Electricity Markets: Pricing, Structures and Economics (The Wiley Finance Series)

Electricity Markets......Page 4
Contents......Page 10
Preface......Page 22
Acknowledgements......Page 24
Introduction......Page 26
1.1 How electricity works......Page 32
1.2 Early development of the Electricity Supply Industry (ESI)......Page 35
1.3 The lifecycle of electric power......Page 37
1.4 Development, structure, coordination, legislation of the ESI......Page 39
1.5 New ownership structure......Page 40
1.6.1 Europe......Page 41
1.6.2 Development in the Americas......Page 43
1.6.3 Australasia......Page 44
1.6.5 Africa and the Middle East......Page 45
2.1 Energy sources......Page 46
2.1.1 Fossil fuel......Page 47
2.1.4 ‘Hot’ natural energy......Page 51
2.1.7 Stored......Page 52
2.1.9 Integration of energy sourcing and power generation......Page 53
2.2 Power generation......Page 54
2.2.1 Turbine generation......Page 55
2.2.3 Conventional thermal generation......Page 56
2.2.6 Turbines driven by water......Page 59
2.2.9 Distributed power generation......Page 61
2.2.10 The production of environmental and amenity impact factors......Page 62
2.2.11 Abating the production of environmental impact factors......Page 65
2.2.12 Constructing the emission abatement stacks......Page 69
2.2.13 Stock management......Page 74
2.2.14 Flexibility......Page 75
2.2.17 Three phase......Page 80
2.2.18 Efficiency......Page 81
2.2.19 Cost......Page 83
2.2.20 Generation mix......Page 84
2.2.23 The relative value of the different forms of plant service......Page 85
2.2.24 Generator hedging......Page 86
2.3.1 Electrical networks......Page 87
2.3.2 Functions associated with network operation......Page 97
2.3.3 Coordinated planning of generation and transmission build......Page 99
2.3.4 Signals to build......Page 101
2.3.5 Interconnection......Page 103
2.3.6 Charging mechanisms available to the grid and system operators......Page 104
2.4 Distribution......Page 106
2.4.1 The roles of the distribution network operator......Page 107
2.4.2 Entry connection cost......Page 108
2.5 Metering......Page 109
2.5.2 The metering lifecycle......Page 110
2.5.3 Meter types......Page 111
2.6 Supply......Page 112
2.6.1 Billing......Page 113
2.6.3 Regulatory requirements......Page 114
2.6.4 Consumer agreements......Page 115
2.6.6 Retail pricing......Page 118
2.6.7 Hedging......Page 120
2.6.8 Supplier risk and supplier charges......Page 126
2.6.10 Demand side management......Page 127
3 Policy – Issues, Priorities, Stakeholders, Influencers......Page 130
3.1 Agendas and policy formation......Page 131
3.2 Policy issues and drivers......Page 132
3.3 Policy outcomes and instruments......Page 135
3.4.1 Policy trends......Page 137
3.4.2 Formation of policy......Page 140
3.5 Framework......Page 141
3.6 Domestic institutional players......Page 142
3.7 The role and influence of international players......Page 143
4 Liberalisation, Deregulation and Regulation......Page 146
4.2 Steps......Page 147
4.2.1 Unbundling (and de-integration)......Page 148
4.2.2 Corporatisation......Page 150
4.2.3 Ring fence some activities under state control......Page 151
4.2.6 Deregulation......Page 152
4.2.12 Pressure on retail deregulation......Page 153
4.3 Conditions for reform......Page 154
4.4 The role of the state......Page 155
4.4.2 Mechanisms of government influence......Page 156
4.5 Measures of liberalisation and deregulation......Page 157
4.6 Regulation......Page 159
4.6.2 Prescriptive model for regulation......Page 160
4.7 Regulators......Page 162
4.7.3 Price regulation......Page 164
4.8 Industry key performance indicators......Page 165
5 Market Structures for Electricity......Page 166
5.1.1 Acquiring the information on demand......Page 168
5.1.2 Management of variation in demand in the centrally managed system......Page 170
5.1.3 Acquiring the basic information on generation capability......Page 171
5.1.4 Construction of the first trial schedule......Page 174
5.1.5 Schedule feasibility and adjustment......Page 175
5.1.7 Profiles within commitment periods......Page 183
5.1.8 Generator failure......Page 184
5.2.1 Information and behaviour in centrally managed systems......Page 185
5.2.2 Introduction of Independent Power Producers (IPP’s)......Page 188
5.3 The single buyer......Page 189
5.4 The pool model......Page 190
5.4.1 The trial schedule in the pool......Page 191
5.4.2 Subsequent trial schedules and final initial schedule......Page 192
5.4.4 Power capacity......Page 193
5.4.7 Contracts for difference......Page 194
