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EE 710 Electricity Trading, Electrical and Electronics Eng. Dept., METU, Spring 2005, Prof. Dr. Osman SEVAİOĞLU,

METU

Market StructureM

arke

t

Stru

cture


METU

Market Structure

Factors Shaping Market Structure

Definition

In principle, structure of a market depends on;

• Model for the ownership of assets,• Cost structure;

• Generation cost,• Transmission cost,• Distribution and service costs

• Technological tools and instruments employed for market operation

Most of the above aspects, except the last, such as, stranded costs, fixed costs of the plants are difficult to take into account

Discovery of the First Natural Gas Reserve in Göçerler, Adatepe, Tekirdağ (2003)


METU

Market Structure

Difficulties in Designing Market Structure

Main Difficulties

Main difficulties in designing the market structure;

• The field is rather new and undiscovered,

• The field requires sophisticated technological hardware and software tools for an effective monitoring and control,

• The field is multi-disciplinary, i.e. there are a lot of technological knowledge to be gathered from engineering, economics and legislation,

• Market utilizes the grid, which is a regulated, sometimes shared asset


METU

Market Structure

The Effect of Technology on Market Structure

Computer hardware, software

and telecommunication

technologies are used to

monitor, control, meter,

record, log, calculate, trade-

off and billing the energy

transactions in real time

The Effect of Technology


METU

Market Structure

Two Demand-Side Flaws

• The First Demand-Side Flaw

Demand characteristics of the customers in a regulated retail market is rather ridig, i.e., it is almost completely insensitive to the price fluctuations in the wholesale market,

Two Demand Side Flaws

Demand side has two important flaws that create difficulties in market design and operation

• The Second Demand-Side Flaw

Parties in a bilateral agreement absorb / supply power to / from third party suppliers or to customers in grid without any contract


METU

Market Structure

The First Demand-Side Flaw

Definition

The first demand-side flaw is the situation that the demand characteristics of the customers in a (fully-regulated) retail market is almost independent of the prices in the retail or wholesale market

Demand elasticity is significantly enhanced by employing three-rate tariff in real-time which dramatically reduce the market power and improve the stability of generation investments

4.5

5.0

5.5

6.0

6.5

7.0

7.5

1000 1050 1100 1150 1200 1250 1300

Pri

ce (

Cen

t/kW

h)

This aspect determines the incentives for investment

in the generation sector

Demand (103 x kWh)


METU

Market Structure

Rigid Demand

Price Elasticity of Demand

Some customers may be more elastic,

while some others rigid

A customer with rigid demand

characteristics does not agree to transfer

its consumption in the peak loading period

to other periods

A rigid (inelastic) demand is the one with a

certain daily or yearly characteristics that

does not vary with price

Pri

ce (

Cen

t/kW

h)

4.5

5.0

5.5

6.0

6.5

7.0

7.5

1000 1050 1100 1150 1200 1250 1300

Demand (103 x kWh)


METU

Market Structure


Price Elasticity Curve or Demand Curve

is a curve showing the sensitivity of

electric consumption or customer

demand on price

Price Elasticity Curve depends on type

and nature of the customer

Price Elasticity Curve may be nonlinear

Pri

ce (

Cen

t/kW

h)

Elasticity of Demand

Price Elasticity Curve shows how much

the customer agrees to pay for the first

kWh to be consumed, and then for the

second, and so on

4.5

5.0

5.5

6.0

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7.0

7.5

1000 1050 1100 1150 1200 1250 1300

Demand (103 x kWh)


METU

Market Structure

Example to Price Elasticity of Demand

The First Demand-Side Flaw

In New York, when operating reserves run extremely short, prices has driven up to 600 Cents / kWh

In a regulated environment, where the retail prices is around only 6.0 cents / kWh, a customer will make only this amount of saving during the evening period, while the actual price was 600 Cents / kWhHence, he will not respond to prices, unless he is not metered in real-time


METU

Market Structure

The Effect of Deregulation on the Elasticity of Demand


• rigid in a regulated market, where

wholesale prices are not reflected to

retail prices, i.e. price is the same in

all time periods, hence customers

have no reason for shifting their

consumptions to nights,

• elastic in a competitive market, where

retail prices are influenced by the

wholesale prices,

Demand is;

