Exchanges vs Pools
If there is to be a public day-ahead market, should it be a pool or an exchange PJM, NYISO, and ISO-NE all adopted pools, but CA ISO adopted a combination of public exchange the Power Exchange and private exchanges and dealers the other scheduling coordinators . Although the California market has performed disastrously, this probably has little to do with its architecture and everything to do with its structure. No conclusion regarding exchanges can be drawn from this California's Power...
inframarginal rent See profit
installed capacity ICap . Generating capacity that has been operational and will be again although it may currently be experiencing a planned or unplanned outage. ICap refers to the total installed capacity of a control area. integer problem. See lumpiness problem. interchange. Power or energy that flows from one control area to another. Interconnection. When capitalized, any one of the five major electric system networks in North America Eastern, Western, Texas ERCOT , Qu bec, and Alaska. An...
Power Supply and Demand
And when the Rain has wet the Kite and Twine, so that it can conduct the Electric Fire freely, you will find it stream out plentifully from the Key on the Approach of your Knuckle. The physical aspects of supply and demand play a prominent role in power markets. Shifts in demand, not associated with price, play a role in all markets, but in power markets they often receive attention to the exclusion of price. This is not simply the result of regulatory pricing even with market prices, demand...
Stage 2 PriceQuantity Outcomes
Price-quantity outcomes are usually well described by the four price differences discussed in the previous section, but one semantic confusion should be mentioned. Market-power strategies are often described by the verb withholding. This action can take the form of a high bid, shutting down a plant, or curtailing its output. These actions should not be confused with the quantity difference, AQw, which is described by the noun phrase withheld. Sometimes the two are numerically equal, as in the...
Price Spikes Recover Fixed Costs
HAT PRICES WILL COVER A GENERATOR'S FIXED COSTS WITHOUT OVERCHARGING CONSUMERS Short-run competitive prices perform this service and, in addition, induce the right level of investment in every type of generation technology. This does not solve the long-run problems of power markets because demand-side flaws prevent contemporary markets from determining competitive prices.1 Subsequent chapters will discuss regulatory policies that compensate for these flaws, while this chapter focuses on how...
Designing and Testing Market Rules
Genius is one per cent inspiration, ninety-nine per cent perspiration. If Edison had a needle to find in a haystack he would proceed .to examine straw after straw. Untested market designs cause real-world market failures. Suppliers are quick to take advantage of design flaws, especially those that pay 9,999 MWh for a product that is worth less than 5 MWh.' Currently, many if not most, market designs are implemented without any explicit testing Although the most serious market flaws typically...
Result 431 The Average Lerner Index Equals HHI over Demand Elasticity
The share-weighted average Learner index in a Cournot oligopoly is given by The result shown above means that the average price-cost markup in a Cournot oligopoly weighted by market share is given by the HHI divided by the demand elasticity at the equilibrium price and output level. This provides some justification for using HHI as an indicator of unilateral market power because the price-cost markup is the immediate consequence of market power. Note, however, that HHI by itself does not...
Defining PriceQuantity Outcomes
Monopoly power is the market power of sellers, who want higher prices, as opposed to buyers, who want lower prices. Because market power must move price away from the competitive equilibrium, the result is always a price that is higher The principle method of exercising monopoly power is termed withholding of output, though very often this takes the form of financial withholding which simply means charging more than buyers are willing to pay. However, before investigating the complex strategies...
Using PriceQuantity Outcomes to Show Market Power
Market power is not defined in terms of strategies and proof of its existence should not be attempted by analyzing strategies directly. Rather their consequences for market outcomes and consequences should be analyzed. This section will ignore the consequence of profitability which will be assumed to focus on the role of the price-quantity outcome on determining market power. Generally, if any of the four price-quantity differences AP A Qm AP and Agdistort are positive, market power has been...
Bilateral Markets Dealers Exchanges and Auctions
In. bilateral markets buyers and sellers trade directly, although this is typically facilitated by a broker. Such markets are extremely flexible as the trading parties can specify any contract terms they desire, but this flexibility comes at a price. Negotiating and writing contracts is expensive. Assessing the credit worthiness of one's counter party is also expensive and risky. For these reasons there is a great advantage to moving toward more standardized and centralized trading when this A...
Discontinuous Supply Curves
Individual supply curves are almost always drawn as hockey sticks. That is, they are drawn with a slight upward slope or as flat until they reach the capacity limit of the generator and then they are drawn as perfectly vertical see curve A, Figure 1-6.1 . Textbook supply curves usually have a slope that increases gradually See curve B, Figure 1-6.1 . Curves without a vertical segment are called continuous. Unfortunately, a generator's supply curve, as typically drawn, takes an infinite upward...
