Electricity Market Reform An International Perspective 1st Edition by Fereidoon Sioshansi, Wolfgang Pfaffenberger 008045030X 9780080450308

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ISBN 10: 008045030X

ISBN 13: 9780080450308

Author: Fereidoon P. Sioshansi, Wolfgang Pfaffenberger

Since the late 1980s, policy makers and regulators in a number of countries have liberalized, restructured or “deregulated” their electric power sector, typically by introducing competition at the generation and retail level. These experiments have resulted in vastly different outcomes – some highly encouraging, others utterly disastrous. However, many countries continue along the same path for a variety of reasons.

This book examines the most important competitive electricity markets around the world and provides definitive answers as to why some markets have performed admirably, while others have utterly failed, often with dire financial and cost consequences.

The lessons contained within are direct relevance to regulators, policy makers, the investment community, industry, academics and graduate students of electricity markets worldwide.

· Covers electicity market liberalization and deregulation on a worldwide scale
· Features expert contributions from key people within the electricity sector

Electricity Market Reform An International Perspective 1st Table of contents:

PART I: What’s Wrong With the Status Quo?

1. Why Restructure Electricity Markets?

Summary

1.1. Why Change the Status Quo?

1.2. Drivers of change in regulatory paradigm

1.3. Alternative views on competition and regulation

1.4. In search of insights

References

2. Sector-Specific Market Power Regulation versus General Competition Law: Criteria for Judging Comp

2.1. Introduction

2.2. The Search for Sector-Specific Market Power

2.2.1. The theory of contestable markets

2.2.2. The theory of monopolistic bottlenecks

2.2.2.1. Localizing network-specific market power

2.2.2.2. Monopolistic bottlenecks and the concept of the essential facility

2.2.3. The theory of contestable networks as precursor for the theory of monopolistic bottlenecks

2.3. Imperfectly Contestable Markets versus Monopolistic Bottlenecks

2.3.1. The focus of the empirical studies on the theory of contestable markets

2.3.2. One-sided focus on the role of potential competition

2.3.3. Imperfect contestability versus monopolistic bottlenecks

2.3.4. On the independence of network-specific market power from alternative behavioral assumptions

2.3.5. The “ε sunk cost” argument versus the localization of network-specific market power

2.4. Localizing Monopolistic Bottlenecks in Different Network Sectors

2.5. Localizing Monopolistic Bottlenecks Within the Energy Sector

2.5.1. The different value chains in the electricity and gas sectors

2.5.2. Competitive generation/production and retail

2.5.3. Monopolistic bottlenecks in the transmission and distribution networks

2.5.3.1. The specific characteristics of natural gas transmission and electricity transmission compa

2.5.3.2. Power transmission networks as monopolistic bottlenecks

2.5.3.3. Active network competition in supra-regional transmission gas pipelines

2.5.3.4. Monopolistic bottlenecks in the regional/local distribution networks

2.6. Disaggregated Regulation of Access to Monopolistic Bottlenecks

2.6.1. Application of regulatory instruments to the monopolistic bottleneck basis

2.6.2. Price-level regulation of access charges

2.6.3. Flexible pricing structures for network access

2.6.4. End-to-end regulation versus disaggregated regulation

2.6.5. A critical appraisal of access holidays

2.6.5.1. The avoidance of over-regulation

2.6.5.2. Are access holidays justified?

2.7. Conclusions

Appendix

2.A1. Empirical/Econometric Approaches

2.A2. Game Theory Approaches

References

PART II: Trailblazers

3. Chile: Where It All Started

Chapter summary

3.1. Introduction

3.2. The Chilean ESI

3.2.1. Key characteristics

3.2.1.1. Sistema Interconectado del Norte Grande

3.2.1.2. Sistema Interconectado Central

3.2.2. Factors leading to the liberalization of the ESI

3.2.2.1. System operator

3.2.2.2. Pricing

3.3. Electric Crises

3.3.1. First crisis

3.3.2. Second crisis

3.3.3. Third crisis

3.4. Final Comments

Acknowledgments

References

4. Electricity Liberalization in Britain And The Evolution of Market Design

