market power iranian
TRANSCRIPT
Energy Policy 38 (2010) 5582–5599
Contents lists available at ScienceDirect
Energy Policy
0301-42
doi:10.1
n Corr
E-m
(M.H. A
journal homepage: www.elsevier.com/locate/enpol
Market power analysis for the Iranian electricity market
Mohammad Hossein Asgari n, Hassan Monsef
School of ECE, University of Tehran, North Kargar Avenue, P.O. Box: 14395-515, Tehran, Iran
a r t i c l e i n f o
Article history:
Received 2 September 2009
Accepted 29 April 2010
Keywords:
Iranian electricity market
Market power
Market power mitigation
15/$ - see front matter & 2010 Elsevier Ltd. A
016/j.enpol.2010.04.056
esponding author. Tel.: +98 21 88705484; fa
ail addresses: [email protected], asgari2001
sgari), [email protected] (H. Monsef).
a b s t r a c t
The market power problem in Iranian electricity market is addressed in this study. This paper by using
various structural indices of market power and reviewing market results analyzes the intensity of
competition in Iran’s electricity market and examines whether this market is functioning at an
appropriate level of efficiency. In this article the most well-known indices of market power are
calculated in two approaches for two different scenarios (current situation and future outlook of
generation sector’s ownership in Iran’s power industry). Comparing the results of these scenarios
promises more competitive market for the second scenario. Calculating Residual Supply Index for Iran’s
power market shows despite admissible values of concentration ratios, due to supply scarcity during
periods when the demand is close to the total available capacity, some suppliers can exercise market
power even with a relatively small market share. The most important price and load indices like
weighted average prices and load/price duration curves of Iranian electricity market during March
2007–March 2008 are also analyzed in this paper. These results imply the existence of economic
withholding. The main limiting factors of competition and significant implemented countermeasures
for market power mitigation in Iran’s electricity market are also mentioned.
& 2010 Elsevier Ltd. All rights reserved.
1. Introduction
Like most developing countries, Iran is moving towards acompetitive power market with the assumption that the compe-tition will result in technological progresses, better services,higher efficiency, enhanced reliability, as well as less costlydelivery of electricity to consumers. Experiences with restruc-tured electricity markets have demonstrated that the presump-tion that markets will intrinsically produce competitive results isnot justified and power markets behave more like an oligopolythan a perfect competitive market. One of the main concernsrelated to industry liberalization and market efficiency is marketpower. Due to some characteristics of Iran’s electricity market, itseems that competition is just conceivable in certain hours and inremaining hours some pivotal suppliers abuse market situationand exercise market power.
Market power may be defined as owning the ability by a seller,or a group of sellers, to drive the spot price over a competitivelevel, control the total output, or exclude competitors from arelevant market for a significant period of time. A market powercould hamper the competition in power production, servicequality and technological innovation. The net result of theexistence of market power is the transfer of wealth from buyers
ll rights reserved.
x: +98 21 88700562.
to sellers through a misallocation of resources (Shahidehpouret al., 2002).
Assessment of competitiveness and market efficiency, detec-tion of dominant suppliers, identification of actual exertions ofmarket power, investigation of gaming opportunities, implemen-tation of mitigation measures and modification of market rulesare the main responsibilities of market monitoring units (MMUs).Many tools for detection and identification of market power havebeen developed and many reports and articles have beenpublished about the evaluation of market power in variouselectricity markets throughout the world.
Competitiveness of Korean, Singaporean, Colombian, UK,Nordic, USA, European, German and Texas electricity marketsare analyzed in Ahn and Niemeyer (2007; Chang (2007; Garciaand Arbelaez (2002; Green (2006; Hellmer and Warell (2009;Helman (2006; Lise et al. (2008; Weigt and Hirschhausen (2008and Zarnikau and Lam (1998), respectively. Analyzing marketpower in different electricity markets not only uncovers marketdesign flaws, restricts market power exertions, identifies strengthand weak points of markets and provides recommendations forpolicy makers but also sends economic signals to new entrantsand may help them in decision making process.
This paper examines whether Iran’s electricity market isfunctioning at a workable level of competition. To fulfill thisaim and for analyzing the potential of market power exertions,structural indices of market power (such as the largest marketshare, 4- and 8-firm concentration ratios, Herfindahl HirschmanIndex (HHI), entropy coefficient and Residual Supply Index (RSI))
M.H. Asgari, H. Monsef / Energy Policy 38 (2010) 5582–5599 5583
for Iran’s electricity market are calculated in two approaches (inboth capacity based and energy based methods) for two differentscenarios and the results are compared with each other. The firstscenario represents the current situation of Iran’s electricitymarket that each Regional Electric Companies (RECs), RegionalWater Companies (RWCs) and private generators are consideredas autonomous players. The second scenario corresponds to thefuture outlook of generation sector’s ownership in the country’spower industry (final step of horizontal unbundling process). Inthis scenario, it is assumed that RECs and RWCs are segregated tosmaller generation companies and all these companies participatein the market individually. The topmost important price and loadindices of Iranian electricity market such as weighted averageprices (WAPs), requested load (RL), load duration curve and priceduration curve are also analyzed in this paper. On the whole, thisstudy by using structural indices and analyzing market resultsconcludes that market power is an influential feature of Iranianelectricity market and should be addressed by more competition-oriented activities.
The remainder of this paper is organized as follows: in Section2, the restructuring process and its objectives in Iran’s electricityindustry are briefly explained. Section 3 introduces Iran’selectricity market and points out the main characteristics of thismarket. In Section 4, concepts and the most important topicsrelated to market power are reviewed. In Section 5, differentstructural indices of market power are calculated in twoapproaches for two scenarios for Iran’s power market and theresults are compared with each other. Market results and mostimportant price and load indices of the country’s power marketare analyzed in Section 6. The market power sources and mostsignificant fulfilled activities for mitigating market power inIranian electricity market are discussed in brief in Section 7.Section 8 concludes this study.
Table 1The most important legal actions for the Iranian power industry restructuring.
No. Title Objective
1 Article 122 (sub article b) of the law
of the 3rd socio-economical
development plan
Providing legal foundation for
participation of private sector in
the power industry of the country
2 Article 20 of the law of the 4th socio-
economical development plan and
its code of practice
Encouraging private sector to
invest in the power industry
projects
3 Article 25 (sub article b) of the law of
the 4th socio-economical
development plan and its code of
practice
Providing indiscriminate and open
access to transmission network
4 Sub article (L) of note 21 of the
budget act of fiscal year 2003–2004
Attracting and supporting
investments by private sector in
the power industry
5 The budget act of fiscal year 2005–
2006
Attracting and supporting
investments by private sector in
the power industry
6 The law of independence of
distribution companies
Providing the possibility of
transferring distribution sector’s
activities to private companies
7 Circular for power sell and purchase
conditions, rating and procedure and
its amendment (by Minister of
Energy)
Determining the executive
framework for electricity
transactions and power transit
8 General policies of the Article 44 of
the constitution of the Islamic
Republic of Iran
Resolving legal barriers, providing
foundation and accelerating of
transferring the state
responsibilities to the private
sector
2. Electricity restructuring in Iran
The Ministry of Energy (MOE) is responsible for the energypolicy in Iran. To organize the supervisory activities of thegovernment in the fields of operation and development of theelectric power industry within the framework of the policies ofthe MOE, the Expert Holding Company of TAVANIR (Iran PowerGeneration and Transmission Company) has been established. Theoperational responsibilities of MOE have been vested to the fullystate-owned TAVANIR Company since 2001. At present, TAVANIRCompany is responsible for the management of 16 RegionalElectric Companies (RECs), 32 Generation Management Compa-nies (GMCs), 42 Distribution Companies, Iran Power DevelopmentCo. (IPDC), Iran Renewable Energy Organization (SANA), IranEnergy Efficiency Organization (SABA), Iran Power Plant ProjectManagement (MAPNA) and Iran Power Plant Repairs Co. Based onthis arrangement all shares of aforementioned companies havebeen transferred to TAVANIR (TAVANIR Website).
