Session 1 Flashcards
What’s the Merit Order Model?
1. What’s on the X/Y-axis?
- How is the clearing price defined?
- What is the space under the clearing price?
Model to explain& estimate the short term clearing price of electricity.
1. x-axis: MW installed capacity
y-axis: Marg. cost in €/MWh produced electricity.
2. Intersection of capacity demanded and the marg. cost/ MWh for the (most expensive) electricity resource you’ll then need. Same price for all of them, also RE and nuclear!
So, the el. price should (and often does) follow the demand.
3. Contribution margin, not only profit, as firms have (e.g. investment) costs
Misconceptions of marginal pricing / the Merit Order
- Marginal pricing is an artificial & arbitrary rull: It’s not. It is the only price that underpins a market equilibrium.
- Marginal pricing is unique to electricity markets: It’s not. All commodities price on the margin.
- It’s a model of the day-ahead auction: It’s not. It’s an equilibrium model of the entire electricity market, not just one segment.
- The power prices is coupled to the gas price by law: No, when gas plants are not needed, they don’t influence the clearing price.
Three necessary conditions for power prices to fluctuate
- Demand and/ or supply conditions change over time
- The short-run marginal cost curve is upward-sloping (remember the Merit Order Model)
- Electricity cannot be stored economically in large volumes.
What sets electricity apart from other goods and therefore heavily influences the el. market?
Non-storability.
How are RE integrated in the Merit Order Model?
Caused by their fluctuations, they’re ignored in the M.O. Model. Their average capacity is subtracted ex-post from the capacity need (as negative load), when estimating the clearing price.
Why is electricity demand so price-inelastic?
Consumers who don’t buy their electricity at the wholesale market (aka all small consumers) aren’t exposed to real-time prices.
Energy-intensive industries often produce 24/7 at full capacity, no matter the electricity price.
What happened in the Merit Order Model, if there was CO2 pricing?
Higher marginal costs for lignite, coal and gas. Less carbon-intensive generators move to the left, more c-intensive ones move to the right. Therefore, higher prices, but also higher profits for low-carbon electricity sources (nuclear, RE).
Screening Curve
1. What’s on the x, what’s on the y-axis?
- X-axis: Full Load Hours per year
Y-axis: Annualized FULL costs €/kW
These two over the course from the y-axis to the right, depicting the cost for electricity
+ Annualized FIXED costs (y-intercept) in €/kWa <- don’t confuse with €/kW
+ variable cost in €/MWh (slope)
CAUTION: kW and MW(h) are mixed!
More on
Screening Curve Model
1. Ingredients of the SCM
2. difference/ similarities with M.O. Model
- Screening curves (X: FLH, Y: annualized full costs in €/kW installed), load duration curves (X: FLH, Y: Load (GW)
- Screening Curve Model is the long-term sister of the MOM:
It’s a generalization of the MOM that endogenizes investment
Underlying assumptions of the SCM (6)
- no imports, no exports
- all parameters are known
- perfect competition
- zero demand flexibility
- no storage
- free pricing
How do cost shocks (e.g. emission pricing or an unexpectedly expensive construction of a nuclear power plant) influence the SCM?
slide 52
it shifts up the respective screening curve.
Effect of e.g. no carbon pricing but an expensive construction of a nuclear plant: Nuclear electricity gets more expensive, more coal will be used.
What happens in the SCM if RE are included?
- formula of the residual load
- what happens on the load duration curve?
residual load = Load - RE
On the load duration curve: Load shifts down
Which generators are mostly affected by wind and solar?
1. MOM
2. SCM
3. Reality
MOM suggests: peakers
SCM: base load
Reality: In the short term, production volumes of peakers are mostly affected but revenues of all technologies fall and this hits base load plants hardest.
Theory of peak-load pricing
Power plants always bid variable cost, only this bidding behavior is compatible with profit maximization.
Thus, the „Last“ power plant will never make a profit, hence never recuperate its fixed costs.
Why wouldn’t producers bid more than their marginal costs?
They want potential (cheaper) competitors not to enter the market, so it’s the potential competition that keeps the price lower.
