Homework Ch 13 Electricity Restructuring

1. What services do electricity marketers offer in a restructured electricity industry? In addition to shopping around for the lowest price, they may offer: Green electricity at a price premium Time-differentiated rates Load control Energy-efficient services Eventually leasing or selling solar systems Assisting in selling excess power back to utilities

If line AC has a capacity of 4 MW, (2GA + 1GB )/3 = 4 and GA + GB = 10 2. Generator A has a constant marginal cost of $20 and has a capacity of 10 MW, while generator B has a constant marginal cost of $30 and also has a capacity of 10 MW. A customer at node C demands 10 MW. Using Figure 13.1, what will be the LMP at node C if capacity is unconstrained? What about if capacity on line AC is constrained to 4 MW? If transmission is unconstrained, Generator A supplies all power to the customer at C at $20/MWh. If line AC has a capacity of 4 MW, (2GA + 1GB )/3 = 4 and GA + GB = 10 Solving, (2GA + (10 −GA))/3 = 4 GA = 2 and GB = 8 LMP at Node C 1 additional MWh requires 2 units from B and -1 unit from A so as not to overload line AC. LMP = 2 × $30 – 1 × $20 = $40.

3. Provide an argument for separating generation from transmission 3. Provide an argument for separating generation from transmission. Also provide an argument for not separating them. As seen from question 2, both generators may gain from a capacity constraint, so a reason to separate G and T is to provide the proper incentive to build new transmission. An argument for vertically integrating G and T is Williamson’s concern about the transactions costs of contracting. There could be holdout problems if one transmission line threatens not to carry power from a generator, or a generator threatens not to use a transmission line.

4. Describe the U.K. electricity restructuring that took place in 1990. How successful was it in reducing the cost of producing electricity and why? Prior to restructuring, the government had a single nationalized generating company integrated with transmission and 12 distribution boards. Generation was split into two fossil fuel generating companies and one nuclear generator, and a fourth company that controlled transmission. Effectively, there were only two or perhaps three companies competing in the generating market, so the outcome was closer to a Cournot duopoly than to competition. Over time, more generating companies entered and the industry has moved closer to competition.

Since MCs equal for both firms, 𝑄 1 = 𝑄 2 120−6 𝑄 1 = 0 𝑄 1 = 𝑄 2 = 20 5. Suppose National Power and PowerGen are the only two generating companies in Great Britain, each with a marginal cost of $30. Market demand is P = 150 - 2 Q. What will be the market equilibrium price and quantity according to the Cournot model? What about according to the Bertrand model? 𝑃 1 =150− 2𝑄 1 − 2𝑄 2 𝑀𝑅 1 =150−4 𝑄 1 − 𝑄 2 Setting MR1 = MC: 150−4 𝑄 1 − 2𝑄 2 =30 Since MCs equal for both firms, 𝑄 1 = 𝑄 2 120−6 𝑄 1 = 0 𝑄 1 = 𝑄 2 = 20 𝑃 1 = 𝑃 2 = $70 With Bertrand, P = MC = $30.

National Power\PowerGen High Price Low Price 6. National Power and PowerGen are each deciding independently whether to charge a high price or a low price to the RECs. The table shows the respective (National Power\PowerGen) profit payoffs (in $) depending on the price strategies. What price will each company charge? Moreover, what will be the corresponding profits? Is there a Nash Equilibrium? Is there a Prisoner’s Dilemma? National Power\PowerGen High Price Low Price 80\60 50\100 100\50 70\70 If NP expects PG to charge a high price, NG will charge a low price. If NP expects PG to charge a low price, NG will charge a low price. NP Has a dominant strategy, a low price. So does PG. Nash equilibrium is for both to charge a low price. In this case, it’s not a true Prisoner’s Dilemma, since total profit if both charge a high price is $140, the same as with the low price.

London Electricity will pay NP $10/MWh, or $1,000 for 100 MWh. 7. On January 1, 1994, National Power agrees to deliver 100 megawatt-hours of electricity to London Electricity on April 1, 1994 at 14:00 hours (2 PM) at a price of $80/MWh, or $8,000 for 100 MWh. On April 1 at 14:00 hours, the actual spot price is $70/MWh. Explain how the Contract for Differences will be settled and why it reduces risk. NP will deliver 100 MWh at P = $70/MWh on April 1, or $7,000 for 100 MWh. London Electricity will pay NP $10/MWh, or $1,000 for 100 MWh. The end result is that LE pays $80/MWh, and the CfD eliminates risk. In this case, LE lost by agreeing to the CfD and NP gained; however, had price risen above $80, the opposite would have been true.

The state reduced retail prices by 10% and capped the prices. 8. What major changes did California make in its wholesale and retail markets when it restructured its electricity industry around the year 2000? How did these changes contribute to the failure of their effort to restructure? California required its electric utilities to divest their generating resources to the wholesale market, and buy all their generation on the spot market. The state reduced retail prices by 10% and capped the prices. Wholesale prices skyrocketed, due to a perfect storm of unfavorable conditions, such as a drought in neighboring states that limited their ability to export power, as well as market manipulation by Enron and possibly other independent power producers. These events resulted in blackouts and brownouts, and bankruptcies for some of the large CA electric utilities.

9. Why was price higher in the eastern half of PJM’s territory than in the western half? What changes have taken place in that market and to the differential between eastern and western prices? The transmission lines were congested. Most of the power was produced in the west, and most of the demand was in the east. New transmission was built, and there is also new production in Pennsylvania’s Marcellus shale. The price differential has narrowed considerably.

Texas uses bilateral trades. Describe the difference between bilateral trade and a power pool in restructuring electricity. Provide an example of where each of the approaches were used to restructure electricity. Provide an advantage and a disadvantage of each. Bilateral trade is between two parties. The trades can be at different prices. A power pool operates like an auction, with a single price for all exchanges. The U.K. used a power pool. Texas uses bilateral trades. Bilateral trades are simpler, allowing a more passive ISO. A power pool is more transparent, with price being public, and all generators and customers knowing price.