Competitive Markets Setting the Perspectives EMP @ LUMS Sep 16-20, 2019

1. Competitive MarketsSetting the PerspectivesEMP @ LUMS Sep 16-20, 2019 www.cppa.gov.pk

2. Scheme of Presentation www.cppa.gov.pk

3. Part – IElectricity Markets: Setting the Perspective www.cppa.gov.pk

4. The Electricity Market A trading environment where multiple sellers trade with multiple buyers, market products under specific rules. Why they have been there in many countries? Service providers. What do they do?. Restrictions? Competition may apply in certain segments of the market. Which ones? Why? Why regulation still is necessary? www.cppa.gov.pk

5. Evolution of Each Model ---------------

6. Drivers of the Change to the Market Model Strategy Objectives Efficiency through competition in generation and retail Regulation for activities not appropriate for competition, specifically networks Search for efficiency, as the traditional model had no incentives for reducing costs and making prudent investments Facilitate the financing of the sector, introducing dynamic and creditworthy players Increased efficiency and appropriate financing ultimately should lead to lower tariffs and better service quality for end users

7. Lack of an agreed “best practice” design of the markets And others And others

8. What World has achieved Through Wholesale Competition • US (PJM): • Downwards Trend in Power Prices : Average annual wholesale energy price of $36.26 per megawatt hour (MWh) in 2015 was lower than the 2000 price of $42.28/MWh • Capacity Resources: Gain of 17% in installed capacity, which ensures that sufficient resources are available for reliability • Operational Efficiency: Improvement in generator operational efficiencies (e.g. increased thermal efficiency, reduced reactor outages) and reduced labor and non-fuel costs www.cppa.gov.pk

9. What World has achieved Through Wholesale Competition • UK: • Reduction in electricity prices for end user • Increase in the generation investment • Active participation of demand • Turkey: • Market transparency for new entrants both on production and retail side • Sufficient diversity of active players • Development in the installed capacity • Market price decreased from 100 $/MWh to 49 $/MWh over a period of 2009 to 2017 www.cppa.gov.pk

10. Key Concepts Revision from Module I- Power System Economics- Fundamentals of Law and NEPRA Act- Integrated Energy Planning- Integrated Commercial Perspective- Contractual Framework- Macroeconomics- Information Communication Technologies www.cppa.gov.pk

11. Power System Economics and Electricity Markets www.cppa.gov.pk

12. How much do I value Mangoes? www.cppa.gov.pk

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26. Differences Between Electricity and Red Chili as a Commodity

29. The Electricity Market www.cppa.gov.pk

30. Concepts and Units www.cppa.gov.pk

31. Capacity a Different “Product”? • There is no a single answer to this question. There are defenders in both sides. • Energy only defenders (economic theory) if the market is “efficient” there is no need to encourage long term adequacy • If the market is “short”, prices will go up: signal to develop additional investments. (however it requires that no limitation are on the market prices = frequent spikes • Capacity defenders: the market is imperfect and the signal is not that clear when there is no enough generation that could lead to load shedding • some kind of “cost of unserved energy” need to be used for settling the transactions. www.cppa.gov.pk

32. How to Handle Capacity? • Capacity payment received by all generators, defined by the regulator (regardless their trade in the market). • Add-on to the market price. LOLP * VOLL. All market participants contribute to long term adequacy. • Obligation of having enough capacity contracted for the following “x” years. Penalized in case of non-compliance • Organized auctions where the suppliers can obtain the capacity they need to comply with their obligations. • An important number of hybrid (or ad-hoc) mechanisms. • Any market: short term efficiency (dispatch) – long term adequacy (capacity) www.cppa.gov.pk

33. Benefits of Competition • Market-based price signals are transparent and can stimulate appropriate infrastructure investment, energy conservation, and demand response • Achieve efficiency both in energy and economic terms • Pressure on Price / Adequacy • Create the conditions for a fair allocation of risk and benefit sharing between investors/sellers and buyers/consumers • Level the playing field; removing conflict of interest to facilitate entry of new investors and participation of private players, including Bulk Power Customers • Ensure transparency and predictability • Competition provides customers with choices—i.e., customer sovereignty www.cppa.gov.pk www.cppa.gov.pk

34. Wholesale Market www.cppa.gov.pk

35. Retail Market www.cppa.gov.pk

36. Electricity Markets Models • Seeking for simplification • Centralized economic dispatch market models in which the SO runs an optimization software to determine the merit order list, which also takes into consideration regulated security limits.. • Self dispatch market models in which the SO only takes care of the congestion and through different mechanisms adjust the operation to make it fesable within the regulated security limits. www.cppa.gov.pk

37. Centralized Dispatch Model • All generators and all the demand have to declare to the MO or M&SO • available capacity • prices • variable costs • price (with certain restrictions) • pairs of quantities and prices • SO dispatch generation based on security constrained economic dispatch www.cppa.gov.pk

38. Trading Platforms • In both markets it is possible to implement platforms • Trading platforms for eligible consumers and generators with no long term contracts normally are not regulated • Result: a number of bilateral contracts between the sellers and the buyers • Actual operation: www.cppa.gov.pk

39. What in Terms of Efficiency? • Centralized economic dispatch: optimal solution for the operation (least cost operation for the short and medium term), taking into account all possible restrictions • All other types of dispatch, are either less efficient or at best, obtain same total costs as with the centralized economic dispatch model. • In many cases, pre-existing conditions (like ownership, links with financial markets, etc.) condition the type of market to implement • Centralized dispatch has proven to be very practical for cases with challenging starting point www.cppa.gov.pk

40. Mandatory Power Pool All generators must sell their entire production to the pool Customers Supplier Generation Unit 1 All suppliers must purchase their entire demand from the pool Mandatory Power Pool Customers Supplier Generation Unit 2 System & Market Operator Large Industrial Customers Generation Unit 3 Contracts for Difference (Financial) Transmission Distribution Centralized scheduling, unit based www.cppa.gov.pk

41. Grid Code: Central Dispatch www.cppa.gov.pk

42. Voluntary Power Exchange Voluntary Power Exchange Customers Supplier Generation Unit 1 Customers Supplier Generation Unit 2 Large Industrial Customers Generation Unit 3 Bilateral Contracts System Operation Transmission Distribution Decentralized scheduling, company based www.cppa.gov.pk

43. What is an Imbalance? www.cppa.gov.pk

44. What is an Imbalance? www.cppa.gov.pk

45. Purchase of Energy in Wholesale Market www.cppa.gov.pk

46. Settling the Energy Consumption www.cppa.gov.pk

47. Real Time Dispatch • Demand is continuously varying in time • Every MW of power required at any point in time must be supplied at the same instance • Indication to SO – System Frequency Frequency = 50 Hz Frequency < 50 Hz Generation Generation Demand Demand www.cppa.gov.pk

48. How to Manage Demand Fluctuations www.cppa.gov.pk

50. Fundamentals of Law Regulatory Framework NEPRA Act www.cppa.gov.pk