An integrated theory of dispatch and hedging in wholesale electric power markets

Biggar, Darryl R.; Hesamzadeh, Mohammad Reza

doi:10.1016/j.eneco.2022.106055

Cited by 14 publications

(7 citation statements)

References 36 publications

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“…Fourth, our interest lies in the optimal design of capacity mechanisms for the case of perfect competition among producers. 3 Finally, our setup allows for the presence of a carbon price that is set at the social cost of carbon.…”

Section: Introductionmentioning

confidence: 99%

Optimal Capacity Mechanisms for Competitive Electricity Markets

Holmberg¹,

Ritz²

2021

The Energy Journal

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Capacity mechanisms are increasingly used in electricity market design around the world yet their role remains hotly debated. This paper introduces a new benchmark model of a capacity mechanism in a competitive electricity market with many different conventional generation technologies. We consider two policy instruments, a wholesale price cap and a capacity payment, and show which combinations of these instruments induce socially-optimal investment by the market. Our analysis yields a rationale for a capacity mechanism based on the internalization of a system-cost externality—even where the price cap is set at the value of lost load.In extensions, (i) we show how increasing variable renewables penetration can enhance the need for a capacity payment under a novel condition called “imperfect system substitutability”, and (ii) we outline the socially-optimal design of a strategic reserve with a targeted capacity payment.

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Section: Introductionmentioning

confidence: 99%

Optimal Capacity Mechanisms for Competitive Electricity Markets

Holmberg¹,

Ritz²

2021

The Energy Journal

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“…The principles of market surveillance and market rule interventions in electricity have understandably evolved to mitigate market power, mainly regarding the conduct of thermal generators and in consideration of their marginal costs. Market power analysis-as discussed by Biggar and Hesamzadeh (2014)-has generally looked at markups above short-run marginal costs (PWC 2018) and capacity withholding (Willis and Altozano 2016) as well as structure and conduct considerations (FERC 2014). Several solutions have been proposed in the literature to mitigate market power and its negative impact on the economic efficiency of sequential electricity markets.…”

Section: Background Researchmentioning

confidence: 99%

Optimal Electricity Imbalance Pricing for the Emerging Penetration of Renewable and Low-Cost Generators

Ghiassi-Farrokhfal

Belo

Hesamzadeh

et al. 2023

M&SOM

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Problem definition: With the rise of renewables and the decline of fossil fuels, electricity markets are shifting toward a capacity mix in which low-cost generators (LCGs) are dominant. Within this transition, policymakers have been considering whether current market designs are still fundamentally fit for purpose. This research analyses a key aspect: the design of real-time imbalance pricing mechanisms. Currently, markets mostly use either single pricing or dual pricing as their imbalance pricing mechanisms. Single-pricing mechanisms apply identical prices for buying and selling, whereas dual-pricing mechanisms use different prices. The recent harmonization initiative in Europe sets single pricing as the default and dual pricing as the exception. This leaves open the question of when dual pricing is advantageous. We compare the economic efficiency of two dual-pricing mechanisms in current practice with that of a single-pricing design and identify conditions under which dual pricing can be beneficial. We also prove the existence of an optimal pricing mechanism. Methodology/results: We first analytically compare the economic efficiency of single-pricing and dual-pricing mechanisms. Furthermore, we formulate an optimal pricing mechanism that can deter the potential exercise of market power by LCGs. Our analytical results characterize the conditions under which a dual pricing is advantageous over a single pricing. We further compare the economic efficiency of these mechanisms with respect to our proposed optimal mechanism through simulations. We show that the proposed pricing mechanism would be the most efficient in comparison with others and discuss its practicability. Managerial implications: Our analytical comparison reveals market conditions under which each pricing mechanism is a better fit and whether there is a need for a redesign. In particular, our results suggest that existing pricing mechanisms are adequate at low/moderate market shares of LCGs but not for the high levels currently envisaged by policymakers in the transition to decarbonization, where the optimal pricing mechanism will become more attractive. Funding: Rodrigo Belo acknowledges funding by Fundação para a Ciência e a Tecnologia (UIDB/00124/2020, UIDP/00124/2020 and Social Sciences DataLab – PINFRA/22209/2016), POR Lisboa, and POR Norte (Social Sciences DataLab, PINFRA/22209/2016). Supplemental Material: The e-companion is available at https://doi.org/10.1287/msom.2021.0555 .

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“…However, this mechanism does not consider the scarcity of supply within the local systems; therefore, they fail to signal if additional investments are needed (For example, one of the functions of the wholesale electricity prices is to incentive new investments. This is achieved as high market prices also signify the supply scarcity [108]). The SDR is set to resolve this by dynamically adjusting the prices between these two price points.…”

Section: Pricing Mechanismsmentioning

confidence: 99%

A Review of Peer-to-Peer Energy Trading with Standard Terminology Proposal and a Techno-Economic Characterisation Matrix

et al. 2022

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Nowadays decarbonisation of the energy system is one of the main concerns for most governments. Renewable energy technologies, such as rooftop photovoltaic systems and home battery storage systems, are changing the energy system to be more decentralised. As a consequence, new ways of energy business models are emerging, e.g., peer-to-peer energy trading. This new concept provides an online marketplace where direct energy exchange can occur between its participants. The purpose of this study is to conduct a content analysis of the existing literature, ongoing research projects, and companies related to peer-to-peer energy trading. From this review, a summary of the most important aspects and journal papers is assessed, discussed, and classified. It was found that the different energy market types were named in various ways and a proposal for standard language for the several peer-to-peer market types and the different actors involved is suggested. Additionally, by grouping the most important attributes from peer-to-peer energy trading projects, an assessment of the entry barrier and scalability potential is performed by using a characterisation matrix.

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An integrated theory of dispatch and hedging in wholesale electric power markets

Cited by 14 publications

References 36 publications

Optimal Capacity Mechanisms for Competitive Electricity Markets

Optimal Capacity Mechanisms for Competitive Electricity Markets

Optimal Electricity Imbalance Pricing for the Emerging Penetration of Renewable and Low-Cost Generators

A Review of Peer-to-Peer Energy Trading with Standard Terminology Proposal and a Techno-Economic Characterisation Matrix

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