6. Security of supply - Introduction Flashcards
Other than competition, what was the main driver for liberalization?
To move the respondibiility of investment decisions from state to private companies
Which are the 4 dimensions of the SoS problem?
Generation - Time horizon - SoS dimension
- Operation (short term) Security
- Planning (medium-term) Firmness
- Expansion (long-term) Adequacy
- Strategic Expansion (very long-term) Strategic Expansion Policy
How can optimal signals be provided?
Short-term marginal prices under ideal assumptions
Which are the ideal market theory hypotheses?
- Efficient short-term market
- competitive demand & generation participation
- efficient pricing rule
- Efficient long-term market
- efficient risk allocation among agents
- Continuous investment & no economies of scale
- No inefficient types of regulatory intervention
Market failure: Why is the short-term market not efficient?
- Demand does not participate
- Marktets are not perfectly competitive
- No efficient pricing rules
- > price caps etc.
How would a a risk averse agent choose between 2 alternatives?
- Prefers alternative with lower risk
- Risk averse agent is willing to sacrifice expected profits if it helps reducing risk exposure
- Risk affects medium-term planning
What do investors fear most?
Long-term market price risk volatility
What is the problem with risk averse agents?
Even if there is a well-functioning short-term market in place, if agents are risk averse the scheme can fail to ensure SoS
What do we need if agents are risk averse?
an efficient long-term market
What do generators and regulators want?
Generators
- Hedge their risk
Regulators
- secure electricity supply
- hedge consumers risk
Which are the 3 main components that define the product?
- Firm supply
- Financial contract
- Obligation of physical delivery
What is firm supply?
A common feature of the product to ensure there is a physical back-up
(A 100MW is given 60MW of firm supply)
What do financial contracts do?
Part of the product element
-> Reduce risk to counterparts
Which different types of financial contracts exist?
- Base-load contract for differences
- Peak-load contract for differences
- Option contracts
Give some examples of products
- Purely financial contract
- Firm supply
- Financial + firm supply
- Financial contract + physical delivery + physical backup
Benefits of auction vs. bilateral mechanisms
- more transparent
- enhance liquidity
Benefits of centralizing acquisition
Allows exploiting economies of scale
What is the reliability option?
- A financial call-option (with a very high strike price, which is used as an indicator for scarcities)
- long-term mechanism
What is a financial reliability option?
- purely financial contract
- hedges price risk for both demand and generation
What’s a financial reliability option with firm supply and no penalties
- hedges price risk
- requires physical back up
e.g. Columbia
What is a physical reliability option?
- There is a penalty that increases the incentive for physical delivery
- The short-term energy price is amplified in case of scarcity
- Downside of the penalty:increases investor’s risk
What is the company “Piclo” about?
- peer-to-peer energy trading platform
- matches customers with the energy produced by their neighbour’s solar panels.
- enables distribution network operators (DNOs) to participate by placing bids for “demand flexibility” in congested parts of their network and reward customers accordingly
