Download Electricity Market and Auctions: the Italian case

Topics
• Deregulation and Privatization of the
Electricity Market
• Reasons for it
• Features of the Electricity Market
• Auction Theory and Electricity Market
• Uniform vs Discriminatory Auctions
• The problem of Interconnections
• The Italian Case
Deregulation and Privatization
• The 1990s featured a wave of deregulation
and privatization of electricity industries in
several Nations: Finland (1997); U.K. and
Germany (1998); Sweden (1999); Austria
(2001); Spain (2003) … France, Italy and
many others (2007).
• In Italy this process begins in 1999
(privatization of ENEL) up to 2007
(creation of the free Electricity Market)
Why?
Competition in the production and sale has
become focal in policy discussion related to
electricity (Hunt 2002) and changes in the
electricity arrangements would:
1. Best meet the needs of customers with respect
to price, choice, quality and security of supply.
2. Enable costs and risks to be reduced and
shared efficiently.
3. Provide transparency.
4. Enable demand to be met efficiently.
Why?
5. Respond flexibly to unexpected
circumstances.
6. Promote competition in electricity markets,
facilitating entry and exit from such markets.
7. Avoid discriminations against particular energy
sources.
8. To be compatible with government polices.
Why?
The overall objective was that: “trading
arrangements should deliver the lowest
possible sustainable prices to all
customers, for a supply that is reliable in
both the short and the long run”
(Electricity Pool, U.K., 1998).
Features of the Market
In general sale electricity markets are organized as
multi-unit procurement uniform price auctions,
run daily by Indipendent System Operators
(ISOs). Typically there are two systems: DayAhead auctions, run daily for each hour of the
following day, and real-time (adjustment)
auctions, run every five minutes during the day.
Generators participate in these auctions by
submitting offer curves consisting of generation
levels and energy prices (and other technical
constraints).
Features of the Market
The ISO collects these offers and combines them
with energy bids from load serving entities to
construct the aggregate supply and demand
curves it uses to clear the market in a (Offer)Cost-Minimizing Way (typically by using an
optimization algorithm). Alternatively a Payment
cost minimization can be adopted, Luh et al.
(2005) show that Payment cost minimization
problem returns procurement costs relatively
lower than those obtained under (Offer) cost
minimization. A complete analysis of these
problems in Shunda (2005).
Uniform vs Discriminatory Auctions
The Auction mechanism at work in these markets has two
components, one related to the method of final payment and
one to the allocation of energy contracts among generators.
The methods of final payment most considered in literature are:
Uniform prices (pay market clearing price) vs Discriminatory
Prices (pay the offer price).
The British regulatory authorities believed that uniform auctions
are more subject to strategic manipulation (following Klemperer
opinion).
California Power Exchange goes in the opposite directions
(according to Kahn, Cramton, Porter and Tabors).
It is well known among auction theorists that discriminatory
auctions are not generally superior to uniform auctions. In multi
unit settings the comparison is even more complex. Other
Auction methods such as Vickery auctions, in such markets,
have received little attention.
BUT…..
…BUT
• A huge literature shows extensive evidence on
the existence of generators’ unilateral market
power and resultant pricing above marginal cost
(Borenstein (2002), Puller (2005), Patrick
(2001), Puller (2005), Wolak (2003)…).
• Simple auctions, such as uniform or
discriminatory auctions, are not in general
optimal in terms of productive efficiency (Leutier
2001).
• Are more complex auctions methods the right
answer?
The Key-Point
• The key-point is: without competition in
production, expected prices will equal the
reserve price (related to the previous
regulated price), in this case auctions are
unnecessary and costly and also the
design of more complex auctions methods
(as Ausubel (1998)) for discouraging
collusion is useless.
The Market Players
• Producers
• Suppliers
• Traders
They are not mutually exclusive, as a result,
the producer may also supply electricity to
final consumers.
The Italian Case…
Market Players
MINISTERO
ECONOMIA
FINANZE
TERNA
ENEL
ENI
Cheap Fonts in Production
Activity (percentage)
90
80
70
60
50
40
30
20
10
0
USA
CHINA
JAPAN
RUSSIA
INDIA
GERMANY FRANCE
U.K.
ITALY
SPAIN
SWEDEN
EU25
WORLD
How production depends on Oil
(Percentage)
80
70
60
50
40
30
20
10
0
GERMANY
SWEDEN
EU25
Peso percentuale FRANCE
sulla produzione di U.K.
energia elettricaITALY
complessiva deiSPAIN
derivati del petrolio
e del gas naturale
Customers
• More than 98% of families has not
changed provider.
• Only 62% of families knows that electricity
market has been deregulated.
• What about prices?
Prices
Souce: GME; prices of: 24 Sept 2008
Price in EU Electricity Markets
(Source: Thomson Reuters)
90,00
80,00
70,00
60,00
GERMANY
50,00
FRANCE
ITALY
40,00
SPAIN
SWEDEN
30,00
20,00
10,00
0,00
2004
2005
2006
2007
2008*(may)
Interconnections
A related (less studied) issue is the regulation of
exchange of electricity among countries. It is a
significant barrier to efficient electricity market
formation. Transmission activity across markets
has become increasingly important in all
industrial countries. The European Electricity
Market looks like a juxtaposition of individual
markets rather than an integrated commodity
market (Finon 2001). The Florence Forum
recommends to use the implicit auction method
for managing cross-border congestion. However
the “Use it or lose it” principle seems to have
been widely adopted.
In Italy…the import of electricity is about 70%
Rete di trasmissione nazionale