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Single buyer power market EPOC Workshop University of Auckland 5 September 2013

Single buyer power market EPOC Workshop University of Auckland 5 September 2013. John Small. Outline. Caveat Short-run operations Long-run capacity issues Competition effects. Caveat. No inside knowledge of current plans. Ricardian rent. Demand. Price ($/ MWh ). Variable Cost. P*.

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Single buyer power market EPOC Workshop University of Auckland 5 September 2013

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  1. Single buyer power marketEPOC WorkshopUniversity of Auckland5 September 2013 John Small

  2. Outline • Caveat • Short-run operations • Long-run capacity issues • Competition effects

  3. Caveat • No inside knowledge of current plans

  4. Ricardian rent Demand Price ($/MWh) Variable Cost P* Surplus revenue paid to lower cost generation plants Q* Quantity (MWh)

  5. Operational issues • Power purchase contracts with each plant • Three part tariff • Fixed cost component • Running cost component • Availability component • Plants submit supply offers to S.O. • Volume only, because price is known • Merit order, constraint checking etc • Economic dispatch similar to status quo

  6. What about hydro? • Ideally, use same opportunity cost approach as now • Expected future spot prices = f(running payments, hydrology) • Design choice: who runs these models? • Should make choice based on information resources • Centralisedmodelling inside NZPower, or • Decentralised to power stations • Would need incentive payments / information rent

  7. Capacity adequacy • Few energy-only markets in the world • Most have added capacity mechanisms, or are doing so • Peaking plant difficult to justify in energy-only • Need very big price spikes, which carry political risk • In NZ, tendency to build base load • Grid upgrades also help

  8. Who picks the reserve margin? • In NZ currently: no-one • It is the outcome of (regulated) market processes • Under single-buyer…..? • Some options • The single-buyer acting alone • The single-buyer subject to GPS, like RBNZ’s policy targets agreement • Any others? • NB: reasonable chance of a higher reserve margin • Which is more costly

  9. Will investment be forthcoming? • Yes

  10. Competition & efficiency • It is effectively vertical separation • Regulated generation sector • with tender-based competition for new plant contracts • Single buyer would sell tranches of hedges to retailers • Stand-alone retailers would be viable • Retail competition would probably intensify quite a bit • Possibly some risk pooling benefits?

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