summing up1 econ 4930 autumn 2007 electricity economics lecture 12 lecturer: finn r. førsund
TRANSCRIPT
Summing up 1
ECON 4930 Autumn 2007 Electricity Economics Lecture 12
Lecturer:
Finn R. Førsund
Summing up 2
The key theme: drivers of price changes Point of departure: water as a natural
resource in limited supply All prices equal, Hotelling’s rule
The price of electricity varies over both day and season
We must come up with explanations NB! price variation in the market may not be
optimal
Summing up 3
Constraints as price drivers
Reservoir constraint Threat of overflow Running empty
Production constraint Pipes, turbines, generator
Environmental constraints Ramping up and down Minimum production (max covered above)
Summing up 4
Threat of overflow and empty reservoir
p2(e2H)
e2H
p1(e1H)
DC
Period 2Period 1
λ1
λ2
BA e1H
γ1
p2p1
Total available waterRo + w1 + w2
Summing up 5
In between empty and full
M
λu+1=pT
pu pu+1
Period u Period u+1
B C DA
Water to period u+2
Summing up 6
Production constraint: constraint in period 2: peak demandp1
p1=λ1
DCA
Period 2Period 1
ρ2
p2
λ2
p2=λ2+ρ2
B B’ B’’
Summing up 7
Production constraint: constraint in period 1:threat of overflow
Spill
p1
p1=ρ1
DCA
Period 2Period 1
ρ1
p2
p2=λ2=γ1
BB'
γ1
λ1=0
Summing up 8
Unregulated generation
Run-of-the-river Full reservoirs turn a power station into a run-of-
the-river station Windmills
Range of fluctuation large Geothermal
May take time to regulate steam pressure, etc. Downward price jumps when hydro plants
can do pure accumulation and low demand
Summing up 9
Must take: Run-of-the-river and wind power
Total controllable inflow
p1
p2
B D
River flow
e1R
p2(x2)
e2H
p1(x1)
C
Period 2Period 1
λ1 = λ2
e1H
River flow
e2RA
Summing up 10
Hveding’s conjecture Assume independent hydropower plants with
one limited reservoir each, and perfect manoeuvrability of reservoirs, but plant-specific inflows
The plants can be regarded as a single aggregate plant and the reservoirs can be regarded as a single aggregate reservoir when finding the social optimal solution for operating the hydropower system. If overflow, then all reservoirs overflow at the
same time, if empty then all reservoirs are emptied at the same time
Summing up 11
Price fluctuation when hydro interacts with thermal Thermal sector is used according to merit
order ranking of marginal cost General rule: price equals water value equals
marginal cost of thermal Typical result: price variations less than in a
pure hydro system
Summing up 12
Bathtub diagram with thermal and hydro with reservoir constraint
p1
λ1
Period 2Period 1
Thermal extensions
p1
c'c'
A' A B C D D'Hydro energy
γ1
λ2
p2
p2
Summing up 13
The impact of trade on prices Unlimited trade
External exogenous prices determine the regional prices
Limited trade due to transmission Region may have different prices if trade is limited If import-constrained higher regional price If export-constrained lower regional price
Endogenous trade prices Equal prices without constraints on
interconnectors Different prices with constraints on
interconnectors
Summing up 14
Impact of trade on prices
p1
Prod.1 Cons.2Import Export
Total available water
p2
α2
β1
γ1pAU
Period 1 Period 2
x1A B C Dx2
p1=1
p1XI
p2XI
p2=2
Summing up 15
The impact of transmission on prices Transmission: connecting all generator nodes
and consumption nodes by lines Fundamental physics: loss of energy on lines
Implication: nodal prices as the optimal price structure; higher consumer price the higher the loss
Limited capacity of lines and congestion Thermal capacity (Ohm’s law) More general resistance; impedance when AC Loop flows and other electric mysteries with AC
Summing up 16
Bathtub with loss and congestion
p1
λ
DB D'A
λ
Total available water
p2
A'
Period 1 Period 2
2
C
x
Summing up 17
Uncertainty as price driver
Assuming all information for the present period to be known, price for the next period will be expected price The construction and use of expected water value
table, role of constraints When time progresses there will be a
continuous update of expected prices Realised price will typically differ from
expected price, implying fluctuating price
Summing up 18
A general case for period t
A' A B Mt|t-1 Mt C
ptPeriod t
pt
1{ }t t tE p R
1 1{ }t t tE p R
1 1{ }t t tp E p
Period t-1
Summing up 19
Market power as price driver
Monopoly No reservoir constraint, no spill
Shifting of water from relatively inelastic periods to more elastic periods
Price will then go down in periods where more is produced and up in periods with less production
Reservoir constraint, no spill Shifting if constraint not binding Social price solution if reservoir constraint is binding
Summing up 20
Bathtub illustration of two periods
p2M
Period 1 Period 2
p2S = λSp1
S= λS
p1M
λM
Summing up 21
The competitive solution
Second welfare theorem: any efficient allocation can be sustained by a competitive equilibrium
Problems: Electric externalities due to transmissions with
loop flows, reactive power, etc. Hydraulic externalities for plants along the same
river system Uncertainty and expectation formation
Summing up 22
The optimisation problem of producer j at period 1 with certainty for given prices
1
, 1
max
subject to
, 0 ,
, , , , , given, 1,.., ,
free
TH
t jtt
Hjt j t jt jt
jt j
H Hjt j
Hjt jt
Ht jt jo j j
jT
p e
R R w e
R R
e e
R e
T p w R R e t T
R
Summing up 23
The Lagrangian
1
, 11
1
1
( )
( )
( )
TH
t jtt
TH
jt jt j t jt jtt
T
jt jt jt
TH H
jt jt jt
L p e
R R w e
R R
e e
Summing up 24
The Kuhn – Tucker conditions
, 1
, 1
0 ( 0 for 0)
0 ( 0 for 0)
0( 0 for )
0( 0 for )
0( 0 for )
Ht jt jt jtH
jt
jt j t jt jtjt
Hjt jt j t jt jt
jt jt j
H Hjt jt j
Lp e
e
LR
R
R R w e
R R
e e
Summing up 25
Investments
Deregulation of electricity sector Unbundling generation and transmission
Investment in generation and investment in transmission made by independent organisations, but investments need coordination both over time and over space
Use of shadow prices on capacities as marginal investment signals