Alternative Models to Analyze Market Power and Financial

184 Pages·2005·1.28 MB·English

Alternative Models to Analyze Market
Power and Financial Transmission
Rights in Electricity Markets
by
Guillermo Bautista Alderete
A thesis
presented to the University of Waterloo
in fulfillment of the
thesis requirement for the degree of
Doctor of Philosophy
in
Electrical and Computer Engineering
Waterloo, Ontario, 2005
(cid:13)c Guillermo Bautista Alderete, 2005
I hereby declare that I am the sole author of this thesis. This is a true copy of the thesis,
including any required final revisions, as accepted by my examiners.
I understand that my thesis may be made electronically available to the public.
ii
Abstract
One of the main concerns with the introduction of competition in the power sector is
the strategic behaviour of market participants. Computable models of strategic behaviour
are becoming increasingly important to understand the complexities of competition. Such
models can help analyze market designs and regulatory policies. In this thesis, further
developments on the modelling and analysis of strategic behaviour in electricity markets
are presented. This thesis work has been conducted along three research lines.
In the first research line, an oligopolistic model of a joint energy and spinning reserve
market is formulated to analyze imperfect competition. Strategic behaviour is introduced
by means of conjectured functions. With this integrated formulation for imperfect compe-
tition, the opportunity cost between generation and spinning reserve has been analytically
derived. Besides, inter-temporal and energy constraints, and financial transmission rights
are taken into account. Under such considerations, competition in electricity markets is
modelled with more realism. The oligopolistic model is formulated as an equilibrium prob-
lem in terms of complementarity conditions.
In the second research line, a methodology to screen and mitigate the potential exacer-
bation of market power due to the ownership of financial transmission rights is presented.
Hedging positionratiosarecomputed toquantify thehedging level offinancial transmission
rights. They are based onthe actualimpact that each participant hasin theenergy market,
and on the potential impact that it would have with the ownership of financial transmission
rights. Thus, hedging position ratios are used to identify the potential gambling positions
from the transmission rights bidders, and, therefore, used to prioritize critical positions in
the auction for transmission rights.
In the last research line, alternative equilibrium models of markets for financial trans-
mission rights are formulated. The proposed equilibrium framework is more natural and
flexible for modelling markets than the classic cost-minimization markets. Different mar-
kets for financial transmission rights are modelled, namely: i) forwards, ii) options, and iii)
joint forwards and options. Moreover, one-period, multi-period and multi-round markets
for forwards are derived. These equilibrium models are proposed to analyze the bidding
strategies of market participants. The potential impact of bidders on congestion prices is
modelled by means of conjectured transmission price functions.
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Acknowledgements
I would like to express my deepest gratitude to my parents. Through all the limitations
and problems they faced to provide me with an education, they showed me the value of
it, and built on me the spirit of hard work and effort. To them I owe my values and
achievements. Thanks to my brother and sisters for being always there.
I am grateful with Eugenia, my beloved wife, who joined me in this 12/7 task during
the last two years. For all her support and confidence during the hard times we have passed
through. She rose me up to more than I can be.
I will always be grateful to my supervisor, Dr. Victor H. Quintana; throughout this
memorable and rewarding time at Waterloo, he has provided unwavering guidance and
continuous support. Special thanks to Mrs. Mone Quintana for all her caring and kindness.
In this three years, I had the opportunity to share with them many unforgettable moments,
from the enjoyable coffee times to the dinner with chocolate pizza in Brazil. I appreciate
their support and encouragement for traveling to Argentina, Australia, Brazil, Canada,
Chile, Italy, Malaysia, Mexico, Russia, Spain, Singapore and the United States.
Thanks to Profs. Anthony Vannelli, Antonio G´omez Exp´osito, David Fuller andKankar
Bhattacharya, members of my committee, for their confidence and suggestions. To Jose
Aguado, Rodrigo Fuentes and Marcelino Madrigal for their help. Thanks to Jill Knight for
all those meetings and talks.
This research work has been carried out under the sponsorship of Mexico through Con-
sejo Nacional de Ciencia y Tecnolog´ıa (CONACYT). I would like to express my gratitude
for this support.