4.1. Introduction

4.2. Restructuring and Privatization

4.2.1. Market and institutional design

4.2.2. Regulation of domestic suppliers, entry, and the “dash for gas”

4.2.3. Performance after privatization

4.3. Characterizing Market Equilibrium in a Pool

4.3.1. Tacit co-ordination in the Electricity Pool

4.4. The NETA

4.4.1. The evolution of market structure

4.4.2. The impact of the new trading arrangements on market performance

4.4.3. Security of supply in an energy-only market

4.5. Retail Competition

4.6. Conclusions

Acknowledgments

References

5. The Nordic Electricity Market: Robust By Design?

5.1. Introduction

5.2. Coping with a Supply Shock

5.3. Market Integration and Retail Competition

5.4. Wholesale Prices

5.5. Retail Competition

5.6. Market Structure

5.7. Market Power and Price Discrimination

5.8. Supply Security and Adequacy

5.9. Supply Security: Balancing Demand and Supply

5.10. Supply Adequacy: Optimizing Capacity Investment

5.11. Emissions Trading

5.12. The Nordic Market for Green Certificates

5.13. Joint Effects and Compatibility of ETS and TGC

5.14. Conclusion

References

PART III: Evolving markets

6. The Electricity Industry in Australia: Problems Along the Way to a National Electricity Market

Summary

6.1. The Market Breakdown and Supply Profile

6.1.1. The market profile

6.1.2. The fuel profile of Australian electricity generation

6.2. Reforming the State Owned Integrated Utilities

6.2.1. The process of reform

6.2.2. The national setting for electricity market reform

6.2.3. Market governance

6.2.4. Structural developments

6.2.5. Retail price control and competitive churn

6.2.6. Other forms of retail regulation

6.2.7. Control of transmission

6.2.8. Network price setting

6.3. Operations of the National Market

6.3.1. The spot and contract markets

6.3.2. Market integration: access to transmission

6.3.3. Issues concerning generator market power

6.3.4. Price outcomes in the wholesale market

6.4. Performance of the Reformed Electricity Market

6.4.1. Generation

6.4.2. Distribution

6.4.3. Consumer price outcomes

6.5. Issues Concerning Public and Private Ownership

6.6. Government Market Interventions

6.6.1. Mandatory insurance schemes

6.6.2. Retail price control

6.6.3. Greenhouse gas abatement schemes

6.6.4. Sovereign risk

6.7. Outcome of Australian Electricity Market Arrangements

6.7.1. Summary of market distortions

6.7.2. Outcomes in terms of new capacity and prices

6.8. Glossary of Acronyms

7. Restructuring the New Zealand Electricity Sector 1984–2005

Summary

7.1. Background

7.2. Supply/Demand Balance

7.3. Restructuring the Sector

7.3.1. First steps

7.3.2. Initial structure

7.3.3. Generation and transmission restructuring

7.3.4. Nodal pricing

7.3.5. Distribution and retail restructuring

7.4. Pricing, Profitability, and “Light-Handed Regulation”

7.4.1. “Efficient” pricing

7.4.2. Economic and accounting theory and the New Zealand reforms

7.4.3. Generation and the wholesale spot price

7.4.4. Grid pricing

7.4.5. Distribution networks

7.5. The Electricity Commission: Back to An Industry Regulator

7.6. Conclusion: The State of Play at 2005

References

8. Energy Policy and Investment in the German Power Market

Summary

8.1. Introduction

8.2. The German Electricity Supply Industry

8.2.1. How the sector is structured

8.2.2. The institutional steps

8.2.3. Past, present and future

8.3. Energy Policies and the Investment Effect

8.3.1. The Energy Act 2005, regulation and the regulator BNA

8.3.1.1. The Energy Act 2005

8.3.1.2. The institutional disequilibrium

8.3.1.3. Regulation and network investment

8.3.2. The policy on RES, CHP and the CO[sub(2)] emission trading scheme

8.3.2.1. Support for RES and CHP

8.3.2.2. CO[sub(2)] emission trading

8.3.3. Generation adequacy

8.3.3.1. Hands-off policy on generation adequacy

8.3.3.2. Generation capacity and investment in Germany

8.3.3.3. New capacity: gas or coal?

8.4. Concluding Remarks

Acknowledgment

References

9. Competition in the Continental European Electricity Market: Despair or Work in Progress?

Summary

9.1. Introduction

9.2. Background: Facts, Figures and History

9.2.1. Development of demand and supply

9.2.2. Generation capacity and load

9.2.3. Development of imports and exports

9.2.4. Past and current issues of transmission

