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Modern Energy Markets

Real-Time Pricing, Renewable Resources and Efficient Distribution

Authors: Maria Kopsakangas-Savolainen, Rauli Svento

Publisher: Springer London

Book Series : Green Energy and Technology

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Technik" , Springer Professional "Wirtschaft"

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About this book

Energy has moved to the forefront in terms of societal and economic development. Modern Energy Markets is a comprehensive, economically oriented, exploration of modern electricity networks from production and distribution to deregulation and liberalization processes. Updating previous work by the authors, different aspects are considered resulting in a complete and detailed picture of the systems and characteristics of modern electricity markets.

Modern Energy Markets provides clear detail whilst encompassing a broad scope of topics and includes:
•A method to model energy production systems including the main characteristics of future demand side management,
•Different applications of this model in nuclear and renewable energy scenarios,
•An analysis of Real-Time Pricing of electricity and its potential effects across the market, and,
•A discussion of the need for regulation in an easily monopolized industry.

Engineering and Economics students alike will find that Modern Energy Markets is a succinct and informative resource, as will researchers interested in environmental and energy issues. The inclusion of timely and relevant issues related to economic decision will also be of value to industry and civil officials.

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Table of Contents

Frontmatter

Chapter 1. Introduction

Abstract

Energy and electricity have become key elements and drivers in the modern world. In our networked economies with digital products and processes and device-driven consumption stabile, riskless, and justly priced electricity supply is the current day basement upon which everything else more or less builds on. At the same time the use of many primary energy sources can be connected with greenhouse gas emissions and global warming. This basement has also gone through heavy structural changes and even bigger changes can be seen in the future. In this book we try to envision and analyze these changes with an economist’s eye.

Maria Kopsakangas-Savolainen, Rauli Svento

Chapter 2. Restructuring of Electricity Markets

Abstract

In this chapter we present and discuss the grounds and incentives of the deregulation and liberalization processes that have been carried out in many countries during the past few decades. We also assess the crucial factors which affect the potential successfulness of the deregulation and liberalization processes. We use the first international electricity market (Nordic power market) as an example to characterize and describe the restructuring process of the electricity industry. According to our assessment the success of deregulation and improved efficiency as a result of the restructuring process depends largely on six issues; on the number of active players; on the rules of bidding procedure in the wholesale market of electricity; on the organization and provided incentives of the demand-side management; on the neutral role of the transmission grid; on the mixture of production technologies; and finally on the ownership structure of the market participants.

Maria Kopsakangas-Savolainen, Rauli Svento

Chapter 3. Modeling Energy Production System

Abstract

In this chapter, we derive one of the various ways to model the energy production system. The main motivation to choose this specific modeling approach is our goal of analyzing the energy market in a forward-looking sense. Especially, we want to include into the model the main characteristics of the future demand-side managements. We do this by including into the model the Real-Time Pricing (RTP) mechanism of the energy market. The supply side of the markets is first constructed by using one representative technology in order to describe the main features of the model. It is then enlarged by constructing production system technology by a technology such that the long-run equilibrium of the market can be reached. The model constructed in this chapter is used later in this book in various simulation applications.

Maria Kopsakangas-Savolainen, Rauli Svento

Chapter 4. Real-Time Pricing; An Application to the Nordic Power Markets

Abstract

In this chapter we study the potential effects of real-time pricing of electricity on; the need for total, peak, and mid-merit capacities; total demand; prices; peak demand hours; and economic welfare in the Nordic power markets. A characteristic of the Nordic power market is the large variety of production technologies, of which hydro and nuclear power are capacity constrained. We have also studied whether the results of real-time pricing (RTP) are sensitive to the simultaneous implementation of tradable emission permits. We find that RTP diminishes the need for total capacity even with inelastic demand. Our results show that even with modest assumptions related to RTP participation, the annual mid-merit and peaker capacity efficiency savings amount to 97 million Euros, which are around 6% of their total annual investment costs. The price of the peak demand hour clearly diminishes as the share of the RTP customers increases or demand becomes more price elastic. We compare RTP and tradable emission permits as two separate instruments in reaching energy use efficiencies and show how these two instruments must be seen as complementary and not as substitutable instruments. We find that welfare effects of the implementation of RTP are positive.

Maria Kopsakangas-Savolainen, Rauli Svento

Chapter 5. The Effects of Nuclear Power Investments in Real-Time Pricing Framework

Abstract

In this chapter we analyze the potential impact of increase in nuclear power capacity on; the need for other technology capacities; on the price of electricity; on the demand for electricity; and on CO₂ emissions. Based on the decisions made by the Finnish government, nuclear power production is going to increase in the Nordic power market in the future. We use the Real-Time Price accounting simulation model in analyzing the effects. We show that due to an outward shift of the supply curve the prices are going to decrease. As a result of this, the total energy demand increases. But the generation structure changes so that the share of mid-merit technologies decreases. As a consequence emissions decrease significantly. Interestingly, decrease in emission is strengthened as the demand becomes more elastic and also with an increase in the share of customers using Real-Time price-based contracts. This confirms the argument of the importance of Real-Time Pricing and price-sensitive demand in reaching the EU-set targets of mitigation in greenhouse gases.