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Contents
1 Introduction 1
1.1 Electricity Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Preliminaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2.1 Modelling competition . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2.2 Energy and spinning reserve markets . . . . . . . . . . . . . . . . . 6
1.2.3 Financial transmission rights and market power . . . . . . . . . . . 7
1.2.4 Markets for transmission rights . . . . . . . . . . . . . . . . . . . . 8
1.3 Research Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.4 Structure of the Thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2 Economics of Power Systems 12
2.1 Market Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.2 Competition in Power Markets . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.3 The Congestion Management Problem . . . . . . . . . . . . . . . . . . . . 16
2.4 Locational Marginal Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.5 Transmission Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3 An Oligopolistic Model for Power Networks 28
3.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2 An Integrated Market for Energy and Spinning Reserve . . . . . . . . . . . 31
3.2.1 GenCo problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.2.2 ISO problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.2.3 Markets clearing conditions . . . . . . . . . . . . . . . . . . . . . . 36
3.2.4 Equilibrium model . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
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3.2.5 Energy and spinning reserve interaction . . . . . . . . . . . . . . . . 41
3.3 Illustrative Six-Node System . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.3.1 Competitive energy market . . . . . . . . . . . . . . . . . . . . . . 43
3.3.2 Oligopolistic energy market . . . . . . . . . . . . . . . . . . . . . . 48
3.3.3 Multi-period market . . . . . . . . . . . . . . . . . . . . . . . . . . 52
3.4 A 57-node System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
3.5 FTR Impact on Market Power . . . . . . . . . . . . . . . . . . . . . . . . . 59
3.5.1 GenCo problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3.5.2 ISO problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
3.5.3 Market clearing conditions . . . . . . . . . . . . . . . . . . . . . . . 63
3.5.4 An illustrative example . . . . . . . . . . . . . . . . . . . . . . . . . 64
3.5.5 A 118-node system . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
4 Exacerbation of Market Power due to FTR Ownership 73
4.1 Proposed Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
4.1.1 A market for FTRs . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
4.1.2 Transmission usage factors for market participants . . . . . . . . . . 75
4.1.3 Transmission usage factors for FTRs . . . . . . . . . . . . . . . . . 76
4.1.4 Hedging position ratios . . . . . . . . . . . . . . . . . . . . . . . . . 76
4.1.5 Modified auction for FTRs . . . . . . . . . . . . . . . . . . . . . . . 78
4.2 Numerical Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
4.2.1 A three-node system . . . . . . . . . . . . . . . . . . . . . . . . . . 78
4.2.2 Larger systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.2.3 Change in network configuration . . . . . . . . . . . . . . . . . . . 88
4.2.4 Modified auction for FTRs . . . . . . . . . . . . . . . . . . . . . . . 88
4.3 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
5 Equilibrium Models of Markets for Financial Transmission Rights 93
5.1 Premium vs. Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
5.2 Influence on Congestion Prices . . . . . . . . . . . . . . . . . . . . . . . . . 95
5.3 A Market for Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
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5.3.1 FTR bidders problem . . . . . . . . . . . . . . . . . . . . . . . . . . 97
5.3.2 ISO problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
5.3.3 Market clearing condition . . . . . . . . . . . . . . . . . . . . . . . 100
5.3.4 Equilibrium model . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
5.4 A Market for Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
5.4.1 FTR bidders problem . . . . . . . . . . . . . . . . . . . . . . . . . . 105
5.4.2 ISO problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
5.4.3 Market clearing condition . . . . . . . . . . . . . . . . . . . . . . . 106
5.4.4 Equilibrium model . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.5 A Joint Market for Obligations and Options . . . . . . . . . . . . . . . . . 108
5.5.1 FTR bidders problem . . . . . . . . . . . . . . . . . . . . . . . . . . 108
5.5.2 ISO problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
5.5.3 Market clearing conditions . . . . . . . . . . . . . . . . . . . . . . . 110
5.5.4 Equilibrium model . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
5.6 Numerical Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
5.6.1 A three-node system . . . . . . . . . . . . . . . . . . . . . . . . . . 113
5.6.2 A five-node system . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
5.7 A Multi-Round Market for Obligations . . . . . . . . . . . . . . . . . . . . 120
5.7.1 FTR bidders problem . . . . . . . . . . . . . . . . . . . . . . . . . . 122
5.7.2 ISO problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
5.7.3 Market clearing condition . . . . . . . . . . . . . . . . . . . . . . . 122
