An Oligopolistic Oligopolistic Electricity Market Model Electricity Market Model An with Tradable NO x Permits with Tradable NO x Permits Yihsu Chen Benjamin F. Hobbs Dept. Geography & Environmental Engineering Whiting School of Engineering The Johns Hopkins University Baltimore, MD USA
Outline Outline I. Overview of Questions II. Model Structure and Computation Approach III. Application Interaction of PJM Electricity and USEPA NO x Budget Program a. Background b. Assumptions IV. Results Comparison of perfect competition with different scenarios a. Price b. Social Welfare c. Productive and NO x Trading Efficiency d. Strategy Rationale V. Conclusion
THIS SLIDE SHOULD BE OMITTED IN A THIS SLIDE SHOULD BE OMITTED IN A 10 MINUTE TALK, WILL TAKE TOO 10 MINUTE TALK, WILL TAKE TOO LONG (YOU SHOULD PRACTICE YOUR LONG (YOU SHOULD PRACTICE YOUR TALK TO SEE WHICH SLIDES CAN BE TALK TO SEE WHICH SLIDES CAN BE What might be the effect of policies concerning… – Generation structure (mergers, ownership, distributed resources, entry…) DONE QUICKLY AND WHICH SEEM LIKE DONE QUICKLY AND WHICH SEEM LIKE – Transmission investment (new lines …) DISTRACTIONS DISTRACTIONS – Market rules • Transmission pricing (taxes, congestion pricing, counterflows, zonal …) • Access (retail load, generators, arbitragers …) • Environmental markets (green certs., CO2 trading …) …upon… – Economic efficiency (allocative & productive efficiency) – Income distribution (TSO revenues, profits, consumer surplus) – Emissions …considering generator strategic behavior? – Bidding – Capacity withdrawal – Manipulation of transmission (deliberate congestion, decongestion) – Manipulation of emissions markets (withholding of allowances)*****
II. Model Structure and Computational Approach: Model Structure and Computational Approach: II. Direct Solution of Equilibrium Conditions Direct Solution of Equilibrium Conditions Producer A Producer A Producer B Producer B Choose gen & Choose gen & Choose gen & Choose gen & sales to sales to sales to sales to maximize profit maximize profit maximize profit maximize profit s.t. capacity s.t. capacity s.t. capacity s.t. capacity st order ⇒ 1 ⇒ ⇒ 1 st order ⇒ 1 st order 1 st order conditions conditions conditions conditions ISO: Choose Transmission Flows to Max Value of Network ISO: Choose Transmission Flows to Max Value of Network st order conditions s.t. transmission constraints ⇒ ⇒ 1 1 st order conditions s.t. transmission constraints Consumers: Max Value - - Expenditures (Demand Curve) Expenditures (Demand Curve) Consumers: Max Value Market Clearing Conditions Market Clearing Conditions 1. Derive first-order conditions for each player 2. Impose market clearing conditions 3. Solve resulting system of conditions ( complementarity problem )
III. Application Background Application Background III. PJM Market and USEPA NO x Program PJM Market and USEPA NO x Program PJM Market USEPA NO x Program Need to give credit for Figure …
Model Assumptions Model Assumptions • Network and Load – Load duration curve (LCD) approximated by 5 blocks – Only 500 kV line � 14 nodes, 18 arcs – No transmission losses – Power Transfer and Distribution Factors (PTDFs) • Producers – 791 generators – 6 largest producers (capacity share: 4% to 18%) • Cournot strategy in electricity market • Conjectured pricing in NO x market – Remaining produces price takers (3 producers) • Consumer – Linear demand Curve • ISO • Importer
NO x Conjectured Pricing NO x Conjectured Pricing Producer’s belief regarding its action on NO x price p nox ($/ton) NCP f = 0.1 [($/ton)/ton] + Buy - Sell q nox (tons) qNO x : Net Position in NO x permit market � Sell (-) and Buy (+)