In the long run, a 10 % increase in retail

prices results in 5-15 % decrease in

demand

Pri

ce (

Cen

t/kW

h)

Demand (103 x kWh)

4.5

5.0

5.5

6.0

6.5

7.0

7.5

1000 1050 1100 1150 1200 1250 1300

Demand curve in a deregulated market

Demand curve in a regulated market


METU

Market Structure

• Establish competitive retail markets to support the wholesale markets

Remedies for the First Demand Side Flaw

Remedies

The general principle is quite simple and obvious;

• Implement meters with three-rate tariff structure at retail level in order to;

a) Discourage consumption during the evening period by imposing a relatively high price,

b) Encourage consumption during other periods, particularly, during the night period, by imposing relatively low prices,

Three-Rate Tariff

0

500

1000

1500

2000

2500

3000

3500

4000

4500

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Time (Hours)

Po

wer

Dem

and

P(t

) (M

W)

Daily Period Evening Period Night PeriodNight Period


METU

Market Structure

Three-Rate Tariff

Area under each segment of the curve correspond to the total energy consumed within that period

Three-Rate Tariff Three-Rate Metering

0

500

1000

1500

2000

2500

3000

3500

4000

4500

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Time (Hours)

Po

wer

Dem

and

P(t

) (M

W)



METU

Market Structure

Single and Three-Rate Tariffs (*),(**)

(TL/kWh)

Customer

Type

Single

Rate

Tariff

Evening

(17:00-

22:00)

Night

(22:00-

06:00)

Daily

(06:00-

17:00)

Industrial(**) 119.800 202.740 58.240 113.810

Spring Water 123.300 206.450 61.300 117.150

Sewage Treatment 119.800 202.740 58.240 113.810

Commercial 151.950 277.250 61.300 144.350

Residential 127.800 201.350 61.300 115.000

Agricultural 115.250 186.550 61.300 109.500

Government Inst. 119.500 186.550 61.300 109.500

Single and Three-Rate Tariffs

--------------------------------------------------(*) TEDAS (64 cities +1 associated share), January 01, 2004(**) No incentive

0

500

1000

1500

2000

2500

3000

3500

4000

4500

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Time (Hours)

Po

wer

Dem

and

P(t

) (M

W)



METU

Market Structure

Three-Rate Tariff Reshaped Daily Loading Curve

Reshaping the Daily Loading Curve

Total area under the curve is the

overall demand, hence it does not

vary with reshaping

In other words, the area reduced

within the peak period is the same

as the area increased within the off-

peak periodP

ow

er D

eman

d P

(t)

(MW

)

500

1000

1500

2000

2500

3000

3500

4000

0

New Curve

Old Curve

0 2 4 6 8 10 12 14 16 18 20 22 24Time (Hours)

Total area under the curve is unchanged after reshaping



METU

Market Structure

Time (Hours)

500

1000

1500

2000

2500

3000

3500

4000

0

New Curve

Old Curve

0 2 4 6 8 10 12 14 16 18 20 22 24


Po

wer

Dem

and

P(t

) (M

W)

Reshaping Daily Loading Curve

Total area under the curve is unchanged after shaping



METU

Market Structure

Example Reshaped Daily Loading Profile

PeriodResidential Consumption

(Before Reshaping)Peak Demand

(kWh) (%) (MW)

17:00 - 22:00 8.330.000.000 49 4.000

22:00 - 06:00 3.570.000.000 21 3.300

06:00 - 17:00 5.100.000.000 30 3.250

Total 17.000.000.000

PeriodResidential Consumption

(After Reshaping)Peak Demand

(kWh) (%) (MW)

17:00 - 22:00 6.800.000.000 40 3.400

22:00 - 06:00 5.100.000.000 30 3.000

06:00 - 17:00 5.100.000.000 30 2.950

Total 17.000.000.000

Time (Hours)

Po

wer

Dem

and

P(t

) (M

W)


Only (49-40)/49 = 18.3 % of the evening load is shifted to night


500

1000

1500

2000

2500

3000

3500

4000

0

New Curve

Old Curve

0 2 4 6 8 10 12 14 16 18 20 22 24


METU

Market Structure

Reshaping;

Reshaped Load Duration Curve

• will clip peak portion of the Load

Duration Curve, thus resulting in a

“Re-shaped Load Duration Curve”,

• will raise the lower part of the

curveTotal area under the curve is unchanged after reshaping


Po

wer

Dem

and

P(t

) (M

W)