Following the global trend to privatization and deregulation,extensive need for electricity and lack of governmental resourcesfor the development of electrical infrastructures, Iran decided toexperience restructuring in its electricity industry.
The feasibility studies of power industry restructuring andrelevant studies of power market design in Iran primarily began inearly 1990. These studies had two main directions: providinglegal foundations and determining the main implementationsteps.
The main legal impediment for the contribution of privatesector in parts of power industry was the dominant interpretationof article 44 of Iran’s constitutional law. According to article 44,large scale and mother industries such as ‘‘electricity supply’’ are
publicly owned and are administrated by the State. By thetraditional dominant interpretation of this article, all parts ofthe electricity generation industry must be governmental. But thewords of law are ‘‘electricity supply’’ and these words opened theway for a new interpretation by which the ‘‘supply’’ is meant as‘‘be sure from supplying the generation’’ (Ghazizadeh et al., 2007).
This new interpretation facilitates the next legal actions. Thenext significant legal actions for reforming Iran’s power industryare summarized in Table 1.
The main objectives of creation of competitive environmentand privatization in electricity industry in Iran are as follows:
�
Reduction the duty of the government in the areas of activitiesin which natural monopoly does not exist. � Clarification and separation of costs of generation, transmis-sion and distribution of electricity.
� Provision of just and fair competitive environment forgenerators and distributors of electrical energy and enhance-ment of the quality of their services.
� Improvement of productivity, reduction of losses and conse-quently reduction of generation costs of power units, whichhas a great competitive impact on industrial production of thecountry at the world market level.
� Providing the end user with the option to select the bestsupplier, among various energy suppliers.
� Provision of essential facilities for direct trade between buyersand sellers of electricity and operation of transmission andsub-transmission networks as transit networks.
� Provision of necessary incentives for attraction of the privatesector to invest on generation of electricity in collaborationwith foreign investors.
� Development of managerial potential. � Development of the capacities for domestic contractual andconsulting activities.
� Development of domestic manufacturing of power plant,transmission and distribution equipment (Iran Power IndustryInformation and Data Center, 2008).
M.H. Asgari, H. Monsef / Energy Policy 38 (2010) 5582–55995584
To fulfill the restructuring process in Iran’s power industry somesteps have been taken in two directions. The power sector of Iran
has unbundled the vertically integrated utility to four separateparts including generation, transmission, distribution and retailtrading. This separation was performed in three distinct steps. First,the financial separation and transparency were implemented byseparate accounting in each sector. The second step involved theestablishment of each part as an independent legal personality andas the last step in this direction competition was applied to thecompetitive sections of the industry (except transmission net-works). On the other hand, the restructuring was done horizontallyto solve the problem of the unique ownership, which is present inalmost all the industry sections. These actions include separatingthe ownership and trading operations from each other, releasingthe service, consulting and maintenance activities to the privatesector, providing build–operate–own (B.O.O.) and build–operate–transfer (B.O.T.) schemes for attracting capital from outside theindustry and encouraging private sector to contribute in expandingand constructing electricity infrastructures (Aflaki khosroshahiet al., 2009; Ghazizadeh et al., 2007).As another step towards liberalization of the industry,according to Article 44 of Iran’s constitutional law, MOE mustrelease and transfer the ownership of many of its power plants tothe private sector and pave the way for a competitive electricitymarket. Iranian government is preparing itself for implementingthis target.
To facilitate private sector contribution into power generation,the government has offered four basic options for the sale ofelectricity from Independent Power Producers (IPPs) plants andother power stations that private investors may have acquired fromTAVANIR. These options are: selling electricity directly to end-users,participating in the wholesale market, selling power to TAVANIRunder a long term Energy Conversion Agreement (ECA) and finallyselling power to Iran Grid Management Co. (Iranian IndependentSystem Operator) under a guaranteed fee arrangement.
As mentioned, signing ECA in the form of B.O.T. and B.O.O.contracts is a common way for attracting private sector’sinvestments in order to compensate Iran’s budget shortage inthe power sector.
From 2004 to 2007, Iran’s MOE had signed some long-termECAs with the private sector in B.O.T. and B.O.O. contracts.TAVANIR Co., being a representative of the Iran’s MOE and as themain holding company dealing with electricity generation,transmission and management in Iran, is responsible for signingthese agreements. In the first phase, TAVANIR signed two ECAswith South Isfahan Investment Co. and Mah-Tab Gostar Co.for Chehel-Sotoon and Rudeshur power stations, respectively(Sobhiyah and Kashtiban, 2008).
According to these agreements, TAVANIR guarantees toprovide the project companies with the needed fuel of the powerplants during the commercial operation period. TAVANIR also iscommitted to buy the negotiated net capacity of the power plantsbased on the availability rate and the energy conversion rate fromthe connection point of the power plants to the Iran’s nationalpower network with a guaranteed price.
Although many actions have been fulfilled by Iranian’s autho-rities to contribute private sector, in 2007 Iran’s MOE and itsaffiliated companies owned 89.35% of the total generating stationsand private sector together with large industries just possessed theremaining 10.65% (Electric Power Industry Statistics, 2008).
3. Electricity market in Iran
Iran’s power market was established in 23 October 2003. Tocomply with the general policy of the electric power industry of
Iran in the field of providing just and fair competition atmosphereand providing indiscriminate access of market participants totransmission network Iran Grid Management Co. (IGMC) wasformed in 2004 as an Independent System Operator (ISO) for Iran’spower grid. System operator (SO) that evaluates and acquiresrequired ancillary services, conducts transmission girds, integratesschedule and manages network in real time along with marketoperator (MO) that administrates financial transactions and orga-nizes information of transactions are two separate entities thatoperate under the supervision of IGMC C.E.O. (i.e. IGMC is a Min ISO).
To provide a close and effective supervision on the powermarket of the country, Electricity Market Regulatory Board hasbeen established. This Board is independent of TAVANIR Co.,private power stations and any other entities of Iran’s electricityindustry. This autonomous regulatory board comprises sevenexpert persons of the power industry that are assigned each twoyears directly by Iran’s energy minister.
Determining and approving market rules, ensuring fair andefficient operation of the electricity, developing new markets,market monitoring and investigating suspected cases of abuse ofmarket power are the main responsibilities of Iran’s ElectricityMarket Regulatory Board.
The power market in Iran is a purchasing agency and allparticipants are mandated to take part in the power pool. The mostsignificant features of Iran’s electricity market are as follows:
�
A day-ahead market. � Unilateral auction (distribution companies and RegionalElectric Companies (RECs) are just entitled to forecast theirhourly demand, namely, the demand curve in a certain hour isa vertical line whose value is equal to the aggregated demandin that hour and the price elasticity of demand is zero).
� The discriminatory pricing in supply side (the method ofpayment is Pay-as-bid).