9.3. How the System Changed: Political Issues Of Restructuring

9.3.1. Providing non-discriminatory access to the market and to the grid

9.3.2. The new institutional and regulatory environment

9.3.3. The promotion of renewables

9.4. Comparison of Developments by Country

9.5. The Markets: Structures and Performances

9.5.1. Characteristics of the markets

9.5.2. Mergers, takeovers and market concentration

9.5.3. Wholesale electricity price evolution

9.5.4. Transmission prices

9.5.5. Retail electricity price evolution

9.5.6. Evolution of capacity margin

9.5.7. Cross-border transmission issues

9.6. Future Outlook: Priorities for Improvements

9.6.1. Access to the market

9.6.2. Remedies in restructuring utilities

9.6.3. Refining the regulatory or the market design

9.6.4. Perspectives for adequacy, reliability and security of supply: generation and transmission ca

9.6.5. The future of regulatory governance

9.6.6. The future of environmental issues

9.6.7. Summing up: perspectives for delusion or for competition?

9.7. Conclusions

Acknowledgments

References

Appendix

PART IV: North America, New world, New Challenges

10. California Electricity Restructuring, The Crisis, and Its Aftermath

Abstract

10.1. California’s Restructuring

10.1.1. California electricity system before restructuring

10.1.2. Changing federal regulations

10.1.3. The context for California electricity restructuring

10.1.3.1. Generation/wholesale markets

10.1.3.2. Stranded costs

10.1.3.3. Retail markets

10.1.4. The restructuring process

10.1.4.1. CPUC regulatory proceedings

10.1.4.2. State legislation: AB 1890

10.1.4.3. After passage of AB 1890

10.1.5. Wholesale markets under the restructured system

10.1.5.1. The California power exchange (PX)

10.1.5.2. The California independent system operator

10.1.5.3. Divestiture of IOU generating assets

10.1.5.4. Forward wholesale contracts for electricity (and lack thereof)

10.1.5.5. Wholesale markets: in summary

10.1.6. Retail markets

10.1.7. Municipal utilities

10.2. Market Issues in the Restructured System

10.2.1. Bidding strategies for electricity generators

10.2.2. PX-bidding strategies for utilities

10.2.3. Market risk

10.2.3.1. Wholesale market risk

10.2.3.2. Retail market risk

10.3. Western Electricity Crisis and California Financial Crisis

10.3.1. The nature of the crisis

10.3.2. The electricity crisis

10.3.2.1. Wholesale price increases

10.3.2.2. Energy emergencies and rolling blackouts

10.3.2.3. Economic forces during the electricity crisis

10.3.3. The financial crisis

10.3.4. State and Federal regulation changes during the crises

10.3.4.1. Federal responses: FERC rule making

10.4. California After the Crises

10.4.1. Current conditions

10.4.1.1. Electricity generation capacity

10.4.1.2. IOU Status

10.4.1.3. Retail prices of electricity

10.4.1.4. Litigation

10.4.2. Changing market structure, market forces

10.4.2.1. Fundamental market flaws

10.4.2.2. Retail competition on hold

10.4.2.3. Electricity demand measures

10.4.2.4. IOU wholesale electricity procurement

10.4.2.5. ISO market redesign

10.4.2.6. Capacity incentives

10.4.3. Other electricity-related policies

10.4.3.1. Environment

10.4.3.2. Transmission

10.4.3.3. Natural gas

10.4.4. Organizational issues

10.4.5. Proposals to re-regulate

10.4.6. Public perceptions

10.5. Some Reflections

References

11. Texas: The Most Robust Competitive Market in North America

11.1. Introduction

11.2. Background on the Unique ERCOT Market

11.2.1. Relatively little federal jurisdiction

11.2.2. Size

11.2.3. Generation mix

11.3. Impetus for Restructuring and Legislative Actions

11.3.1. Wholesale competition

11.3.2. Retail competition

11.4. Restructuring Implementation

11.4.1. Unbundling

11.4.2. Single control area and competitive wholesale markets

11.4.3. Maintaining a strong transmission system

11.4.4. Markets for generation, ancillary services, and transmission rights

11.4.5. Introduction of retail competition

11.4.6. Social programs and policy goals

11.5. An Assessment of the Wholesale Market

11.5.1. An overview of performance

11.5.2. Choice of market design: zonal versus nodal

11.5.3. Problems with the existing zonal system

11.5.4. Is it workably competitive? Market concentration and market power

11.5.5. Price volatility

