ELECTRICITY MARKET PERFORMANCE UNDER PHYSICAL CONSTRAINTS

1. ELECTRICITY MARKET PERFORMANCE UNDER PHYSICAL CONSTRAINTS Collegio Carlo Alberto - Moncalieri (TO) 25th September 2007 Network constraints impacts on market efficiency and market power in competitive electricity markets Ettore BOMPARD Politecnico di Torino – Department of Electrical Engineering ettore.bompard@polito.it Elena RAGAZZI Ceris-CNR e.ragazzi@ceris.cnr.it Graziano ABRATE University of Piemonte Orientale and HERMESg.abrate@hermesricerche.it

2. PHYSICAL AND TECHNICAL FEATURES OF ELECTRICITY AS A COMMODITY • Non storability of electricity • Need for an instantaneous balance between power production and power consumption plus losses • Power flow path depending on the system physical parameters • Transmission losses • Limits on the flows feasible when transferring power from/to different locations • Various operational limits that define the feasible region of the system and must be enforced

3. POWER MARKETS MARKETS Wholesale Retail Ancillary services Financial derivatives Green Certificates Generators Retailers Traders Consumers Interactions between market players in different markets... over a physical network... Regulator TSO ECONOMIC PERFORMANCES PHYSICAL PERFORMANCES Measurement ... give rise to economic performances (prices, market efficiency, surplus allocation, ...) and physical performances (physical efficiency, ...), whose measurement provides useful information for the regulation of the markets and the strategic planning of the network

4. MARKET FAILURES AND NEED FOR REGULATION • Transmission and distribution services are natural monopolies • Role of externalities: • physical (power flow equations) • environmental • Power system security against natural and malicious threats as apublic good • Role of information: asymmetry and noise

5. ECONOMIC ISSUES IN THE ELECTRICITY MARKET PRODUCTIVE EFFICIENCY PRICE-CAP REGULATION DYNAMIC EFFICIENCY DECISIONS CONCERNING INVESTMENTS: GENERATING PLANTS, NETWORK, … ALLOCATIVE EFFICIENCY POLICY AGAINST MARKET POWER MARKET EFFICIENCY

6. ECONOMIC VS ENGINEERING PROBLEMS In a context of distributed decision making … • Market players need tools of optimization • Researchers need to model strategic interaction among market players • Regulatory authorities need tools and metrics to measure market efficiency and allocation of surpluses among market players • Politicians need to choose the appropriate market design for the power exchange to implement competition • A steady state and dynamic modeling of the network is needed • Unit commitment must be coordinated • Reliability of the electrical system must be ensured • An efficient, robust and sure power system control is necessary Economic and engineering problems are strictly interconnected and cannot be studied separately

7. RESEARCH AREAS (1#2) • MODELS OF THE STRATEGIC BIDDING BEHAVIOR OF THE PRODUCERS IN THE WHOLESALE MARKET • Models of strategic interaction • Role of asymmetric information • ANALYSIS MODELS OF NETWORK CONFIGURATION AND THE IMPACT ON MARKET PERFORMANCES • Impact of network constraints on the strategic behavior of producers and on market power • Models of congestion management

8. RESEARCH AREAS (2#2) • MODELS OF THE DEMAND SIDE • Measurement of the effects of demand elasticity on wholesale market performances • Model of retail market competition • STRATEGIC PLANNING OF THE NETWORK WITH REFERENCE TO THE MARKET PERFORMANCES • DEVELOPMENT OF SIMULATION TOOLS • Long run and short run simulators of the competitive markets • Models of price forecasting

9. METHODOLOGICAL APPROACHES • GAME THEORY MODELS: Strategic interaction of players and price responsive demand (pool market models) • MULTI-AGENT SYSTEMS: dynamic interaction for producers retailers and final customers • COMPLEX NETWORK(WORK IN PROGRESS):bipartite networks for bilateral markets modelling UNDER NETWORK CONSTRAINTS

10. Network Constraint Impacts on the CompetitiveElectricity Markets Under Supply-SideStrategic Bidding • GOAL:comparing the performances of the market under different cases: • C0: unconstrained market under perfect competition; • C1: constrained market under perfect competition; • C2: unconstrained market under strategic bidding; • C3: constrained market under strategic bidding. • THEORETICAL FRAMEWORK: • The producers bid a supply function (SFE): • In the case of perfect competition, their supply function is equal to the marginal cost; • In the case of strategic bidding behavior, their supply function is equal to the marginal cost plus a parameter that producers choose in order to maximize their profits • The alternative cases are tested using the IEEE30 bus system.

11. Network Constraint Impacts on the CompetitiveElectricity Markets Under Supply-SideStrategic Bidding % difference with respect to the baseline case C0

12. MICRO-ECONOMIC ANALYSIS OF THE PHYSICAL CONSTRAINED MARKETS: GAME THEORY APPLICATION TO COMPETITIVE ELECTRICITY MARKETS • GOAL:analyzing the effect on market performance of the strategic behavior vs competitive behavior without and with network constraints with different game theory models • THEORETICAL FRAMEWORK:many different game theory models have been analyzed and tested using the IEEE30 bus system. • RESULTS: • Worsening of market performances passing from competition to oligopoly; network constraints further worsen market performances, with higher prices, lower quantity exchanges, lower consumer surplus • Results vary a lot from a model to another: theoretical approach is not indifferent • The effect of network constraints is stronger in oligopoly models

13. MARKET RESULTS

14. The Demand Elasticity Impacts on the StrategicBidding Behavior of the Electricity Producers • GOAL:analyzing the impact of demand side participation – measured with a demand elasticity parameter - on market performances • THEORETICAL FRAMEWORK: • SUPPLY SIDE: Strategic bidding of producers incorporating network constraints (as in case C3 above) • DEMAND SIDE: • Linear demand function • Changes of demand elasticity are exogenous • The model is appropriate for peak load hours (when actually demand elasticity is likely to be more important), since it is implicitly assumed that an increase of elasticity always decrease demand • Results are assessed on a simplified 3-bus system and on the IEEE30 bus system.

