reaction of the fringe to the quantity of the dominant firm • Solving for thermal output as a function of hydro output Market power

  11. The reaction of the competitive fringe, cont • Determining the sign of the reaction function • Differentiating the behavioural condition Market power

  12. Solving the optimisation problem of the dominant hydro firm • The Lagrangian function • The Kuhn – Tucker conditions Market power

  13. Interpretations • Signing of the expression (1 + detTh/detH) Market power

  14. Interpretations, cont. • Decomposition of conditional marginal revenue • Conditional marginal revenue curve closer to demand curve due to • Market share less than 1 • Fringe reaction of increasing output when price increases Market power

  15. A constraint on fringe thermal capacity • Advantage for the dominant firm when fringe capacity constraint is biting • Limit on the fringe quantity reaction • Fringe response Market power

  16. The leader – follower game Period 1 Period 2 p2 θ2 p1 c’ c’ λ λ A B C D E Hydro energy Thermal fringe Market power

  17. Extentions • Hydro as competitive fringe • Hydro fringe can release all water just in one period, may restrict market power further • Oligopoly game between hydro producers • Essentially a dynamic game, reduces the possibilities of strategic shifting of water • Quite complex to find solutions to dynamic gaming • Uncertainty • Future water values become stochastic variables, system must avoid overflow or going dry, qualitatively the same problem for social planner and monopoly Market power

  18. Conclusions • Hydro monopoly shifts water from relatively inelastic periods to elastic ones • May be difficult to detect because variable cost is zero, only alternative value of water is variable cost and not readily observable • Reservoir constraints, production constraints, etc. reduce the impact of market power • Competitive fringe may block use of market power • Fear of hydro market power exaggerated? Market power

More Related