11.5.6. Demand response

11.5.7. Wholesale assessment: a summary

11.6. Retail Competition in ERCOT: An Assessment

11.6.1. Early problems with switches, billing data, computer systems

11.6.2. New market entrants and numbers of active REPs

11.6.3. Switching activity

11.6.4. Load aggregation

11.6.5. Price trends

11.6.6. Retail assessment: a summary

11.7. Lessons Learned

11.7.1. Creation of a central registration agent function can be an overwhelming task

11.7.2. The need for adequate resources and infrastructure for market monitoring

11.7.3. Customer education

11.7.4. Required transition time

11.8. Challenges Ahead

11.8.1. Transition to a nodal market structure

11.8.2. Assuring an adequate reserve margin

11.8.3. Sufficient demand response

11.9. The Final Words

References

Appendix

12. Electricity Restructuring in Canada

12.1. Introduction

12.2. The Setting in Ontario

12.3. Pre-2004 Restructuring

12.3.1. The market opens

12.3.2. The retail price freeze

12.4. Implementation Problems

12.4.1. Market structure: supply

12.4.2. Market structure: demand

12.4.3. Market rules

12.4.4. Consumer expectations and information

12.5. Results of the Price Freeze

12.5.1. Unrestrained consumption

12.5.2. The government’s financial exposure

12.5.3. Discouraging private investment

12.6. A New Vision

12.6.1. Pricing, regulation and consumer response

12.6.2. Supply

12.6.3. Conservation

12.7. Lessons from the Ontario Experience

12.8. The Alberta Restructuring Experience in Brief

12.8.1. Observations from the Alberta experience

References

13. The PJM Market

Chapter Summary

13.1. Introduction

13.2. PJM History

13.3. PJM Market Overview

13.4. Generating Resources – Basic Characteristics

13.4.1. Capacity by fuel type

13.4.2. Generation by fuel type

13.4.3. Marginal units by fuel type

13.4.4. Generator performance

13.5. Energy Market

13.5.1. Energy market design

13.5.2. Competition in the energy market

13.5.3. Energy market structure

13.5.4. Energy market performance

13.5.5. Market power mitigation in the energy market

13.6. Energy Imports and Exports

13.6.1. Import and export activity

13.6.2. Import and export issues

13.7. Congestion

13.7.1. Overview

13.8. FTRs and ARRs

13.8.1. FTR/ARR market structure

13.8.2. FTR market performance

13.9. Capacity Market

13.9.1. Background

13.9.2. Rationale

13.9.3. Capacity resources

13.9.3.1. Energy recall right

13.9.3.2. Day-ahead energy market offer requirement

13.9.3.3. Deliverability

13.9.3.4. Generator outage reporting requirement

13.9.4. The operation of PJM capacity markets

13.9.4.1. Overview

13.9.4.2. Capacity market structure

13.9.4.3. Capacity market performance

13.9.4.4. Capacity market summary

13.10. Ancillary Service Markets

13.11. Conclusion

Acknowledgment

Bibliography

Key FERC Orders re competitive electricity markets

Key FERC orders re PJM electricity markets

Additional PJM resources

Additional electricity market resources

14. Independent System Operators in The USA: History, Lessons Learned, and Prospects

Summary

14.1. Introduction

14.2. Overview and Timeline of US Regulatory Reforms in Support of ISOs

14.2.1. Significant market and regulatory developments prior to Order 888

14.2.2. Order 888 and ISOs

14.2.3. ISO formation and developments, 1996–1999

14.2.4. Order 2000

14.2.5. The California crisis (2000–2001) and consequences

14.2.6. The standard market design proposal

14.2.7. ISO formation and developments, 2000–2005

14.3. Market Design: Principles and Performance

14.3.1. Defining and evaluating efficient spot market design

14.3.2. Consequences of design failure

14.4. Design of efficient generation spot markets

14.4.1. Representation of energy offers and bids

14.4.2. Spot energy pricing

14.4.3. Complementary and substitution properties of energy and short-term AS

14.4.4. Offer representation and pricing of regulation and operating reserves

14.4.5. Sequential versus simultaneous market clearing

14.4.6. Spatial aspects of energy and reserves pricing

14.4.7. Revenue sufficiency guarantee

14.4.8. Scarcity pricing and demand curves for reserves

14.4.9. Pricing of reactive power

14.4.10. Sequence of forward and spot generation markets

14.5. ISO demand-response programs

14.6. Design of markets for generation capacity

14.6.1. Energy-only market