� Wholesale market. � The uniform pricing in demand side (the price of energy fordistribution companies and RECs is determined through amarket clearing price (MCP)).
� A hybrid market model (direct access and bilateral contracts areallowed in Iran’s power market between RECs and consumers.All information, except prices, must be submitted to the ISO).
� Availability based payments for transmission services (IGMCWebsite).
Ancillary service markets in Iran’s power market are evolvingand developing gradually. The first presented ancillary service inIran’s electricity market was the regulation service (primaryfrequency control) and this market was launched on 22 May 2007.At present, voltage support services (reactive power market) andblack start services are two other ancillary services in Iran’s powermarket (Asgari et al., 2008).
RECs and Regional Water Companies (RWCs) (as the represen-tative of their regional power plants) together with some privatepower stations are supply side participants of Iran’s electricitymarket, which take part in the market individually. It is noteworthythe private power stations that are entered to a long term EnergyConversion Agreement (ECA) with TAVANIR do not supply the partof electricity that is previously sold to TAVANIR (based on thecontract) to the market. This part is sold by TAVANIR in thewholesale market. Thus, TAVANIR is considered as another supplyside participant of Iranian power market. Most of private powerplants sell their output with the guaranteed price to TAVANIR orIGMC and normally do not directly participate in power pool. RWCsown generation facilities of hydro power plants and dams. RWCsare working under the supervision of the Deputy of Water and
Table 2The market execution process in Iranian electricity market.
4 days earlier � SO: Announcing load forecasts for four days later.
3 days earlier � SO: Announcing load forecasts variations for three days
later.
� Sellers: Declaring generation capability, suggesting an
hourly individual supply curve (in maximum ten steps) for
each unit of power plant they own and submitting these
data to MO (before 9:00 AM).
� Buyers: Forecasting hourly demand for three days later and
submitting the data to MO (before 9:00 AM).
� MO: Receiving supply and demand curves, the latest
information of load forecasts and grid’s status.
2 days earlier � SO: Announcing load forecasts variations for two days later.
� Sellers: They are just entitled to change their declared
generation capability (due to failures in their generation
facilities or other restrictions). They are not allowed to
modify their suggested rates.
� Buyers: They are allowed to modify their hourly demand
forecasts for two days later.
� MO: Receiving modified supply and demand curves, the
latest information of load forecasts and grid’s status.
1 day earlier � SO: Announcing load forecasts variations for next day,
receiving market results from MO after market settlement.
� Sellers: They are just entitled to change their declared
generation capability (due to failures in their generation
facilities or other restrictions). They are not allowed to
modify their suggested rates (before 10:00 AM).
� Buyers: They are allowed to modify their hourly demand
forecasts for next day (before 10:00 AM).
� MO: Receiving modified supply and demand curves, the
latest information of load forecasts and grid’s status,
determining market results, informing winner producers
and publishing the next day’s market results (12:00 AM).
Marketexecution day
� SO: Dispatching winner generation units in accordance with
market results and managing the grid in real time.
� Sellers and buyers: Cooperating with SO.
M.H. Asgari, H. Monsef / Energy Policy 38 (2010) 5582–5599 5585
Waste Water of the MOE. Hydro electricity consists 14.7% of thetotal installed power generation capacity of the country. KhuzestanWater & Power Authority possesses most of this capacity.
Most of the thermal generation capacity of the country belongsto RECs. While RECs are affiliated to the Expert Holding Companyof TAVANIR, they are acting the same as the holding companywithin the border of their managerial territory and are respon-sible for coordination of their affiliated companies, generation,transmission and sell and supply of electricity to all consumingsectors in their region. 100% of the shares of all these companiesare governmental and are administrated by TAVANIR Company.The generation, transmission and distribution facilities in eachregion are under the ownership of relative REC. GenerationManagement Companies (GMCs), which are established as non-governmental companies, are responsible for the operation of oneor several power plants in the related region. At present, each ofthese companies acts as a contractor for operation of power plantunder one agreement with the relative REC (TAVANIR Website).
Distribution companies and RECs are demand side participantsof Iranian electricity market. At present, 42 distribution compa-nies are working as non-governmental companies in Iran.According to the articles of association of distribution companies,private sector (Power and Water Industries Investment Co. (SABACo.)) possesses 60% of the share and the remaining share belongsto government sector. The governmental share of these compa-nies is in the possession of the Expert Holding Company ofTAVANIR and from the point of view of operation they are underthe supervision of the RECs. The activities of power distributioncompanies are carried out in less than five agreements with theRECs such as agreement for customer’s service, agreement forplanning design and supervision, agreement for improvement andoptimization and agreement for development of services. RECs, asthe other demand side participant, on behalf of large industriesand consumers submit their hourly demand forecasts and takepart in power market (like distribution companies).
Table 2 summarizes Iran’s electricity market executionprocess.
Payments to supply side participants in Iran’s power marketconsist of two components: capacity payment and energypayment. All the available generators in the market (for theirdeclared generation capability and regardless of their actualgeneration) receive a certain hourly fixed payment. The avail-ability rate is set annually by the minister of energy. This rate isequal for the all types of generators. All accepted generators in themarket receive energy payment, too. The price of energy iscalculated through the market clearing price from a submitted bidcurve and pay-as-bid method is selected for this payment. Inorder to mitigate market power and prevent price spikes, a hard(inelastic) price cap is designed for Iran’s power market. The valueof price cap is determined annually by Iran’s minister of energy.
Market designers of Iranian electricity market confirm thecapacity payment mechanism and claim this payment increasesthe investment security, prevents price spikes and avoidsunnecessary stress in the market, especially at market start-up(Ghazizadeh et al., 2007).
Although the establishment of power market in Iran has hadpositive and undeniable consequences such as clarification andseparation of costs of different sectors, reduction of losses andother excessive costs, provision of incentives for attracting privatesector’s investments and paving the way for privatization andindustry liberalization (IGMC Website; TAVANIR Website),Iranian electricity market is still in its initial steps to attain a fullycompetitive market. Regardless of the technical problems of Iran’spower system such as lack of appropriate measuring, commu-nication and telecommunication infrastructures, some problemsin operation of power stations, transmission network constraints,
generation shortage and market power problems, there are someother significant factors that have unfavorable impacts onefficiency of Iran’s power market. Long term governmentalbackground about electricity supply, traditional thoughts in somemanagerial levels of the industry, some limitations in liberal-ization of energy prices, adverse budgeting system in the powerindustry, lack of proper education for market participants aboutrestructuring and bidding strategies are other problems of Iran’selectricity market in transition to a fully competitive market.
In Section 5, we try to analyze and quantify one of theseproblems (market power), which seems have undesirable effectson Iranian electricity market efficiency.
4. Literature review on market power
Market power is a symptom of an unfair and discriminativecompetition and decreases the economic efficiency of an elec-tricity market. Market power also results in deadweight welfareloss and transfer of wealth from consumers to producers.Economists, antitrust agencies and electricity market regulatorshave various interpretation of this concept. Some economistsdefine market power as ‘‘The ability to profitably alter prices awayfrom competitive levels’’ (Mas-Colell et al., 1995). On the otherhand, Department of Justice and Federal Trade Commission of USdefines market power as ‘‘The ability profitably to maintain pricesabove competitive levels for a significant period of time’’ (USDepartment of Justice and Federal Trade Commission, 1997). The
M.H. Asgari, H. Monsef / Energy Policy 38 (2010) 5582–55995586
definition of market power that is presented by Stoft is morestringent than others. He describes market power as ‘‘The abilityto affect the market price even a little and even for a few minutes.Two more qualifications are needed to complete this definition:The effect must be profitable, and the price must be moved awayfrom the competitive level’’ (Stoft, 2002).