0

500

1000

1500

2000

2500

3000

3500

4000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Time (Hours)

+

-

Shaped Load Duration Curve

Unshaped Load Duration Curve


METU

Market Structure

Advantages of Load Reshaping

Advantages Gained

By re-shaping the load duration curve;

a) Investment for the generation, transmission and distribution facilites to meet the same amount of energy demand will be reduced,

Hence, the generation, transmission and distribution facilities will be utilized more efficiently, since they will be more uniformly loaded, 0

500

1000

1500

2000

2500

3000

3500

4000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Time (Hours)

+

-




METU

Market Structure


Advantages Gained

b) Overall tariff will be reduced since;

• No peaker plant with expensive fuel costs will be utilized, i.e. only base plants will be utilized,

• Expensive power exchange with the third parties (ref. to next section; “Second Demand Side Flaw”) will be reduced,

• Capacity cost is reduced since less capacity is utilized

• No payment for scarsity rents

0

500

1000

1500

2000

2500

3000

3500

4000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Time (Hours)

+

-




METU

Market Structure



d) Consumption will be more uniform and stable and hence investors, who plan to make investment in the generation sector will gain more confidence about the loading characteristics,

e) Market power will be curbed, since there will be no power shortage during evenings

0

500

1000

1500

2000

2500

3000

3500

4000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Time (Hours)

+

-




METU

Market Structure

PgTPn

WholesaleCompany

PgTP1

The Second Demand Side Flaw

The Second Demand Side Flaw

An exact match between generation and consumption as written in Bilateral Agreements can never be achieved

Hence, depending upon power balance condition, consumers may absorb and generators may submit power to grid without contract

Parties in a bilateral agreement absorb / supply power to / from third party suppliers or to customers in grid without any contract

Third Party Supplier(s)

Main Supplier Eligible Customer

PL

Transmission

and/or

Distribution System

Third Party Customer(s)

Pg1

PLTP

Pgk

WholesaleCompany


METU

Market Structure

The Second Demand-Side Flaw

Daily Mismatch between Supply and Demand

Please note that for a wholesale company with healty balancing and settlement characteristics, the payments made for the energies in these areas (not the energies themselves) must be equal after a certain period of time, such as one month

Energy supplied to third parties

Energy absorbed from third

parties

Generator power output (MW)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Time (Hours)



METU

Market Structure

Bilateral Agreements

Definition

The general principle in designing Bilateral Agreements in competitive markets is that the parties are completely free on the technical and commercial conditions in the Contract

Definition: Bilateral Agreementis an electricity trading contract made between a supplier and a customer on;

• the amount,• price,• duration,• and other conditions

of tradingMain Supplier Eligible Customer

PL

Bilateral Agreement

Pgk

WholesaleCompany

Pg1

Transmission

and/or

Distribution

System


METU

Market Structure

Application

All Bilateral Agreements (Electricity Sale

Agreements) (Bilateral Agreement)

concerning power trades among all market

participants are submitted to BSC for

approval and recordingBSC examines the agreements in terms of;

• amount,

• feasibility,

• system security, (congestion

possibility),

• system stability,

• load frequency control,

• resulting increase in system losses

Bilateral Agreements


METU

Market Structure

Formation of Supplier Portfolio

Bilateral Agreements with two or more suppliers

Suppliers

Wholesale Companies or

Independent Producers

Bilateral Agreement concerning;• Amount• Price• Duration

Supplier-1

Supplier-2

Supplier-3

Supplier-n

Transmission and/or Distribution System

Eligible Customer - 1



Eligible Customer - n


METU

Market Structure


Balancing market structure is designed in order to meet the power absorbed or supplied from / to the third parties,

Price spikes due to power unbalance, in real-time resulting in invaluntary load shedding, treating customers are reduced

These aspects determine the incentives for investment in Generation sector



METU

Market Structure

Mismatch between Supply and Demand

Load characteristics follows the daily loading curve, while the generation follows a flat linear profile, hence the two curves never match exactly

Eligible Customer

Po

wer

Dem

and

(M

W)

Summer

Winter

Time (Hours)

Consumption Characteristics

Time (Hours)

Gen

erat

ion

(MW

)