14.6.2. Long-term contracts or options for energy

14.6.3. Payment mechanisms for capacity

14.6.4. Quantity requirements for capacity

14.6.5. Demand curves for capacity

14.6.6. Present status of capacity markets in the USA

14.7. Market Power Monitoring and Mitigation

14.7.1. The sources of market power in generation markets

14.7.2. Mitigation of market power

14.7.3. Long-term ex ante screening for market-based rates authorization

14.7.4. Ex ante mitigation of ISO spot markets

14.7.5. Behavioral rules

14.7.6. Ex post refunds and settlements

14.7.7. Lessons learned and performance evaluation

14.7.8. Alternatives to behavioral restrictions

14.8. Design of ISO transmission markets

14.8.1. Market design debates

14.8.2. Definition and attributes of FTRs

14.8.3. Allocation and trade in FTRs

14.8.4. Revenue shortfalls

14.8.5. Performance of financial transmission right markets

14.8.6. Loss pricing methods

14.9. ISOs and Reliability

14.10. ISO Performance: Evaluation and Improvement

14.10.1. Costs and benefits of ISOs

14.10.2. Advances in information technology and large-scale computation

14.10.3. Incentives for efficient management and innovation

14.10.4. Quantitative tools for design decisions

14.11. Conclusions

Acknowledgment

References

15. Competitive Retail Power Markets and Default Service: The US Experience

Chapter Summary

15.1. Introduction

15.2. The Purpose and Components of Default Service

15.2.1. Dimensions of default service

15.2.1.1. Last Resort Service versus Status Quo Service

15.3. Default Service Pricing Models

15.3.1. Negotiated rate model (standard offer models)

15.3.1.1. Pros

15.3.1.2. Cons

15.3.2. Auction or RFP model (bidding models)

15.3.2.1. Pros

15.3.2.2. Cons

15.3.3. Hub or forward market price model (formula models)

15.3.3.1. Pros

15.3.3.2. Cons

15.3.4. Spot market model

15.3.4.1. Pros

15.3.4.2. Cons

15.3.5. Fuel factor model

15.3.5.1. Pros

15.3.5.2. Cons

15.3.6. Unregulated price model

15.3.6.1. Pros

15.3.6.2. Cons

15.3.7. Principles for designing pricing models

15.3.8. The price–cost relationship

15.3.9. Principles for addressing the price–cost relationship

15.3.10. Compensation for default service providers

15.3.11. Non-price regulation

15.4. Default Service Organizational Models

15.4.1. Principles for designing organizational models

15.5. Experience to Date

15.5.1. Price impacts

15.5.1.1. United Kingdom

15.5.1.2. Texas

15.5.1.3. PJM

15.5.1.4. Nationally

15.5.1.5. California

15.5.2. Innovation and customer choice

15.5.2.1. Pricing attributes not available in regulated markets

15.5.2.2. Product customization and flexibility not available under regulated regime

15.5.2.3. Customer choice

15.5.3. Shifting risk from customers to suppliers

15.6. An Overview of the Players

15.7. The Optimal Default Service Model

References

PART V: Other Markets

16. The Case of Brazil: Reform By Trial And Error?

Summary

16.1. Background of the Brazilian Reform

16.2. The First Reform Process (1993–2002)

16.3. The 2001 Power Crisis and Its Causes

16.4. The 2002 Picture: Unfinished or Warped Reform?

16.5. Reform of the Reform (2003–2004): New Institutional Arrangements Under Lula

16.6. The Present: Prospects and Uncertainties

Acknowledgments

References

Appendix: Most Used Acronyms

17. Understanding The Argentinean and Colombian Electricity Markets

Chapter Summary

17.1. Introduction

17.2. Argentina

17.3. Colombia

17.4. Comparison of the Evolution of the Two Electricity Markets

17.5. Discussion and Conclusion

Acknowledgments

References

18. A New Stage of Electricity Liberalization in Japan: Issues and Expectations

Summary

18.1. Introduction

18.2. The Electric Power Industry in Japan

18.3. Electricity Liberalization

18.3.1. The deregulation process

18.3.2. The ESCJ

18.3.3. The JEPX

18.3.4. Expansion of eligibility

18.3.5. Characteristics of electricity liberalization in Japan

18.4. What Has Deregulation Changed?

18.4.1. Retail electricity prices and supplier switching rate

18.4.2. Overview of the JEPX

18.4.3. Changes in the corporate management of electric power companies

18.5. Continuing Issues

18.5.1. The wholesale power market

18.5.2. Governance of the ESCJ

18.5.3. Full retail liberalization

18.5.4. Future of nuclear power

18.6. Conclusions

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