Various definitions of market power by Federal EnergyRegulatory Commission (FERC) appear to be concerned mostlyabout the ability to exercise market power, while antitrustagencies (and many economists) are concerned about combina-tion of ability and incentive of exercising market power. Despitedifferent interpretations of this concept, there is consensus on itsunfavorable consequences.
Market power in the electricity industry stems primarily fromindustry concentration (measured by the number and size ofsuppliers and location of their generators), supply and demandelasticity, particularly highly inelastic short-term (spot) demandand the highly inelastic upper portions of aggregate supplycurves, transmission network externalities and barriers to entry.The impossibility of storing electricity, the too low price elasticityof demand and the requirement of second-by-second balancing ofdemand and supply make the electricity market much morevulnerable to market power and the resulting market pricespotentially extremely volatile (Helman, 2006).
For well functioning of electricity markets, market powershould be accurately detected, be quantified and be forbidden intime. For detecting and identifying market power, many methodsand tools have been developed. In classifying the various methodsof detecting market power, a useful distinction is betweentechniques that are applied ex-ante (looking for the potential ofmarket power) and those that are applied ex-post (usually lookingfor the actual exercise of market power). To the extent thatprevention is often better than cure, it is observed that interest inidentifying the potential of market power is deemed by mostmarket monitoring units (MMUs) as significant as detecting theactual exercise of market power.
Based on time horizons and geographical scopes market powerindices may be categorized to short-term or long-term measures andlocal market level or system-wide market level indices, respectively.
Classifying indices to structural and behavioral indices is anothercommon distinction. Whereas structural indices look to find thepotential for market power and deal with dimension, number andother structural features of markets, behavioral indices typicallyexamine the actual conduct of companies and look for evidence ofthe exercise of market power. This often involves examiningindividual bid prices and quantities (Twomey et al., 2004).
The most known structural measures are market share basedindices such as: the largest market share, 4- and 8-firmconcentration ratios, Herfindahl Hirschman Index (HHI) andentropy coefficient. These indices do not consider some importantaspects of competition like demand level, transmission con-straints and current situation of market. The price–cost margin,Lerner index, net revenue benchmark analysis, economic andphysical withholding indices are some of the behavioral indices.
At present, many electricity markets apply a combination ofsimple or sophisticated structural, behavioral and simulationmeasures (as complementary tools) to detect, identify, assess andquantify the potential and actual exertions of market power.
5. Analyzing structural indices of market power in Iran’selectricity market
This section analyzes how competitive Iran’s electricity market isand it also examines the potential of exercising market power bycalculating various structural measures. The most important
practical impediment to extensive application of behavioral mea-sures is determining the firm’s marginal cost of production at anygiven point. Without a measurement or reasonable estimate ofmarginal cost, the failure rate, the maintenance schedules of unitsand some other detailed data these indices are incalculable.Although approximation of unit’s marginal cost with variable costsof generators (which is calculated from fuel prices and thermalefficiencies (heat rates)) is possible, this estimation is not so accuratebecause it does not take into account other variable costs that aredifficult to quantify such as increased cost of equipment degradationif used outside designated parameters and commitment decisions.
Unfortunately, the marginal cost data of most power plants inIran are unknown or unavailable. On the other hand, forcalculating behavioral measures, the bid curves of competitorsfor a considerable period of time are required that these data beconfidential and not published publicly in Iran thus these data arenot available and accessible to researchers, too. Hence, thissection just concentrates on structural indices and examines theirresults. In Section 6, Iranian electricity market results and themost important price and load indices of the market are analyzed.
For examining the potential of market power the largestmarket share, 4- and 8-firm concentration ratios, HerfindahlHirschman Index (HHI), entropy coefficient and Residual SupplyIndex (RSI) are applied to Iran’s power market for a one yearperiod. The considered period in this study is from 21 March 2007to 19 March 2008 (corresponding to the Iranian calendar year, theSolar Hejra year 1386). The unprecedented cold weather in the2008 winter (which imposed exogenous restrictions to marketparticipants and hampered competition in some regions) distin-guishes the observed period from previous years.
These indices are calculated for two different scenarios. In thefirst scenario, each Regional Electric Companies (RECs), RegionalWater Companies (RWCs) and private power stations are consideredas an independent participant in power market. This scenario, infact, represents the current situation of Iran’s electricity market. Thefirst scenario’s market players comprise 24 distinct participants(15 RECs, 8 RWCs and TAVANIR (as the buyer and the contract partyof Energy Conversion Agreements)). Amongst 16 RECs in thecountry, Zanjan REC do not possess any generation facility so it isnot regarded as a market player in the first scenario. In theconsidered period no private power station directly participated inthe market. In the second scenario, it is assumed that RECsand RWCs are segregated and separated to smaller generationcompanies. In other words, each power plant is considered as anindependent generation company (GENCO), which competes withother power plants and takes part in the market individually. Thisscenario represents the future outlook of the power industry in Iran.Actually, this scenario corresponds with the final step of horizontalunbundling process in Iran’s power industry (downsizing anddivesting large electricity utilities to smaller and more competitivecompanies). This process is a prerequisite of transferring controland ownership of these utilities to private sector. Obviously thisprocess will enhance competitiveness of Iran’s power market. Thesecond scenario’s participants comprise 95 power stations (whereeach of them are assumed as an independent GENCO). It is worthmentioning, in the observed period 84 of those power plants directlytook part in the wholesale market. Comparing the results of thesescenarios demonstrates how the competitive level of the market willimprove if each power plant participates in the market separately.
5.1. Market share concentration ratio
Market share index is a simple and easy to calculate tool, which isvery practical and popular between both market monitoring units(MMUs) and researchers. The market share concentration ratio is the
M.H. Asgari, H. Monsef / Energy Policy 38 (2010) 5582–5599 5587
percentage of market share of the largest companies in the market.Market share can be used for long term and close to real time studies.There are different ways to calculate the market share of participants,for example some researchers use the daily, monthly or annual totalnet (or gross) generation of market participants and some others usethe total installed or nominal capacity of the generators. In otherwords, this index is calculable in energy based or capacity basedapproaches. The capacity market share of suppliers is predeterminedby the participant’s total capacity, overhaul plan and other impersonalconditions, which is comparatively steady unless the market structurechanges considerably. On the other hand, generation market share ofplayers varies dynamically according to their bidding strategies andtransmission networks’ constraints.
It is important to note that for electricity, the market sharesare better defined in terms of capacity and not energy production,as they then provide a better assessment of potential exercise ofmarket power. Capacity market shares are indirectly related tothe firm’s ability to set prices above marginal costs. For a givenlevel of market demand elasticity, a firm’s own-demand elasticitydecreases as its capacity market share increases (Kirschen andStrbac, 2004). Thus, for any given demand elasticity in a properlydefined market, higher capacity market shares reflect greaterability to set price above marginal cost.
In the US, Federal Energy Regulatory Commission (FERC)identified 20% as the benchmark for finding lack of market power.In other words, if the percentage of the largest market shareexceeds 20%, it will imply the potential of exercising marketpower (Twomey et al., 2004).
