6. Security of supply - Introduction

Question 1

Other than competition, what was the main driver for liberalization?

Answer 1

To move the respondibiility of investment decisions from state to private companies

Question 2

Which are the 4 dimensions of the SoS problem?

Answer 2

Generation - Time horizon - SoS dimension

1. Operation (short term) Security
2. Planning (medium-term) Firmness
3. Expansion (long-term) Adequacy
4. Strategic Expansion (very long-term) Strategic Expansion Policy

Question 3

How can optimal signals be provided?

Answer 3

Short-term marginal prices under ideal assumptions

Question 4

Which are the ideal market theory hypotheses?

Answer 4

1. Efficient short-term market
   
   • competitive demand & generation participation
   • efficient pricing rule
2. Efficient long-term market
   
   • efficient risk allocation among agents
3. Continuous investment & no economies of scale
4. No inefficient types of regulatory intervention

Question 5

Market failure: Why is the short-term market not efficient?

Answer 5

1. Demand does not participate
2. Marktets are not perfectly competitive
3. No efficient pricing rules
   - > price caps etc.

Question 6

How would a a risk averse agent choose between 2 alternatives?

Answer 6

• 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

Question 7

What do investors fear most?

Answer 7

Long-term market price risk volatility

Question 8

What is the problem with risk averse agents?

Answer 8

Even if there is a well-functioning short-term market in place, if agents are risk averse the scheme can fail to ensure SoS

Question 9

What do we need if agents are risk averse?

Answer 9

an efficient long-term market

Question 10

What do generators and regulators want?

Answer 10

Generators
- Hedge their risk

Regulators

1. secure electricity supply
2. hedge consumers risk

Question 11

Which are the 3 main components that define the product?

Answer 11

1. Firm supply
2. Financial contract
3. Obligation of physical delivery

Question 12

What is firm supply?

Answer 12

A common feature of the product to ensure there is a physical back-up

(A 100MW is given 60MW of firm supply)

Question 13

What do financial contracts do?

Answer 13

Part of the product element

-> Reduce risk to counterparts

Question 14

Which different types of financial contracts exist?

Answer 14

1. Base-load contract for differences
2. Peak-load contract for differences
3. Option contracts

Question 15

Give some examples of products

Answer 15

1. Purely financial contract
2. Firm supply
3. Financial + firm supply
4. Financial contract + physical delivery + physical backup

Question 16

Benefits of auction vs. bilateral mechanisms

Answer 16

• more transparent

- enhance liquidity

Question 17

Benefits of centralizing acquisition

Answer 17

Allows exploiting economies of scale

Question 18

What is the reliability option?

Answer 18

• A financial call-option (with a very high strike price, which is used as an indicator for scarcities)
• long-term mechanism

Question 19

What is a financial reliability option?

Answer 19

• purely financial contract

- hedges price risk for both demand and generation

Question 20

What’s a financial reliability option with firm supply and no penalties

Answer 20

• hedges price risk
• requires physical back up

e.g. Columbia

Question 21

What is a physical reliability option?

Answer 21

• 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

Question 22

What is the company “Piclo” about?

Answer 22

• 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