Maria Kopsakangas-Savolainen, Rauli Svento

Chapter 6. Emission Trading and Market Access of Renewables

Abstract

In this chapter we look at the impact of different carbon emission prices combined with the Real-Time Pricing (RTP) to the promotion of renewable energy (wind) to enter the Nordic power market. We show that regardless of the carbon price the amount of wind entering to the market increases with the share of the consumers on RTP. The amount of wind entering to the market is also really increasing with the emission permit price. The increase in the amount of wind power is shown also as reduced emissions of carbon dioxide. The reduction is bigger the higher is the emission price. The decrease in emissions is strengthening as the share of the customers in RTP increases. Notably, even though wind power is entering to the market as the carbon price increases we do not reach the aggregate national target level for wind power even with very high carbon price at least if we assume risk averse wind power investors. Consequently if we want to see high levels of installed wind power capacity also other support mechanisms are needed.

Maria Kopsakangas-Savolainen, Rauli Svento

Chapter 7. Efficiency of Electricity Distribution

Abstract

In this chapter we show that, because of utility heterogeneities efficiency measurement is a demanding task. Electricity distribution is a natural monopoly industry and consequently there is a need for regulation. Efficiency measurement of distribution utilities is essential to achieve accurate information of ingredients for the efficient regulation. Unless heterogeneities are explicitly modeled inaccurate information can be produced for the regulators to use. We present Data envelopment analysis (DEA) and Stochastic frontier analysis (SFA) models, which are the basic models of frontier efficiency analysis. We show by using consistency measurement techniques how these models produce inconsistent results. We also show by testing traditional Cobb–Douglas and flexible form Translog frontier specifications that the frontier functional form specification is not crucial in identifying the inefficiencies once observed heterogeneity is included into the model.

Maria Kopsakangas-Savolainen, Rauli Svento

Chapter 8. Observed Versus Unobserved Heterogeneity in Electricity Distribution

Abstract

In this chapter we present the new ways to include both observed and unobserved heterogeneity into the efficiency frontier models that have been developed. Observed heterogeneity can be included in the frontier and as explaining cofactors for the moments of the distributions of either the frontier or of the inefficiency. Unobserved heterogeneity can be included by randomizing the frontier parameters. We show how these models can be specified and estimated. We show that random parameter estimation of stochastic cost frontiers produces clearly smaller inefficiency estimates than the basic random effects (RE) model or its extended version. We show how the best fit can be reached by modeling observed heterogeneity into the inefficiency distribution and unobserved heterogeneity into the firm-specific random constant term of the frontier.

Maria Kopsakangas-Savolainen, Rauli Svento

Chapter 9. Regulating Electricity Distribution Utilities

Abstract

In this chapter we compare the welfare effects of different regulation schemes of electricity distribution utilities. The compared regulation schemes are Fixed Price regulation, Cost of Service regulation, Menu of Cost-Contingent Contracts, and Simple Menu of Contracts. In our calculations we utilize the information of a firm’s potential to improve cost efficiency. The firm-specific cost information of Finnish electricity distribution utilities is obtained by using various Stochastic Frontier models presented in earlier chapters of this book. Our basic result is that welfare can be improved by changing the Cost of Service regulation scheme to the Menu of Contracts regulation. Welfare also increases in the case of Fixed Price regulation and Simple Menu of Contract regulation. There is, however, a significant difference among regulation regimes on how this improved welfare is distributed to consumers and producers.

Maria Kopsakangas-Savolainen, Rauli Svento

Chapter 10. The Future of Electricity Markets

Abstract

In this chapter we look at the future of electricity networks and markets. We look at the technological and economic changes related to the change from “dumb grids” to “smart grids.” We show how this technological change also changes the distribution environments into two-sided markets. We give a basic model of such two-sided electricity market. We discuss the ways this change necessitates new economic business models in distribution. We open the question of how this change to smart grid environments also relates to demand side management issues. New types of economic incentive-based contracts are necessitated. Also new types of incentive-based regulation schemes must be created.

Maria Kopsakangas-Savolainen, Rauli Svento

Backmatter

Title: Modern Energy Markets
Authors: Maria Kopsakangas-Savolainen
Rauli Svento
Copyright Year: 2012
Publisher: Springer London
Electronic ISBN: 978-1-4471-2972-1
Print ISBN: 978-1-4471-2971-4
DOI: https://doi.org/10.1007/978-1-4471-2972-1