Example 2A Absence of a Classic Competitive Equilibrium
A classic competitive equilibrium is defined by the outcome of a Walrasian auction.5 An auctioneer calls out prices. If a certain price elicits more demand than supply, he tries a higher price, and vice versa. To define a competitive equilibrium, economists consider what the outcome would be if both suppliers and demanders assumed they could have no influence on the auctioneer's price. Under this assumption, if there is a price at which supply equals demand, that is the The assumption on...
VOLL Pricing Induces Optimal ICap Even When ICap Is Random
If random fluctuations in ICap are accepted as inevitable, then VOLL pricing induces the correct distribution of ICap. In this case, optimal average ICap will be greater than the optimal ICap in a deterministic world with deterministic K. Combining Approaches. Because VOLL pricing is optimal, combining it with an optimal capacity approach would double the profits of generators if they maintained the same optimal level of Ke. This would lead to more investment and a Because of the side effects...
Left and RightHand Marginal Costs
In the example of Figure 1-6.2, the marginal cost of production goes from 30 on the left of 10 GW to infinity on the right of 10 GW. This is a double complication. Not only does marginal cost change abruptly, it becomes infinite. The present Right- and left-hand marginal costs. definitions can be illustrated more clearly with a less pathological marginal-cost curve. Figure 1-6.3 shows the total cost curve and the marginal cost curve of a simple market. The discontinuity is the jump in marginal...
Why Is Competition Good For Consumers
In the long-run producers cover their fixed costs, and in the short run total surplus is maximized, but what consumers want is a low price. Does competition provide the lowest possible price Not in the short run. In the short run, it is possible to design market rules which lower the market price without reducing supply. This is difficult but possible. But at a lower price producers will not cover their fixed costs. This will make future investors think twice. The result will be a risk-premium...
The Lumpiness of Fixed Costs
Poorly behaved costs can interfere with the competitive process and invalidate the Efficient-Competition Result Section 1-5.1 . Natural monopoly conditions, discussed in Section 1-1.1, were the first example. This condition is sometimes confused with the existence of fixed costs because these cause the average production cost of a given generator to decline as average output increases. If an industry's average cost declines as total output increases, it is a natural monopoly. A generator's...
The ShortRun Equilibrium
Marginal cost is the cost of producing one more unit of output, one more kilowatt-hour. It is also approximately the savings from producing one less kWh. In this section and the next, these are assumed to be so close together that no distinction is necessary, which is typically the case. Chapter 1-6 pays a great deal of attention to the special case where these are different. In a competitive market suppliers are price takers. They cannot change the market price profitably, so they consider it...
Short and LongRun Equilibrium Dynamics
Markets are never in equilibrium, but economics focuses primarily on their equilibrium behavior. The ocean is never in equilibrium, yet it is always found at the lowest elevations where physics predicts its equilibrium to be. In equilibrium the ocean would have no waves. Although markets, like oceans, have waves, they too usually stay near their equilibrium. An equilibrium may change over time as the globe warms and the ice caps melt, but this does not prove the equilibrium uninteresting. A...
The LongRun Equilibrium
The process of long-run competition involves investing in plant and equipment, not simply changing the output of existing plants. This dynamic requires a definition of profit. Profit is of course revenue minus cost, but economics defines costs more broadly than does business. Economics, and this book, define cost to include a normal rate of return on all investment. This rate of return is defined to include a risk premium. If a supplier covers its costs, it automatically earns a normal rate of...
Screening Curves and LongRun Equilibrium
When demand is inelastic or when it faces a fixed price so that the load-duration curve is fixed, this curve can be used to find the optimal mix of generation technologies. The technique was developed for a regulated power system in which price and the load-duration curve are often fixed, but it is still useful for understanding certain aspects of competitive markets. It assumes that fixed and variable costs adequately describe generators. These are used to draw screening curves for each...
Frequency Voltage and Clearing the Market
So far, this chapter has considered how to describe demand and how to find the optimal mix of technology to supply it. This section considers the physical details of the supply-demand balance in real time. At any instant, customers are using power, generators are producing it, and the amount produced is exactly equal to the amount consumed. Some may object to the word exactly, but the discrepancy is at least a thousand times smaller than anyone's ability to measure it and is entirely...
Marginal Cost in a Power Market
The trouble with the world is not that people know too little, but that they know so many things that ain't so. Simplified diagrams of generation supply curves have confused the discussion of marginal cost. Typically, these supply curves are diagrammed to show a constant marginal cost up to the point of maximum generation. Then marginal cost becomes infinite without taking on intermediate values. Typically it jumps from about 30 to infinity with only an infinitesimal increase in output....