5.4.8 Supplier price......Page 195
5.4.11 Market power in the pool......Page 196
5.4.14 Offering and contracting strategy for generation plant in the pool......Page 197
5.4.15 Interpool relationships......Page 200
5.5.2 Physical notification in the bilateral system......Page 201
5.5.4 Operational strategy for contracted plant in the bilateral market......Page 202
5.6.1 Market structure for balancing and imbalance......Page 203
5.6.3 Provision of balancing......Page 204
5.6.5 Profile effects within the balancing period......Page 205
5.6.9 Auction choices......Page 206
5.7 Reserve contracts......Page 207
5.8 Wholesale markets......Page 208
5.9.1 The journey to power exchanges......Page 209
5.9.2 Specifics of power exchanges......Page 212
5.10 Advanced pool markets......Page 214
6.1 The definition of capacity......Page 216
6.2.1 Generator failure......Page 218
6.2.3 Network failure......Page 221
6.3.2 Provision of capacity by a unit......Page 222
6.4.1 Capacity effect of take or pay fuel supply contracts......Page 225
6.4.2 Capacity effect of annual emission limits......Page 227
6.4.4 Capacity effect of coal stocking......Page 228
6.4.5 Capacity effect of plant life usage optimisation......Page 229
6.4.7 Generation above normal maximum capacity......Page 230
6.4.8 Long term capacity......Page 231
6.4.10 Pumped storage......Page 232
6.5 Modelling capacity capability from the consumer side......Page 233
6.6 Commercial mechanisms – the generator perspective......Page 234
6.6.1 Day ahead capacity payments in pool markets......Page 235
6.6.3 Traded options and capacity contracts......Page 239
6.6.4 Self insurance for generator shortfall......Page 242
6.6.5 Mutual insurance......Page 243
6.6.6 Value from rare but highly priced energy contracts......Page 244
6.7.1 Requirements to secure capacity by load serving entities......Page 245
6.8 Capacity provision – the network operator’s perspective......Page 248
6.9.1 Cost to consumers......Page 249
6.10 Capacity facilitation – contractual instruments......Page 251
6.10.2 Insurance and reinsurance......Page 252
6.11 Use of options to convey probability information......Page 260
6.12 Effect of price caps on capacity and prices......Page 262
7 Location......Page 264
7.1.1 Build and maintain......Page 265
7.1.4 Redundancy and security......Page 266
7.2 Counterparties for payment and receipt......Page 267
7.3.2 Use of system charges......Page 268
7.3.4 Losses......Page 270
7.3.7 Regional structure for cross subsidy......Page 272
7.3.9 Reactive power......Page 273
7.4.1 Postage stamp......Page 274
7.4.3 Postage stamp with market splitting......Page 275
7.4.4 Nodal......Page 276
7.4.7 Position in voltage hierarchy......Page 278
7.5.1 Market models......Page 279
7.5.2 Transmission allocation at system borders......Page 283
7.6.1 Case examples......Page 285
7.6.2 Global opinion......Page 287
7.7 Environmental borders......Page 288
8.1 Environmental pressure......Page 290
8.2 Definitions......Page 291
8.2.1 Definition of production of potential impact factors......Page 293
8.2.2 Definition of impact......Page 294
8.2.3 Definition of sensitivity of impact factors once produced......Page 297
8.3 The policy debate......Page 298
8.4.1 Continuous limits......Page 299
8.4.2 Non instantaneous limits......Page 300
8.4.4 Technology prescription or limits......Page 301
8.4.6 Annual limits (caps)......Page 302
8.4.7 Cap and trade......Page 304
8.4.10 Taxes......Page 308
8.4.11 Cap and tax......Page 309
8.5.2 Renewable obligation......Page 310
8.6 Fuel labelling and power content labelling......Page 311
8.8 Valuation of environmental factors......Page 317
8.9 Corporate responsibility......Page 318
8.10 The environmental impact of consumption......Page 319
9 Price and Derivatives Modelling......Page 320
9.1.2 Random walk......Page 321
9.1.4 Transformation of process and Ito’s Lemma......Page 323
9.1.5 Normal and lognormal distributions......Page 324
9.1.7 The Poisson process......Page 326
9.1.8 Jump diffusion......Page 327
9.1.10 Extreme value theory......Page 328
9.1.11 Mean reversion......Page 329
9.1.12 Mean reversion with jump diffusion......Page 331
9.1.13 Regime switching......Page 332
9.1.14 Markov processes......Page 334
9.1.15 Spot and Forward price processes......Page 335
9.1.16 The choice between spot and forward price processes......Page 342
9.1.18 Correlation......Page 343
9.1.20 Conditional expectations......Page 346
9.1.22 Cost of risk......Page 350
9.1.23 Transaction cost......Page 352