In this paper, the results of each of the aforementionedscenarios are calculated in both energy based (applied data: theannual net generation) and capacity based (applied data: nominalgeneration capacities) methods. The nominal capacity of genera-tion facilities is considered constant during the observed period.For the sake of simplicity, hereinafter in our calculations theenergy based method is addressed as the first approach and thecapacity based method is addressed as the second approach.
In Table 3, the eight largest market shares in Iran’s electricitymarket for the first scenario (calculated by both approaches) aredemonstrated.
Table 3The eight largest market shares of Iran’s power market in the first scenario.
Calculation
method
The largest
market share
The second largest
market share
The third largest
market share
The fourth large
market share
First
approach
Tehran REC
(19.23%)
Isfahan REC
(10.33%)
Khuzestan
RWCa(8.77%)
Khorasan REC
(7.75 %)
Second
approach
Tehran REC
(18.71%)
Khuzestan
RWCa(15.67%)
Khorasan REC
(9.25%)
Isfahan REC
(9.18%)
a Khuzestan RWC: Khuzestan Water & Power Authority.
Table 4The eight largest market shares of Iran’s power market in the second scenario.
Calculation
method
The largest
market share
The second largest
market share
The third largest
market share
The fourth large
market share
First
approach
Shahid Salimi
P.P.a (5.66%)
Ramin P.P. (5.18%) Shazand P.P.
(4.02%)
Gilan C.C.b (3.85
Second
approach
Shahid Salimi
P.P. (4.91%)
Karoon 3 P.P.
(4.56%)
Masjed Soleyman
P.P. (4.56%)
Ramin P.P. (4.17
a P.P.: Power plant.b C.C.: Combined cycle power plant.
Table 3 demonstrates that in the first scenario, the largestmarket share (calculated by both approaches) is less than 20%.This amount is an acceptable value and is less than the FERC’ssuggested benchmark for identifying lack of market power.
It is observed that Khuzestan Water & Power Authority, whichpossesses 15.67% of the total installed capacity of the country, justhas produced 8.77% of the total generated electricity. This mattershows the fact that the possession of high generation capacity doesnot necessarily equal with more actual generation. In Iran, this factespecially confirms for hydro electric generators (or RWCs) thatlack of water resources and other operational regime limitationsrestrict their actual generation. Fuel limitations for thermalgenerators, some transmission network constraints and the biddingstrategy of participants are other reasons for this discrepancy.
The four (eight) firm concentration ratio is another structuraland market share based index. This measure shows the sum ofmarket shares accounted for by the four (eight) largest entities in amarket. The four (eight) firm concentration ratio of Iran’s electricitymarket in the first scenario by the first and second approaches areabout 46.09% (74.79%) and 52.81% (76.97%), respectively.
Table 4 shows the eight largest market shares of participants inIran’s power market for the second scenario. This tabledemonstrates if each power station were able to participate inthe market individually, which of them would attain the largestmarket shares.
It is observed that in this scenario, the largest market share ismuch less than the results of the first scenario and the FERC’ssuggested benchmark. The results of the second scenariodemonstrate that by implementing the final step of horizontalunbundling process in Iran’s power industry the potential ofexercising market power will decrease drastically. These resultspromise a more competitive market with no dominant supplier.
Table 5 demonstrates the four largest monthly generation marketshares and their variations in the first scenario during the observedperiod. As shown in Table 5, the maximum value of the largestmonthly market share is 20.18% (in the third month of summer)and its minimum value is 17.08% (in the first month of winter).The largest market share in all months belongs to Tehran REC.As a consequence of seasonal rainfalls in Khuzestan area,
st The fifth largest
market share
The sixth largest
market share
The seventh largest
market share
The eighth
largest market
share
Fars REC (7.53%) Mazandaran REC
(6.84%)
Bakhtar REC
(6.76%)
Hormozgan REC
(6.58%)
Fars REC (7.18%) Khuzestan REC
(6.10%)
Azerbaijan REC
(5.58%)
Bakhtar REC
(5.3%)
st The fifth largest
market share
The sixth largest
market share
The seventh
largest market
share
The eighth
largest market
share
%) Bandar abbas P.P.
(3.62%)
Kazeroon C.C.
(3.38%)
Shahid Rajaei P.P.
(3.37%)
Fars C.C. (3.17%)
%) Shahid
Abbaspour P.P.
(4.10%)
Damavand C.C.
(3.61%)
Bandar abbas P.P.
(3%)
Shazand P.P.
(2.92%)
Table 5The four largest monthly market shares and their variations in the first scenario during the observed period.
Period The largest market
share
The second largest
market share
The third largest market
share
The fourth largest
market share
Total market
shares of four
largest
participants
21 Mar. 2007–20 Apr.2007 Tehran REC (17.23%) Khuzestan RWCa(14.71%) Khorasan REC (8.53%) Isfahan REC (8.42%) (48.89%)
21 Apr. 2007–21 May 2007 Tehran REC (17.57%) Khuzestan RWCa
(15.95%)
Khorasan REC (7.81%) Isfahan REC (7.42%) (48.75%)
22 May 2007–21 Jun. 2007 Tehran REC (18.24%) Khuzestan RWCa
(10.53%)
Isfahan REC (8.10%) Khorasan REC
(7.15%)
(44.02%)
22 Jun. 2007–22 Jul. 2007 Tehran REC (19.19%) Khuzestan RWCa (8.38%) Isfahan REC (8.08%) Khorasan REC
(7.20%)
(42.85%)
23 Jul. 2007–22 Aug. 2007 Tehran REC (20.11%) Isfahan REC (7.75%) Khuzestan RWCa (7.26%) Khorasan REC
(7.20%)
(42.32%)
23 Aug. 2007–22 Sep. 2007 Tehran REC (20.18%) Isfahan REC (7.52%) Khorasan REC (7.25%) Fars REC (7.01%) (41.96%)
23 Sep. 2007–22 Oct. 2007 Tehran REC (19.05%) Khorasan REC (7.81%) Isfahan REC (7.68%) Fars REC (7.16%) (41.70%)
23 Oct. 2007– 21 Nov. 2007 Tehran REC (17.88%) Khorasan REC (8.32%) Isfahan REC (7.89%) Fars REC (7.57%) (41.66%)
22 Nov. 2007– 21 Dec. 2007 Tehran REC (17.43%) Isfahan REC (10.00%) Mazandaran REC (8.22%) Khorasan REC
(7.98%)
(43.63%)
22 Dec. 2007–20 Jan. 2008 Tehran REC (17.08%) Isfahan REC (9.60%) Fars REC (9.02%) Bakhtar REC (8.32%) (44.02%)
21 Jan 2008–19 Feb. 2008 Tehran REC (18.80%) Fars REC (11.24%) Isfahan REC (9.74%) Bakhtar REC (7.97%) (47.75%)
20 Feb. 2008–19 Mar. 2008 Tehran REC (19.00%) Fars REC (9.31%) Isfahan REC (8.10%) Khorasan REC
(8.07%)
(44.48%)
a Khuzestan RWC: Khuzestan Water & Power Authority.
Table 6Calculating HHI for Iran’s electricity market.
HHI (10000/HHI)
First scenario
First approach 905.15 � 11
Second approach 994.49 � 10
Second scenario
First approach 273.35 � 36
Second approach 240.01 � 41
M.H. Asgari, H. Monsef / Energy Policy 38 (2010) 5582–55995588
Khuzestan Water & Power Authority has achieved the second rankof Table 5 in the spring of 2007 and due to the operational policiesof hydro plants and lack of water resources it has lost its positionin the other months.
