7. Security of Supply - Details Flashcards
Why do market agents supposed take wiser investment decisions than the government?
Investors pay for their mistakes through direct economic losses
Name 3 market imperfections
- Market is risky (generators & consumers are risk averse)
- Distortion of market signals
- Lumpiness of investments
What is meant through market incompleteness?
- generators have issues hedging their risks
- > they install less capacity than required
The long-term segment of the market does not develop as necessary and this impedes generators to hedge their risk.
In pursuit of protection against low-price scenarios, generators tend to install less capacity than the optimal one and this affects system adequacy
Why does demand seem unconcerned about security?
They don’t want to be bound for a long time because they assume there will always be electricity and that prices could change to their advantage
What happens with the reliability of the system with a lower price cap?
the lower the reliability of the system
Which are the different approaches to system adequacy?
- Energy-only markets
- Capacity remuneration mechanisms
- Implicit regulatory safeguards
What is an energy-only market
- The regulator does not interfere with the market
- Demand learns to manage risk by being more active in the long-term
What is a capacity remuneration mechanism?
Intervention from the regulator aiming at guaranteeing the security of supply
Which types of CRMs exist?
- Price-based
2. Quantity based
What is a price-base CRM?
Participants receive a payment per MW (capacity payment) that they offer to the market
What are the problems with price-based mechanisms
- Lack of commitment for the generators & weak economic incentive to be available when needed
- No guarantee that any desired investment target will be achieved
What is a quantity based mechanism?
The regulator establishes the desired quantity [MWh] and allows the market to set the right price
Which designs exist in a quantity-based CRM?
- Strategic reserves
- Capacity obligations
- Capacity auctions
- Reliability options
What are strategic reserves?
Strategic reserves consist of separating off a certain amount of generation capacity that does not participate in the energy market unless the regulator or the system operator finds it necessary.
Dispatched when the market price exceeds a predetermined triggering price
What are the problems with a strategic reserve?
- If the price is too low, it represents a hidden price cap which does not allow resources in the market to recover their fixed costs
- If it is too high, demand may wonder what is the point of paying reserves if the price reaches the value of lost load anyway
What are capacity obligations?
- Generating units receive credit for their installed capacity, de-rated according to a predefined methodology to take possible outages into account
supposed to guarantee that enough installed capacity will be available to supply demand during stress events.
What are capacity auctions?
Centralised procurement: the responsibility of procuring long-term capacity contracts is assumed directly by the regulator, who assesses demand growth and launches centralised tenders for its coverage
What are reliability options?
The specific type of reliability product, which associates the physical long-term capacity contract with a financial call option, which limit the remuneration that resources can obtain during scarcity conditions
Which are the implicit regulatory safeguards?
- State-owned power company
(Shares the regulator’s concerns about system reliability and takes investment decisions that reflect such concerns more than economic rationale - Horizontal concentration
- Advanced procurement of operating reserves (hidden targeted capacity mechanism)
Which are the design elements of capacity mechanisms?
- Procurement process
- Contract provisions
- Reliability product
- Performance incentives
Which elements make up the procurement process?
- Buying side
- Level of centralization
- Selling side
Which elements make up contract provisions?
- Lag period (contract signature - delivery time)
- Contract duration (determines level of hedgin, should be long enough
- Indexation forumals (to update CRM remuneration)
- Financial warranties
Which elements are relevant in performance incentives?
- Penalty rate
- Overperformance payements
- Exemptions and penalty caps
Which are the types of reliability products?
- based on capacity or on energy, depending on the type of scarcity conditions in the system
- can remunerate just the availability of resources to produce the committed product
- require its physical delivery → can be coupled to the physical delivery or not
Whats the difference between capacity- and energy constrained systems?
- Capacity-constrained systems have trouble in covering peak demand because it lacks installed capacity (MW) to satisfy peak demand
- In energy-constrained systems, the system could satisfy peak demand but would not be able to supply the load during the remaining hours of the day or week. The problem is a lack of energy (MWh).
→ Energy-constrained systems are those with a large share of hydropower in their generation mixes
⇒ Congo, Brazil
Important elements in relability products
- Critical period indicator
- Constraints on tradable quantities
What is a critical period indicator?
The methodology to identify scarcity conditions
- short-term price
- stress events
What are barriers to CRM cross-border participation in Europe?
- Mistrust of fulfilment of cross-border contracts during scarcity conditions.
- For CRM to work, the system operator of the country launching the CRM must be sure that during scarcity conditions, the foreign resources are available
- But most electricity laws in Europe say that exports to other countries are to be interrupted in case of a domestic emergency of supply