Scenarios Investigated Scenarios Investigated A. Perfect competition (COMP) – Price-taking behavior in power & allowances markets B. Oligopoly in electricity market ( CONOURT ) Cournot strategy for 6 largest in electricity market – No Conjectured NO x Pricing C. Oligopoly in both markets ( CONOURT+NO x ) – For 6 largest producers: Cournot strategy in electricity market plus Conjectured NO x Pricing in NO x market • NCP 2,3,5,6,7 =0.1 [($/ton)/ton] • NCP 4 = 1.5 [$/ton)/ton] � The largest producer with a long position in the NO x market
IV. Results: Price Comparison Results: Price Comparison IV. COMP 45 COURNOT Price of electricity goes up • 40 COURNOT+NOx as producers restrain output 35 30 25 40 32.7 40 • Peak period electricity price 20 15 increase by 37% and 34% 10 compared with COMP COMP for 5 COURNOT and COURNOT 0 COURNOT+NO x x , COURNOT+NO Sale-Weighted Electricity Price($/MWh) respectively 3000 COMP COURNOT 2500 Price of NO x decreases as a • COURNOT+NOx result of producers reducing 2000 energy output, suppressing 2174 1595 2557 NO x permit demand 1500 1000 • Producer 4 drives up NO x 500 permit price if strategic in emissions market (HOW??) 0 NOx Permit Price ($/ton)
Welfare Analysis: Compared to Welfare Analysis: Compared to Competitive Scenario Competitive Scenario Can’t see total welfare (should show) What is 8931? (Label as CS) CS PS IMP ISO Units? SW (social welfare) • 14000 ISO, 26 declines by 112 and ISO, 67 ISO, 24 106 [M$/yr] for IMP, 171 IMP, 142 IMP, 171 12000 Cournot solutions • PS (producer PS, 2520 10000 PS, 3267 PS, 3261 surplus) goes up as producers exercise 8000 market power • IMP (Importer) 6000 revenue goes up as 8931 electricity prices go 8086 8096 4000 up 2000 • ISO revenue goes down as less power 0 being transferred A B C
Efficiency Comparison Efficiency Comparison Compared to Competitive Scenario Compared to Competitive Scenario Definition of measurement: 82.6 90 79.1 a. Productive Inefficiency 80 = (GC i –GC COMP |load*)[M$] COMP 70 COURNOT 60 COURNOT+NOx b. NO x Trading Inefficiency 50 =(Trade NOx i – Trade NOx COMP ) 40 [10^3 tons] 30 16.3 15.2 Market power leads to: 20 10.3 10 a. A 8.0% and 7.7% of 0 productive inefficiency for 0 COUNOT and COUNOT Production Efficiency Trading Volume [10^3 COURNOT+NO x COURNOT+NO [M$] tons] x b. A 6.8% and 36.5% decrease in NO x trading volume
Player Strategies in NOx Market Player Strategies in NOx Market 35 PECO qNOx [10^3 tons] (Net Sale of Permits - - qNOx [tons]: (Net Sale of Permits PECO Total Sale [10^6 MWh] 30 Sell (-)/Buy(+)) 25 25 27.2 28.6 • PECO: Compare with COMP 20 COMP 15 – Restrain output and sell more 10 COURNOT � NO x permits in COURNOT 5 price falls from $2,557 to $1,595 0 – Expand output and sell fewer COMP COURNOT COURNOT+NOx -5 NO x permit in COURNOT+NO COURNOT+NO x -6.2 -10 -7.8 x � Price falls only to $2,174 -15 -12.6 Connectiv qNOx [10^3tons] 4 Connectiv Total Sale [10^6 MWh] Connectiv: Compare with COMP • COMP 3.3 3.5 – Increase output by 84% due to 3 higher electricity prices in 2.20 1.9 COURNOT � become net buyer 1.83 COURNOT 2 in NO x market – Shrink output by 6% in 1 COURNOT+NO x x compared with COURNOT+NO -0.66 COURNOT due to higher costs 0 associated with NO x permits COMP COURNOT COURNOT+NOx -1
Conclusion V. Conclusion V. • Interactions between electricity and NO x market can be investigated by Cournot and conjectured NO x pricing assumptions in a large-scale model • Detailed representation of market allows a variety of welfare and efficiency analyses, and to gain insight on players’ strategy • The model is capable of answering various policy questions, such as: – “What would the NO x price be if the CAP is imposed over entire year?” This is not an exciting conclusion to end with. Have more questions pointing to future research (e.g., optimal manipulation of NOx market)
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