5.2. Herfindahl Hirschman index (HHI)
One of the drawbacks of the market share index is that theability of a participant with a 20% market share to exert marketpower may be different when that player is the largest entity in anon-concentrated market, versus being the second or third largestplayer in a highly concentrated market. Some other marketconcentration indices not only investigate players’ market sharebut also reflect the number of participants and the inequality oftheir market shares. These ratios are also able to reflect changes inthe market concentration as a result of the entry of a newparticipant into the market or its exit from it, or caused by amerge (Rhoades, 1995). These concentration ratios are extensivelyused for assessing structural features and examining competitionlevel in all the industries. There are a lot of concentration measuresin the economics (such as Herfindahl Hirschman Index (HHI), Ginicoefficient, Hall–Tideman Index (HTI), Rosenbluth Index, Compre-hensive Industrial Concentration Index (CCI), Hannah and KayIndex, Entropy coefficient, etc.) and there is no clear theoreticalbasis for choosing among the various measures (Bikker and Haaf,2002; Rhoades, 1995). HHI and entropy coefficient are the mostprominent concentration ratios that are widely used in the powermarket analyses. In this section, for examining the concentration ofIranian electricity market in current and future situations, HHI andentropy coefficient are calculated for both scenarios.
The HHI index is a well known concentration measure(between 0 and 10,000) that is calculated by summing thesquares of the market shares of all individual market participants.This index can be calculated in a reasonably straightforwardmanner and has been the benchmark index of the US JusticeDepartment merger guideline since 1982 (Rhoades, 1995). HHIalso serves as a benchmark for the evaluation of other concentra-tion indices. The higher the HHI, the more concentrated themarket, and the market is possibly less competitive.
The HHI has a long history in antitrust analysis and variousHHI thresholds have been adopted by different researchers andMMUs. The US Department of Justice/Federal Trade Commission
standards for horizontal market power give ranges in which anHHI under 1000 represents an unconcentrated market (corre-sponding to a market with more than ten equal sized competi-tors), 1000–1800 represents a moderately concentrated market(equivalent to a market where there is approximately more thanfive and less than ten equal sized firms), and above 1800represents a highly concentrated market (similar to a marketwith less than five equal sized participants) (US Department ofJustice and Federal Trade Commission, 1997).
Calculating the HHI for Iran’s power market denotes this marketis not concentrated. The HHI of Iran’s electricity market in the firstscenario by the first and second approaches is 905.15 and 994.49,respectively. This HHI is less than that of England and Wales,Sweden, Singapore and Texas where the HHI is 1600, 3200, 2662and 2463, respectively (Chang, 2007; Zarnikau and Lam, 1998).
The inverse of HHI/10,000 gives a more comprehensible andintelligible interpretation; it gives the number of effective compe-titors with equal market share in the industry. In the first scenario,this value corresponds to a market with 10 and 11 effective marketplayers by the first and second approaches, respectively.
Table 6 summarizes the results of applying HHI on Iran’spower market for both scenarios and by two different approaches.
Fig. 1 shows the monthly variations of HHI in the first scenariothat is calculated by the first approach. The maximum value of themonthly HHI is about 940 (in the first month of spring) and itsminimum value is about 800 (in the second month of autumn).For better analysis of variations of Iranian power market’s HHI duringthe different periods, considering the price and load fluctuations inthose periods can be beneficial. These variations are depicted and areanalyzed completely in Section 6 (see Figs. 10–12).
750
800
850
900
950
1,000
21 M
ar. 2
007
to20
Apr
. 200
7
21 A
pr. 2
007
to21
May
200
7
22 M
ay. 2
007
to21
Jun
. 200
7
22 J
un. 2
007
to22
Jul
. 200
7
23 J
ul. 2
007
to22
Aug
. 200
7
23 A
ug. 2
007
to22
Sep
. 200
7
23 S
ep. 2
007
to22
Oct
. 200
7
23 O
ct. 2
007
to21
Nov
. 200
7
22 N
ov. 2
007
to21
Dec
. 200
7
22 D
ec. 2
007
to20
Jan
. 200
8
21 J
an. 2
008
to19
Feb
. 200
8
20 F
eb. 2
008
to19
Mar
. 200
8
HHI
Fig. 1. Monthly variations of HHI in the first scenario (calculated by the first approach).
220
240
260
280
300
320
340
360
380
400
2007/03/21
2007/04/04
2007/04/18
2007/05/02
2007/05/16
2007/05/3
20007/06/13
2007/06/27
2007/07/11
2007/07/25
2007/08/08
2007/08/22
2007/09/05
2007/09/19
2007/10/0
20307/10/17
2007/10/31
2007/11/14
2007/11/28
2007/12/12
2007/12/2
20608/01/09
2008/01/23
2008/02/06
2008/02/20
2008/03/05
2008/03/19
Days
HHI
Fig. 2. Variations of daily HHI for the second scenario in the observed period.
M.H. Asgari, H. Monsef / Energy Policy 38 (2010) 5582–5599 5589
Fig. 2 displays the daily variations of HHI in the secondscenario, which is calculated by the first approach. The maximumvalue of the daily HHI is about 377 (on 10 April 2007) and itsminimum value is about 250 (on 18 September 2007).
The higher values of HHI in spring are justified by the mustgeneration status of hydro electricity units, particularly inKhuzestan province. In spring, usually the seasonal rainfalls in
that region put dams in the overflow situation and consequentlyin the must run generation status.
According to Iran’s power market rules, the electricitygeneration of green resources (hydro and wind power generation,etc.) must be purchased by the pool manager, even if they werenot winners in the market auction. In this situation, theseunits receive capacity payment but their energy payments are
M.H. Asgari, H. Monsef / Energy Policy 38 (2010) 5582–55995590
determined by the market operator (Iran’s Ministry of Energy,2004). This situation makes the competition harder for thermalunits and they lose some of their traditional market share. Thismatter leads to more concentrated market and higher prices (seeFig. 10). The unprecedented cold weather in the winter of 2008and people’s rush to electrical heating devices increased theelectricity consumption in Iran extremely. On the other hand lackof natural gas for power plants consumption and the problem oftransporting fossil fuels to some thermal plants in the winter of2008 made some power stations operate in part load mode ormade them shut down. These circumstances resulted in shuttingdown of some units and full load generation of some other units,in other words the market share of some units increased but otherparticipants lost their traditional market shares. These changes inparticipants’ market share led to price increase (see Fig. 10) andapproximately high value of HHI in the winter of 2008.
In Fig. 3, the daily variations of HHI for the second scenario(calculated by first approach) in the second month of summer2007 (annual peak demand period) are depicted.
Because of the high electricity consumption in summer seasonin Iran and the low difference between the system demand andthe total available capacity, almost all the generations of availableunits are required to meet the summer demand. So, it is expectedthat in this season the entities’ market shares would be inaccordance with their installed capacity. As shown in Figs. 2 and3, the daily HHIs in summer 2007 are in their closest values to theinstalled capacity HHI (240.01). Due to the relatively appropriatedistribution of installed capacity among Iran’s market players,generally the market shares of participants in summers are nearlyequal and the HHI values are in their minimum values.