9.2.1 Term structure of volatility – TSOV......Page 353
9.2.2 Smile and skew......Page 360
9.3.1 Cross commodity correlation modelling......Page 362
9.3.2 Commodity spread modelling......Page 363
9.3.3 Correlation between long and short duration contracts......Page 364
9.3.4 Correlation measurement using historic data......Page 365
9.3.5 Correlation models......Page 366
9.3.6 Principal components......Page 369
9.4 Pricing electricity derivatives......Page 371
9.4.2 European options......Page 372
9.4.3 American options......Page 373
9.4.5 Monte Carlo Simulation......Page 374
9.4.6 Modelling with trees......Page 375
9.4.8 Volume options......Page 382
9.4.9 Imbalance pricing......Page 383
9.5 Establishing fundamental relationships......Page 384
9.5.1 The exogenous and endogenous worlds......Page 386
9.5.2 Price Growth......Page 389
9.5.3 Weather, climate, daylight......Page 390
9.5.4 Consumer contracts......Page 395
9.5.5 Valuation of physical assets and risks......Page 397
9.5.6 Pricing using world views......Page 400
9.6 Market completeness......Page 401
9.6.1 The completeness of markets with options......Page 402
9.7.2 Banking and borrowing......Page 403
9.8 Network price volatility......Page 404
10.1.1 Microeconomics and macroeconomics......Page 406
10.1.2 Classical economics......Page 407
10.1.3 Neoclassical economics......Page 408
10.1.4 The economics of the margin......Page 410
10.1.5 The demand function......Page 412
10.1.6 The production function......Page 416
10.1.7 Surplus......Page 417
10.1.8 Pareto optimisation......Page 418
10.1.9 Utility......Page 421
10.1.10 Welfare......Page 426
10.1.11 Preference......Page 427
10.1.12 Contingent valuation......Page 431
10.1.14 Policy......Page 432
10.1.15 Discriminatory pricing......Page 433
10.1.16 Problems with cross subsidy and redistribution of wealth......Page 436
10.1.17 Public goods and private goods......Page 438
10.1.20 Externalities......Page 439
10.1.21 Equilibrium......Page 440
10.1.22 Trade......Page 441
10.1.23 Fixed and marginal costs......Page 444
10.1.24 Cost of capital......Page 445
10.1.25 Fundamental measures......Page 447
10.1.27 Price growth......Page 448
10.2.1 The privately owned monopoly operator......Page 449
10.2.3 Fixed cost recovery......Page 450
10.3 Regulated prices......Page 458
10.4 Taxes and subsidies......Page 459
10.4.2 The role of the ESI in the fiscal structure of the macroeconomy......Page 460
10.5 Games, interaction and behaviour......Page 461
10.5.1 Use of information without interaction......Page 462
10.5.3 Collaboration......Page 463
10.5.5 Interactive behaviour of mid merit plant......Page 464
10.5.7 Reaction curves......Page 465
10.5.8 Sequential quantity response – Stackelberg game......Page 466
10.5.9 Simultaneous volume response – Cournot game......Page 467
10.5.11 Price leadership – Bertrand game......Page 468
10.5.12 Gaming and payoff matrices......Page 469
10.5.13 Nash equilibria......Page 470
10.5.14 Repeated games and cooperative games......Page 473
10.5.15 New entrance – pre-emption and optionality......Page 474
10.5.16 Gaming by institutions......Page 475
10.5.17 Auctions......Page 476
10.5.19 Supply function equilibria......Page 477
10.6.1 Valuation......Page 480
10.6.2 Environmental taxes......Page 481
10.6.3 Property rights......Page 484
10.7 Market failure......Page 486
10.8 Shocks......Page 487
10.9 The political economics of liberalisation......Page 489
11.1 Power plant financial model......Page 492
11.2 The baseload contract......Page 494
11.4 The vanilla option contract......Page 495
11.5 Extra flexibility......Page 496
11.6.1 Plant failure as a limiting factor in growth and return......Page 497
11.6.2 Cost of risk......Page 499
11.6.4 Corporate financial measures......Page 500
11.7 Accounting......Page 501
12.1 Supply chain......Page 502
12.1.1 Sources......Page 503
12.1.2 Power generation capacity......Page 504
12.1.5 Suppliers......Page 505
12.2.1 Scenario approach concept of reserve margin......Page 506
12.2.2 Probability approach to reserve margin......Page 507
12.2.3 The effect of import, export and transit......Page 508
12.3 The responsibility for security of supply......Page 509
A.1 Plant life usage......Page 510
A.2.2 Combinatorial analysis......Page 512
A.2.5 Hedging return to service......Page 513
A.2.6 State space modelling of power plant......Page 514
A.3 Reactive power......Page 516
A.4 Direct current load flow modelling......Page 518
A.4.2 Calculation of losses......Page 520
References......Page 522
Index......Page 532