Bidding Pattern and Strategic Behavior in the Iranian Pay-as-Bid Electricity Market

1. Bidding Pattern and Strategic Behavior in the Iranian Pay-as-Bid Electricity Market Ali Morad Sharifi(PhD) Mehdi Sadeghi(PhD) Rahman Khoshakhlagh(PhD) Ali Nazemi

2. Introduction • The main idea behind restructuring is efficiency, known as an equality of price and marginal cost, through increasing competition in the electricity market. Accordingly, the best benchmark to evaluate electricity market performance would be marginal cost. • Several studies have used this method: Fehr and Harbord,(1993) Wolfram (1999) Borenstein, Bushnell and Wolak (2002)

3. Introduction • There are two main differences between this study and the current literatures: • All previous studies are based on uniform price auctions. • Input-output (fuel-output) data is used instead of heat rate in order to estimate short-run marginal production cost.

4. The Iranian Electricity Industry

5. Iranian Electricity Market The Ministry of Energy is responsible for the energy policy making in Iran. In 2009, MOE and its affiliated companies owned 84% of the total generation, large industries owned 7% and private companies just possesses 9% of total generation capacity. Since 2001, the operational responsibility of MOE have been vested to the fully stated owned company (TAVANIR).

6. Iranian Electricity Market ... REC1 Supply REC16 Wholesale Electricity Market (Iranian Grid And Management Co.) Independent System Operator (ISO) TAVANIR Private Producers DisCo1 DisCo 42 RECs (As a representative of industrial consumers) Demand ... The Iranian electricity market and its Grid Management Corporation (IGMC) were inaugurated in 2003 and 2004, respectively. The Iranian Grid Management Corporation (IGMC) is performing as an Independent System Operator (ISO). Like other markets, Market Operator (MO) and System Operator (SO) perform under supervision of IGMC.

7. Iranian Electricity Market 16 Regional Electricity Companies (RECs) act as the representative of their regional power plants along with private companies form the supply side while distribution companies form the demand side of the wholesale electricity market. RECs participate in the market’s demand side as the representative of large industries and all distributions companies act as a non-governmental companies

8. Iranian Electricity Market The power market in Iran is purchasing-agency and all suppliers are committed to participate in the power pool. The market is a day-ahead market. Market outcomes are announced to company “confidentially” and indicate accepted price and quantity per hour. The company is committed to generate according to dispatch schedule which is determined by market operator. Regardless of market outcomes, the generator unit must increase its generation up to declared available generation in the lowest possible time, according to the Market Operator request.

9. Market Operation Buyers: -4 -4 They receive hourly forecasted load for four days later from system operator They receive hourly forecasted load for four days later from system operator • The Market Operator: • Receive modified supply and demand curve • Determines market results • Informs winner producers -1 1- They send Declared Capacity Capability to MO 2- They submit 10 price and quantities for each hour and each generating unit to MO They send their hourly forecasted demand for three days later to MO -3 -3 • System Operator : • Dispatches winner generation units in accordance with market results. 0 -2 -2 They can only modify their forecasted demand They can only change their Declared Capacity Capability -1 • Payment Method: • 1-Energy Payment: The payment method is PAB • 2-Capacity Payment is based on the Declared Generation Capacity They can only change their Declared Capacity Capability They can only modify their forecasted demand -1 Sellers:

10. Marginal Generation Cost

11. Marginal Generation Costs • The method ignores intertemporal constraints: • Ramp Rates • Start up Costs • Minimum up and down time • Wolak (2000, 2002): • Capital costs and periodic fixed capital and maintenance expenses should not be included in any estimates of short-run marginal cost. • These constraints create non-convexities in the production cost functions of firms. • It would not be optimal that a price-taking, profit-maximizing firm incorporates such costs into its supply bid for a given hour. • Puller (2007): • The focus is on peak hours (e.g. from 5 to 6 PM) each day, when those constraints are unlikely to bind.

12. Marginal Generation Cost • In this paper, the inverse production function has been used. • The electric power is produced by combining fuel, labor, and capital as production inputs. Accordingly, once the thermal unit is in place, in the short-run neither capital nor labor changes and only the fuel is considered as a variable input. • Technical relation between electricity (as an output) and fuel consumption (as an input) can creates short-run production function. • Based upon a technical relationship between fuel and electricity, the quadratic or cubic functional form is used to estimate the inverse production function.

13. Marginal Generation Cost

14. Marginal Generation Cost • To model start-up costs, we have used dummy variable which captures the variations of production pattern in the periods of unit on and off. • According to the Iranian electricity market regulations, producers cannot follow on-off strategy and all power plants have to be on-line unless market operator permits a generation unit for being off. Therefore minimum run times and down times are insignificant in this situation. • To deal with the ramp rate, we have restricted our evaluations to peak hours in order to ignore ramp rate effects on bidding strategy.

15. Marginal Generation Cost

16. Long-Run Marginal Cost

17. Data To estimate inverse production function, we have used 100 output and input observations. The output data indicate gross hourly production in MWh and the inputs are the amount of fuel consumption in Mega Calorie (Mcl) in each hour. All data is provided by Isfahan Regional Electricity Company (2009). In the estimation of maintenance and operation fixed and variable costs, the data from Planning and Economic Studies of TAVANIR (2009) have been used. Based upon the aforementioned calculations, maintenance and overnight costs for thermal power plant have been used.

18. Data Submitted bids (offered price and quantity pairs in ten steps) of Montazeri Power Plant during Autumn 2009 have been provided by Isfahan Regional Electricity Company (2009). All thermal power plants in Iran are fueled by natural gas, gas- oil, and fuel-oil. In this study, we use weighted average fuel price, delivered to Montazeri power plant.

19. Empirical Results

20. Empirical Results 1USD=12000 Rials

21. Montazeri Hourly Bids in Autumn 2009

22. Montazeri Hourly Bids in Autumn 2009(Peak Hours)

23. Conclusion • There is a considerable gap between bids and variable costs. • Minimum bid price is quite different from short-run marginal generation cost. • Bid variations take place within tight range which shows low flexibility in submitted prices by Montazeri power plant. • The hypothesis that “producers in the pay-as-bid electricity markets take into account their fixed cost for bidding in the electricity market” cannot be rejected.

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