15. The model of demand elasticity increase • Performance measurement issue: does it make sense to compare social surpluses under different demand curves? (because when elasticity increases, social surplus naturally reduces…)  our approach has been to resort to comparison indexes with respect to the competitive benchmark

16. The Demand Elasticity Impacts on the StrategicBidding Behavior of the Electricity Producers An increase in demand elasticity: • Impacts on market power – as measured by the Lerner index – especially at low levels of elasticity • Leads to higher productive efficiency (more efficient plants are dispatched) • In terms of social surplus we don’t have the expected benefits (but surplus measures are quite unreliable when elasticity is close to 0)

17. The impacts of price responsiveness on strategic equilibrium in competitive electricity markets • GOAL:application of the above model to a specific market demand (Italy) • THEORETICAL FRAMEWORK: • Starting from actual price observed on the EPX during peak load hours, derive the parameters of the model that allows to replicate the results • Then, simulate the effects of changing demand elasticity • RESULTS: • A change in elasticity from -0.05 to -0.15 would reduce equilibrium prices by around 15 percent • Some gross calculation (assuming 20 per cent of the hours in a year as peak hours) lead to estimating the yearly benefits in terms of consumer surplus at more than 1,000,000,000 Euro

18. CONCLUSIONS:SOME LESSONS FOR THE ITALIAN MARKET • Market concentration is not the unique source of market power • Network constraints play a major role: • They are one of the weapons of the strategic behavior of players • Insufficient capacity of transmission lines connecting with other countries create a segregated market, with high market prices and adoption of costly technologies • Low demand responsiveness favours market power and prevents consumers to enjoy the benefits of competition Implications on the strategic planning of the network Time sensitive pricing schemes, automatic metering, …

19. REFERENCES • E. Bompard, F. Italiano, R.Napoli, E.Ragazzi model for strategic bidding analysis under incomplete and asymmetric information Systems Conference, Lemnos, 31/08  RESEARCH AREA (1) • E. Bompard, E. Carpaneto, G. Ciwei, R. Napoli , M. Benini, M. Gallanti, G. Migliavacca performances of competitive electricity markets Petersburg Russia, June 27-30, 2005  RESEARCH AREA (5) • E.Bompard , W.Lu, R.Napoli Competitive Electricity Markets under Supply Side Strategic Bidding Transactions on Power Systems, Vol 21, N. 1, pp.160-170, February 2006.  RESEARCH AREA (2) • E.Bompard , Y.Ma, R.Napoli, C.W. Jiang power due to the network constraints in competitive electricity markets Electric Power Systems Research, Elsevier Science, 76 (11), pp. 953,961,Jul. 2006  RESEARCH AREA (2) • E.Bompard , Y.Ma, E. Ragazzi physical constrained markets: game theory application to competitive electricity markets V.50, April 2006, pp. 153-160  RESEARCH AREA (2) • Ma, Y, Bompard E., Napoli R., Jiang C. - Modeling the Strategic Bidding of the Producers in Competitive Electricity Markets with the Watkins’s Q (λ) Reinforcement Learning Approach - International Journal of Emerging Electric Power Systems Vol. 6 (2), August 2006.  RESEARCH AREA (1) • G.Migliavacca, M. Benini, M. Gallanti, E. Bompard, E. Carpaneto, Gao Ciwei - LREMS: a long term market simulator based on game theory - 2006 Power Systems Conference and Expo, October 29th , November 1st 2006, Atlanta, Georgia, U.S.A.  RESEARCH AREA (5) • Bompard E., Ma Y., Napoli R., Abrate G. - The Demand Elasticity Impacts on the Strategic Bidding Behavior of the Electricity Producers - IEEE Transactions on Power System, Vol. 22 (1), February 2007  RESEARCH AREA (3) • Bompard E., Ma Y., Napoli R., Abrate G., Ragazzi E. - The Impacts of Price Responsiveness on Strategic Equilibrium in Competitive Electricity Markets - International Journal of Electrical Power & Energy System, Vol. 29, n. 5 June 2007  RESEARCH AREA (3) • Bompard E., Napoli R., Abrate G., Wan B. - Multi-Agent Models for Consumer Choice and Retailer Strategies in the Competitive Electricity Market - International Journal of Emerging Electric Power Systems, Vol. 8 (2), February 2007  RESEARCH AREA (3) • L. Wene, E. Bompard, R. Napoli, X. Jiang - Heuristic Procedures for Transmission Planning in Competitive Electricity Markets Systems Research, Elsevier Science, Vol 77 (10), August 2007  RESEARCH AREA (4) • Bompard E., Carpaneto E., Gao C., Napoli R., Benini M., Gallanti M., Migliavacca G. - A game theory simulator for assessing the performances of competitive electricity markets - Electric Power Systems Research, Elsevier Science, in press, available on-line  RESEARCH AREA (5) • Bompard E., Correia P., Gross G and Amelin M. - Congestion-Management Schemes: A Comparative Analysis Under a Unified Framework – IEEE Transactions on Power Systems, Vol 18 (1), 2003  RESEARCH AREA (2) • Bompard E., Ciwei1 G., Napoli R., Torelli F. - Dynamic price forecast in competitive electricity market –IEE Proceedings - Generation, Transmission and Distribution  RESEARCH AREA (3)