5.7.4 Equilibrium model . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
5.7.5 Iterative procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
5.7.6 Numerical examples . . . . . . . . . . . . . . . . . . . . . . . . . . 124
5.8 A Multi-Period Market for Obligations . . . . . . . . . . . . . . . . . . . . 127
5.8.1 FTR bidders problem . . . . . . . . . . . . . . . . . . . . . . . . . . 128
5.8.2 ISO problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
5.8.3 Market clearing condition . . . . . . . . . . . . . . . . . . . . . . . 129
5.8.4 Equilibrium model . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
5.8.5 Numerical examples . . . . . . . . . . . . . . . . . . . . . . . . . . 131
5.9 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
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6 Conclusions 135
6.1 Summary of Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
6.2 Directions for Future Research . . . . . . . . . . . . . . . . . . . . . . . . . 137
Bibliography 139
A Power Distribution Factors 153
B Test Systems Data 156
B.1 Five-node System Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
B.2 Thirty-node System Data . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
B.3 57-node System Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
B.4 118-node System Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
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List of Tables
3.1 Generation and demand data. Six-node system. . . . . . . . . . . . . . . . 44
3.2 Energy and spinning reserve interaction. Competitive market. . . . . . . . 45
3.3 Profits comparison in $/h. Competitive market. . . . . . . . . . . . . . . . 46
3.4 Energy and spinning reserve interaction. Oligopolistic market. . . . . . . . 49
3.5 Profits comparison in $/h. Oligopolistic market. . . . . . . . . . . . . . . . 50
3.6 Ramp-rate limits effect on the market outcome. Static vs. dynamic case. . 53
3.7 Net profits for GenCos. 57-node system (in $). . . . . . . . . . . . . . . . . 58
3.8 Market outcomes comparison with different FTR ownerships . . . . . . . . 66
3.9 Comparison of generation schedules in MW. . . . . . . . . . . . . . . . . . 69
3.10 Comparison of GenCos profits in $/h. . . . . . . . . . . . . . . . . . . . . . 70
4.1 Market outcomes comparison. . . . . . . . . . . . . . . . . . . . . . . . . . 80
4.2 HPRs for different FTR bids. . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.3 Opportunity cost (in $/MWh) for different FTRs. . . . . . . . . . . . . . . 85
4.4 Hedging position ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
4.5 Nodal prices in the fourteen-node system. . . . . . . . . . . . . . . . . . . 86
4.6 HPRs for the n-1 contingencies (p.u.). . . . . . . . . . . . . . . . . . . . . 89
4.7 Allocation of financial transmission rights (in MW). . . . . . . . . . . . . . 91
5.1 Outcome comparison for different FTR markets with A = 0.0. . . . . . . 115
ν,ℓ
5.2 Outcome comparison for different FTR markets with A = 0.01. . . . . . 117
ν,ℓ
5.3 Awards and prices for obligations. . . . . . . . . . . . . . . . . . . . . . . . 119
5.4 Cost, benefit and surplus (in $) for obligations. . . . . . . . . . . . . . . . . 120
5.5 Awards and prices for options. . . . . . . . . . . . . . . . . . . . . . . . . . 121
5.6 Cost, benefit and surplus (in $) for options. . . . . . . . . . . . . . . . . . 121
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5.7 Benefit function parameters (in $/MW) for FTRs. . . . . . . . . . . . . . . 124
5.8 Multi-round market outcome. . . . . . . . . . . . . . . . . . . . . . . . . . 125
5.9 Source and sink nodes for FTRs. . . . . . . . . . . . . . . . . . . . . . . . 125
5.10 FTR prices (in $/MW). Multi-round market. . . . . . . . . . . . . . . . . 126
5.11 FTR awards (in MW). Multi-round market. . . . . . . . . . . . . . . . . . 126
5.12 FTR awards (in MW). Multi-round market (continued). . . . . . . . . . . 127
5.13 Linear parameter values (β ) of the benefit functions. . . . . . . . . . . . 131
ν,ℓ
5.14 Multi-period market outcome. Three-node system. . . . . . . . . . . . . . 132
5.15 FTR prices (in $/MW). Multi-period market. . . . . . . . . . . . . . . . 132
5.16 FTR awards (in MW). Multi-period market. . . . . . . . . . . . . . . . . . 133
B.1 Transmission lines data. Five-node system. . . . . . . . . . . . . . . . . . 157
B.2 Suppliers bids data. Five-node system. . . . . . . . . . . . . . . . . . . . . 157
B.3 Financial transmission rights bids. . . . . . . . . . . . . . . . . . . . . . . 158
B.4 Benefit function parameters for FTRs. . . . . . . . . . . . . . . . . . . . . 159
B.5 Transmission lines data. Thirty-node system. . . . . . . . . . . . . . . . . . 160
B.6 Suppliers bids data. Thirty-node system. . . . . . . . . . . . . . . . . . . 161
B.7 Demand data. Thirty-node system. . . . . . . . . . . . . . . . . . . . . . . 161
B.8 Generation units data. 57-node system. . . . . . . . . . . . . . . . . . . . . 162
B.9 Peak demands for the 57-node system (in MW). . . . . . . . . . . . . . . . 162
B.10 Generation units data. 118-node system. . . . . . . . . . . . . . . . . . . . 163
B.11 Generation units data (Continued). . . . . . . . . . . . . . . . . . . . . . . 164
B.12 Demands for the 118-node system (in MW). . . . . . . . . . . . . . . . . . 165
B.13 Financial transmission rights portfolios (in MW). . . . . . . . . . . . . . . 166
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