Generation Characteristics

4.5

5

5.5

6

6.5

7

7.5

0 6:00 12:00 18:00 24:00PL

PL

Transmission

and/or

Distribution System



Pg1

PgkWholesaleCompany

PgTPn

WholesaleCompany

PgTP1

Main Supplier



METU

Market Structure


Definition

The second demand-side flaw is the situation that the parties in a Bilateral Agreement absorb or supply power from / to third party suppliers or to customers in grid without any contract

In practice, an exact match of the generation to consuption in a Bilateral Agreement can never be achieved

PgTPn

WholesaleCompany

PgTP1



PL

Transmission

and/or

Distribution System


Pg1

PLTP

Pgk

WholesaleCompany

Hence, consumers always absorb from and generators submit power to grid without contract


METU

Market Structure

Daily Loading Curves


A basic characteristics of

electrical loads is that the

demand is not constant, but a

function of time. In other words

the demand varies wrt hours,

days, weeks and season.

As seen from the figure, the

peak level of demand in the

winter season is about 4000

MW, while the off-peak level is

2610 MW, which is 0.65 of the

peak level

Time (Hours)

Off-Peak

level

Peak

level

Po

wer

Dem

and

(M

W)

Summer

Winter


METU

Market Structure



This situation creates serious

difficulties in system

operation, as electricity cannot

be stored, hence the total

supply must always be

matching the total demand and

losses in in the system

The system operator therefore,

spends a considarable amount

of care and effort to follow the

balance between the total

supply and demand

Off-Peak

level

Peak

level

Po

wer

Dem

and

(M

W)

Summer

Winter


METU

Market Structure


where, PL is the power consumed by the customer,

Pg is the power generated by the supplier,

PgTP , PLTP is the power generated or absorbed by the third party

PL < Pg or PL > Pg

hencePL = Pg - PLTP or PL = Pg + PgTP


An exact match between supply and demand is never possible and hence, the customer sometimes absorbes power from third party supplier(s) through grid without any contract



PL

Transmission

and/or

Distribution System


Pg1

PLTP

Pgk

WholesaleCompany

PgTPn

WholesaleCompany

PgTP1


METU

Market Structure



Hence;

• An exact match of supply to demand in a Bilateral Agreement is never possible,

• Customer sometimes absorbes power from third party supplier(s) through grid without any contract,

• Customer sometimes absorbes less power than the written amount in the contract, hence the supplier may be supplying a third party customer in the system through grid,

• hence, an accounting mechanism is needed among the supplier, demand and the third party supplier(s) and the customers



PL

Transmission

and/or

Distribution System


Pg1

PLTP

Pgk

WholesaleCompany

PgTPn

WholesaleCompany

PgTP1


METU

Market Structure



Sometimes power consumed by the

customer from third party supplier(s)

through grid without any contract may be

so high that, the system operator may find

himself in a situation that he has no other

solution, except;

a) some consumers are to be blacked

out, hence, a rotating blackout

program is to be implemented without

regarding the contracts or

consumption levels of customers,

b) some extra power is to be purchased

at a very expensive price



PL

Transmission

and/or

Distribution System


Pg1

PLTP

Pgk

WholesaleCompany

PgTPn

WholesaleCompany

PgTP1


METU

Market Structure



The system operator may prefer;

• purchasing power from third party

suppliers, if the price is reasonable,

i.e. it is within the limits of up to 10

times the long-range average,

• blacking out customers by

implementing a rotating black out

program to all customers without

regarding the contracts or

consumption levels of customers,



PL

Transmission

and/or

Distribution System


Pg1

PLTP

Pgk

WholesaleCompany

PgTPn

WholesaleCompany

PgTP1


METU

Market Structure

Remedies for The Second Demand-Side Flaw

Remedies

In principle remedies for the Second Demand Side Flaw are two folded:

• Flattening the daily loading Characteristics by;

a) wholesale trading,b) employing a Three-rate Tariff

structure, • Establishing a Balancing Market

The first remedy does not completely eliminate the flaw, but only reduces the amount of power taken / given from / to the third parties



PL

Transmission

and/or

Distribution System


Pg1

PLTP

Pgk

WholesaleCompany

PgTPn

WholesaleCompany

PgTP1


METU

Market Structure

Basic Principle of Wholesaling:

Try to market the unsold energy

remaining above the daily loading

curve by offering a cheaper rate

Flattening the Daily Loading Curve

Flattening the Daily Loading Curve by Wholesale Trading

Time (Hours)24

Total Demand P(t) (MW)

0 2 4 6 8 10 12 14 16 18 20 22

Peak demand

Average demand15

30

45

60

75

90

105

120

Sold Energy

Unsold Energy


METU

Market Structure

Flattening the Generation Characteristics

River Plants

Plants with irregular generation profile, such as river plants with no reservoir need to be regulated by the Balancing and Settlement Mechanism or by a third party plant

Regulation of Generation

Mo

nth

ly G

en

era

tio

n (

kW

h)

Months

Energy that can not be supplied by the river plant

Demand Characteristics

Supply Characteristics


METU

Market Structure

Risk Management by

Main and Standby Wholesalers

Transmission and/or

distribution systemEligible

Customer

Wholesaler

Wholesaler

Standby

Wholesaler

(confronts the risks)

Main Wholesale CompanySuppliers

Suppliers

Bilateral Agreement • Amount,• Price,• Duration

AFC = Annual Fixed Cost = FC / kWh * 8765 HoursAVC = Annual Variable Cost = VC / kWh * tAverage Cost = (AFC + AVC) / t Cent /kWh


METU

Market Structure

Risk Management

Three-Lateral Contracts

Wind or

river

energy

supplier

Transmission and/or

distribution system

Suppliers

SuppliersStandby

Wholesaler

(undertakes the risks)

MainWholesaler

Wholesaler

Eligible

Customer

Thermal or

Hydroelectric energy

Supplier



METU

Market Structure

Increasing the Service Reliability by a Standby Supply

Wholesale Company

Supplier-1

Main Supplier - Three-Rate Tariff

Standby Supplier,

Diesel Gen. Set

(Supplier-2)

Uninteruptable Load(Hospital)

Standby Supplier;

• has a higher tariff,• provides stand-by energy in case of

emergency



METU

Market Structure

Wh

ole

sale

Co

mp

any

Suppliers

...

Eligible Customer-1

...4

8

12

16

20

0 4 8 12 16 20 24

4

8

12

16

20

0 4 8 12 16 20 24

4

8

12

16

20

0 4 8 12 16 20 24

P(t)

P(t)

P(t)

40

80

120

160

200

0 4 8 12 16 20 24

Resulting Load Curve

(Total power purchased)Daily Loading Curves

...

Transmission

System

Eligible Customer-2

Eligible Customer-k

Formation of Customer Portfolio

Formation of Customer Portfolio for Wholesale Trading

Distribution

System

P(t)


METU

Market Structure

Wholesale Trading in a Competitive Market

Wholesale Trader-1 GPRS GPRS

Hourly Balancing and Settlement Center (NDUY)

Wholesale Trader-2Energy

Flow

Energy

Flow


METU

Market Structure

Cost of Wholesale Electricity

Enron Energy Trading Center Building (Houston)

Cost(*) of bulk power generation (in Wholesale trading) is nearly half the cost of retail electricity----------------------(*) Not the price

Suppliers

...

Eligible

Customer-k

...

P(t)

P(t)

P(t)


...Transmission

and/or

Distribution

System

Eligible

Customer-2

Eligible

Customer-1

Resulting Load Curve

(Total power purchased)

80

120

160

200

40

0 4 8 12 16 20 24

Wh

ole

sale

Co

mp

any

0 4 8 12 16 20 24

0 4 8 12 16 20 24

4 8 12 16 20 240

8

12

16

20

4

8

12

16

20

4

8

12

16

20

4

http://www.photohome.com/pictures/texas-pictures/houston/enron-center-8a.jpg


METU

Market Structure

Non-Utility Generators (NUG)

Definition: A generating plant that does not belong to distribution utility is called non-utility generator (NUG)

The Effect of Non-utility Generators (NUG) on Tariff

Fact: Non-uility generators (NUG):• Adjust their tariffs according to variations in the

worldwide oil prices,• Hence, exhibit a tendency to raise their tariffs, as they

are not responsible for providing electricity to customers in distribution regions at regulated prices

California Case:Utilities are completely unbundled, resulting in distribution companies with no generating capability, hence they could not produce cheap electricity for reducing their tariffs in their distribution regions

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