5.3. Entropy coefficient
Entropy coefficient is another measure for evaluation of marketconcentration. This index indicates the market share weighted bythe logarithm of the market share and is calculated as (David andWen, 2001):
Entropy coefficient ¼XN
i ¼ 1
Si log21
Si
� �ð1Þ
245
250
255
260
265
270
275
280
285
2007
/07/23
2007
/07/25
2007
/07/27
2007
/07/29
2007
/07/31
2007
/08/02
2007
/08/04
2007
/08/06
200
HHI
Fig. 3. Daily variations of HHI for the second sce
where N and Si represent the number of market participants andeach player’s market share (Si is between zero and one), respectively.
The entropy coefficient is simply an index that takes intoaccount some of the nonlinearities that one assumes affectstructure and performance relationships (the same thing is doneby the HHI, which is the most widely used index of concentra-tion). Scherer by theory and empirics shows that each marketconcentration index has some advantages and disadvantages andno one can really say that one index is better than another,although there are empirical tests that favor the HHI over thesimple n-firm concentration ratios (Scherer, 1980).
The entropy coefficient has its theoretical bases in informationtheory and measures the ex-ante expected information content ofa distribution (Bikker and Haaf, 2002). In the 1960s, Henri Theildeveloped several applications of information theory in econom-ics and applied entropy coefficient in empirical studies ofindustrial concentration (Theil, 1967). This measure has beenused for analyzing market power situation in electricity markets,too (Alvarado, 1998; Asgari and Monsef, 2008; Chicco, 2004).
Entropy measure varies non-linearly (changes inversely to thedegree of concentration) and ranges from zero (monopoly) toinfinity (perfect competition); therefore it is not restricted to[0, 10,000], as HHI. The more the entropy coefficient is, the lessthe potential for exercising market power.
The value of this measure for a market with ten (five) equalsized competing firms is 3.32 (2.32). Although it is impossible toestablish a clear and precise threshold below or above whichmarket power exists for any index, assigning some reasonablevalues for comparing the competitiveness of markets (like HHI) ispossible. Corresponding to HHI which considers a market withmore than ten equal sized competitors (an HHI under 1000) as anunconcentrated market, an entropy coefficient above 3.32 may bealso regarded as an indication of an unconcentrated market.Calculating this index for Iran’s electricity market in bothscenarios denotes that the market is not concentrated.
Table 7 shows the value of entropy coefficient in Iran’selectricity market for both scenarios.
In Fig. 4, the monthly variations of entropy coefficient ofIran’s power market in the first scenario are depicted. As shown,the monthly entropy coefficients range from 3.59 to 3.79, whichare appropriately larger than the suggested benchmark (3.32).
7/08/0
8
2007
/08/10
2007
/08/12
2007
/08/14
2007
/08/16
2007
/08/18
2007
/08/20
2007
/08/22
nario in Iran’s annual peak demand period.
M.H. Asgari, H. Monsef / Energy Policy 38 (2010) 5582–5599 5591
By comparing the variations of HHI and entropy coefficient, it isobserved that they do not follow the same trend. It is worthmentioning, neither of these two measures are definitive indexes ofmonopoly power; they have different definitions and consequentlychange differently. They just give us some general informationabout the market concentration in various time periods anddetermine whether the concentration in a certain market is high,medium or low. These indices do not give us any more detailedinformation and do not detect market dominant players. Therefore,it should not be expected that the variations of these measures inIran’s electricity market be exactly the same. The greatest usefulnessof these indices may be their value as relative market powerindicators: a larger value of HHI (less value of entropy coefficient)indicates greater market concentration and so the potential forgreater market power than a smaller (larger) value (Alvarado, 1998).
Fig. 5 demonstrates the daily variations of entropy coefficientin the second scenario for the observed period. The daily entropycoefficients in the second scenario range from 5.11 to 5.56 thatare highly appropriate values. These results reconfirm that bysegregating RECs/RWCs to smaller competitive companies themarket concentration declines considerably.
5.4. Residual supply index (RSI)
A major criticism of market share based measures (like largestmarket share, HHI, entropy coefficient, etc.) is that these indexesare static measures and just examine the supply side of the
3.45
3.50
3.55
3.60
3.65
3.70
3.75
3.80
3.85
21 M
ar. 2
007
to20
Apr
. 200
7
21 A
pr. 2
007
to21
May
200
7
22 M
ay. 2
007
to21
Jun
. 200
7
22 J
un. 2
007
to22
Jul
. 200
7
23 J
ul. 2
007
to22
Aug
. 200
7
23 A
ug. 2
007
to
EntrCoeff
Fig. 4. Monthly variations of Iran’s power market entropy coefficient in the
Table 7Calculating entropy coefficient for Iranian electricity market.
Entropy coefficient
First scenario
First approach 4.95
Second approach 3.66
Second scenario
First approach 5.48
Second approach 5.71
market. Power market conditions vary hour by hour due tochanging demand levels, generation outages and transmissionfailures. These limitations along other constraints led to thedevelopment of more dynamic measures. RSI is an attempt toincorporate demand conditions, in addition to supply situations.RSI was first introduced and applied by California IndependentSystem Operator (CAISO).
RSI quantifies the reliance of a market from the generation ofits participants. RSI for each generator is calculated by dividingthe total supply offered by all generators other than the generatorin question by the quantity demanded in a given specific hour(Sheffrin, 2001). The RSI of a market corresponds to the lowestcompany RSI among all the firms in the market. If the RSI of aparticipant is less than one, that player will be pivotal. As the RSIdecreases, the market power potential of the participant inquestion increases.
Sheffrin and her colleagues in CAISO claim that in a relativelycompetitive and well structured market, RSI must not be less than110% for more than 5% of the hours in a year or in other words RSImust be more than 110% for 95% of the hours in a year (Rahimiand Sheffrin, 2003).
In this section, by using the available data, RSI is calculated forIran’s electricity market in October 2003–April 2004 (the initialdays of establishment of power market in Iran).
For calculating RSI in a certain hour, in the first scenario thelargest offered capacity of RECs/RWCs and private power stationsand the total offered capacity of all participants in that hour areused. The largest offered capacity of power plants and the totaloffered capacity of all power stations in a certain hour are used forcomputing RSI in the second scenario.
Fig. 6 demonstrates the calculated RSI for Iran’s electricitymarket in the first scenario. It is observed that approximately justin 55% of operation hours during October 2003–April 2004, RSI isgreater than 110%. This situation is so far from the suggestedthreshold.
This measure highlights the fact that in many hours thegeneration of some participants is required to meet demand andthese pivotal players are easily able to abuse market situation,manipulate prices and exercise market power.
22 S
ep. 2
007
23 S
ep. 2
007
to22
Oct
. 200
7
23 O
ct. 2
007
to21
Nov
. 200
7
22 N
ov. 2
007
to21
Dec
. 200
7
22 D
ec. 2
007
to20
Jan
. 200
8
21 J
an. 2
008
to19
Feb
. 200
8
20 F
eb. 2
008
to19
Mar
. 200
8
opyicient
first scenario (calculated by the first approach) for the observed period.
Residual Supply Index (RSI)
0.00.20.40.60.81.01.21.41.61.82.0
0Duration Hours (%)
10 20 30 40 50 60 70 80 90 100
Fig. 6. Residual Supply Index of Iran’s electricity market in the first scenario.
Residual Supply Index (RSI)
0.00.20.40.60.81.01.21.41.61.82.0
0Duration Hours (%)
10 20 30 40 50 60 70 80 90 100
Fig. 7. Residual Supply Index of Iran’s electricity market in the second scenario.
