Week 5: Policies relating to electricity generation Flashcards
What is electricity?
Electricity is a ‘service’ that is essential to the economy. It is a key input in production of G&S and it is important for households.
Why do governments intervene in the energy market, specifically networks?
- Treat like a public good, but it is a private good (clearly rivalrous and excludable)
- Imperfect competition (‘natural monopoly’ argument)
Due to high setup costs and thus barriers to enter, the government is concerned that an absence of compeititon will foster monopoly power à high prices.
How does the government intervene?
Initially through direct provisioning of network services.
- Government setups up network due to high set-up costs and runs it, distributing costs across all electricity users.
What is the case in Australia? Privatisation of assets – ‘regulated monopolies’
Government sells public assets to business and assumes the position of regulation rather than direct provision.
Why is direct provisioning not ideal?
Not ideal due to the following factors:
- Governments lack the private montary incentive to operate networks efficiently.
- No price competition
- Benchmarks and accountability is often not available as government is unlikely to share this information.
- Government lack incentive to adopt innovation:
- No price incetive to do so
Could devalue assets paid for by taxpayers’ money.
What is a regulated monopoly?
A regulated monopoly is basically a monopoly without all the benefits of being a monopoly.
- This is because government intervenes and sets price ceillings, in addition to mandating reliability requirements.
How do governments regulate monopolies?
Price controls – network charge (tariff)
- The government regulates what the network can recover/charge their users.
This includes costs like:
- the cost of maintaining, replacing and extending infrastructure such as ‘poles and wires’, transformers, metering equipment and
- the cost of operating the network business and
- a pre-determined ‘profit margin’
These costs are then divided by à total consumption of electricity over the network for a given period of time.
Results in the per-user charge.
Thus the network charge is $per kWh + daily ‘service charge’
What are the market failure in electricity generation and consumption?
- Negative externalities associated with generating electricity.
- Environmental externalities (CO2, SO2, NOX) and
- Technical externalities in the form of frequency variation (50Hz)
- Imperfect information
- Different sources of generation, that is indistinguishable from each other.
Can’t tell whether a good is ‘green’ – thus credence good.
Describe the externality - frequency variation.
Electricity supply must equal demand at a given time.
- If suppy does not equal deamnd then the frequency deviates.
- When frequency changes substantially, equipment that is plugged into the electricity system may be damaged.
Typically consumers’ impact on frequency is relatively minor, and trational (non-intermittent) generators can control output and generation quite easily.
- Renewable generators (intermittent) are driven by the availability of wind and sun.
- This imposes costs on the system, in that these genrators will feed the system when they intermittently receive wind or sun.
These frequency costs are external to the generator, thus are negative externalities.
How do we overcome this frequency externality?
We overcome these challenges by:
- Using a centralised ‘dispatch’ system.
This system decides which generators produce, when and how much electricity.
2 types of dispatch frameworks:
- Market-based
- Based on economic merit order (lowest cost generators will be dispatched first)
- E.g. most developed countries (Aus, US, EU, Singapore)
- NB: generators, networks are privately owned.
- Centrally planned
- Dispatch is based on some criteria other than costs
- E.g. China
NB: Often state-owned.
How does the wholesale process work for energy? (supply)
The newtork creates a large market place where generators can sell energy ‘into the grid’
- Every dispatch period generators will bid into the market their supply curve.
- NB their supply curve comprises of multiple different price-quantity combinations.
Electricity wholesale – Demand
Information about demand is disaggregated.
Dispatch operators need to forecast demand to determine the level of supply necessary. This forecast is determined by:
- Weather cahnges
- Time of day (morning or overnight)
- Day of the week (weekend, weekday)
In Australia the estiamtes are every 5 minutes.
Electricity wholesale – the price
what determines the price?
The price is determined by the last generator that satisfies the deamnd.
All generators are paid the same ‘pool price’ and retailers pay this when their customers consume the energy.
Base load vs peaking generators
Base load:
- Generators that are always generating to meet the base load requirements
- E.g. large coal generators
Peaking:
- Generators that depend on factors such as timeof day or whether
- Ramp up to meet peak requirements
- MC of peaking generators is much higher than base load generators.
E.g. energy storage, peaking power plants, renewable energy
Load shedding
Some circumstances where dispatch operators determine that it is better to reduce demand.
For example, a large generator fails à may disconnect for a short time. (i.e. power shortage)
How do retailers measure how much is energy is used?
2 primary methods:
- Cumulative Meters:
- Know the total consumption, but not when the electricity was used (time of day or week)
- The individual consumption profile is not known.
- Meter is read periodically by a technician.
- Retailers cannot distinguish between (high and low-cost customers)
- Retail competition is weaker – retailers cannot easily compete for customers.
Market failure: imperfect information
- Work off ‘average cost pricing’ averaging across high and low-cost consumers.
- Nobody pays their true cost of electricity.
- Example: everyone gets a limitless credit card and the spending is averaged across high and low spenders.
- ‘Smart’ Meters:
- Monitors electrcity consumption every 5 minutes
- Can create customer profiles based on consumption patterns.
- The date is made available to customers.
- Retail competition, as retailers can compete for customers by offering deals that better suit the customers’ profile.
- Customers are charged their own cost.
- More accurate pricing (i.e. savings for low cost customers).
Higher rates for customers using during peak times.
Renewable Energy Target (RET)
What is it?
Is it effective?
What are the distributional consequences?
Is ti technology neutral?
Operating since 2001, fed level policy.
22,000 GWh sourced from renewable sources by 2020.
How does it work?
Renewable Energy Certificates (RECs):
- Similar to ‘emission permits’
- RECs are given when 1MWh is produced by an eligble renewable resources.
- For example: solar energy, wind, hydro, ocean waves and the tide, geothermal-aquifers, wood waste, agricultural waste
Demand for certificates comes from retailers:
- Compliance checks occur through retailers, in that they must purchase certificates to the percentage mandated by the govenrment, relative to consumption.
Effectiveness?
- Because overall GHG emissions are not controlled the effectiveness is uncertain.
- I.e. energy generation could increase, and with it emissions.
- Does not address the problem directly, no incentive to reduce emissions or reduce energy consumption (misses the root cause)
- Cost effective: Does not have a feature that would ensure MACs equate
- There may be lower cost options to address GHG emissions
- This policy is ‘sector specific’ and does not allow the ‘reallocation’ of the obligation to a different, more cost-efficient sector.
Distributional considerations:
- The cost of certificates is passed onto customers – increase in customers tariffs.
Technology Neutral?
- No. arbitrary distinction between ‘renewable’ and ‘non-renewable’ sources
- Disadvantages technology that is new and emerging that may not be on the ‘eligibl’ list.