5.00
5.10
5.20
5.30
5.40
5.50
5.60
5.70
2007/03/21
2007/04/04
2007/04/18
2007/05/02
2007/05/16
2007/05/30
2007/06/13
2007/06/27
2007/07/11
2007/07/25
2007/08/08
2007/08/22
2007/09/05
2007/09/19
2007/10/0
20307/10/17
2007/10/31
2007/11/1
20407/11/28
2007/12/12
2007/12/26
2008/01/09
2008/01/23
2008/02/06
2008/02/20
2008/03/05
2008/03/19
Days
Entropy Coefficient
Fig. 5. Daily variations of entropy coefficient in the second scenario for the observed period.
M.H. Asgari, H. Monsef / Energy Policy 38 (2010) 5582–55995592
The calculated RSI during October 2003–April 2004 for thesecond scenario is depicted in Fig. 7. As shown, in this scenarioapproximately just in 77% of operation hours of the aforesaidperiod, RSI is greater than 110% whereas according to CAISO’ssuggested benchmark this should be more than 95% of theoperation hours.
The difference between 77% in the second scenario and 55% inthe first scenario is considerable. This comparison demonstratesthat the RSI will improve significantly if all power plantsparticipate in market individually, although even in this situationthere is a long distance to achieve a satisfactory value.
In Fig. 8, the largest offered capacities to the market in eachhour during October 2003–April 2004 are compared for bothscenarios.
Fig. 8 shows that by implementing the final step of horizontalunbundling in Iranian electricity industry, the reliance of marketon a participant with the largest offered capacity decreases
significantly. This matter reduces the potential of dominantsuppliers for exercising market power.
One of the main reasons for unfavorable value of RSI in Iran’selectricity market is supply scarcity problem. In other words inmany hours the demand level is so close to the total availablegeneration capacity and always there is low operational reservemargin.
According to the increasing rate of demand growth in Iran andslow rate of attracting investments in electrical infrastructures, itis anticipated that the RSI even exacerbated in future years.Extensive brownouts in summer of 2008 are prominent evidencesof this fact.
Altogether, though the generation market in Iran is consideredunconcentrated by market share based indices and concentrationratios, RSI demonstrates that in many hours there are somepivotal suppliers in the market that are able to exercise marketpower.
Fig. 8. Comparing the largest offered capacity to the market in each hour for two scenarios.
M.H. Asgari, H. Monsef / Energy Policy 38 (2010) 5582–5599 5593
6. Analyzing market results of Iranian electricity market
Even though market share based indices and concentrationmeasures are still substantial tools of market power analysisthrough the world and will almost certainly serve an unques-tionable role in the potential screening of market power in longterm ex-ante studies of market design or merger proposals, theCalifornia experience, where market designers just trustedheavily in low market share and HHI indices to relieve fears ofmarket power, manifestly demonstrates the potentially mislead-ing nature of these metrics. Some published studies point out thatduring the California crisis HHI value for this market was 664(Blumsack and Lave, 2003) and under certain definitions of therelevant market, no single supplier in the market had a 20%market share (Sheffrin, 2001). Hence, relying just upon structuralmetrics for analyzing market power in an electricity market doesnot seem so sensible. As mentioned earlier due to lack of adequatedata for calculating behavioral indices, in this section we are justcontent with analyzing market results of Iranian electricitymarket.
The most significant price and load indices such as weightedaverage prices (WAPs), requested load (RL), load duration curve andprice duration curve of Iranian electricity market during 21 March2007–19 March 2008 are applied for our analysis in this section.
For optimal bidding strategy, the bid blocks should begenerated regarding the market price indices. In un-congestedmarkets with uniform pricing structure, market clearing price(MCP) is the most important price index to forecast (as a globalprice index of the whole market) while in pay-as-bid markets,there are different price indices, which may be significant toforecast for a suitable bidding strategy. One of the most importantprice indices in these markets is WAP. WAP in a pay-as-bidelectricity market is defined as the average of the accepted priceblocks in the market, where each price has been weighted by theamount of its underlying accepted energy in the market, for eachhour. Hourly WAP is the uppermost important price index that isannounced publicly in Iran’s electricity market and is extensively
used for profit estimation, risk analysis and participants’ biddingstrategies. The most significant load index in power markets is RL.The RL is the total energy that is exchanged in the market for eachhour. It contains the effect of some phenomena such as climateproperties (like temperature and humidity) and the calendarproperties (Bigdeli and Afshar, 2009).
Due to the relative low value of price cap and tight situation ofsupply/demand in Iran’s electricity market, it is observed that thesubmitted bids of participants in many hours are close to the pricecap. Fig. 9 demonstrates the average of WAPs in each hour during21 March 2007–19 March 2008. As shown, the average of WAPs inhours 19–22 during the period are 96.35%, 95.81%, 95.52% and96.27% of the price cap, respectively. The price cap value wasdetermined as 60,000 Rials/MWh in the observed period (in theconsidered period, 1 US$� 9200 Iranian Rials).
Fig. 10 shows the daily averages of WAPs and daily averages ofRL during the observed period.
In Fig. 11, the daily averages of WAPs and daily averages of RLin peak load hours of the observed period are depicted. Four hoursin each day are considered as peak load hours in Iran (hours21–24 in spring and summer and hours 18–21 in autumn andwinter are determined as peak load hours by Iranian Ministry ofEnergy). As shown, the daily averages of WAPs in peak load hoursin almost all days are close to the price cap. Looking at the dailyaverages of WAPs especially in peak load hours demonstrates thatactually there is no competition amongst parties in these hours. Inpeak load hours many suppliers, even participants who do notcontrol a significant market share, bid close to the price cap.
Even though the high values of the daily averages of WAPs inthe winter of the observed period may be justified by theunprecedented cold weather conditions and lack of gas and fuelresources for the consumption of power stations in that period,these high values in spring and autumn (off-peak seasons) of theconsidered period imply the existence of economic withholding.Substantial portion of the installed capacity of the country is oldand timeworn, therefore special maintenance schedules arerequired for ensuring their effective and reliable operation. These
Fig. 9. Average of WAPs in each hour of the observed period.
Fig. 10. Daily averages of weighted average prices (WAPs) and daily averages of requested load (RL) during the observed period.
M.H. Asgari, H. Monsef / Energy Policy 38 (2010) 5582–55995594
schedules are normally performed in off-peak periods (spring,autumn or winter) so even in these periods when the demandlevels are nearly lower, the reserve margin (the differencebetween the total available generation capacity and the systemdemand) is not considerable. This fact motivates suppliers to bidhigh in almost all times (especially in peak load hours).
Fig. 12 shows the daily averages of WAPs and daily averages ofRL in low load hours during the considered period. Eight hours ineach day are considered as low load hours in Iran (hours 1–8 inspring and summer and hours 1–5 and 22–24 in autumn andwinter are determined as low load hours by Iranian Ministry ofEnergy).
The main reason for the relatively high values of the average ofWAPs in low load hours of 2008’s winter (despite lower demand
level in comparison with other low load periods) is the fuelrestrictions of thermal generation units (due to the unprece-dented cold weather conditions and consequently growth ofresidential gas consumption).
Reviewing the results of Iranian power market shows thatsuppliers just in low load and medium load hours for avoiding therisk of losing their market share participate in the marketcompetitively. On account of acceptable reserve margin in lowload and medium load hours, the effective competition in thecountry’s electricity market is just meaningful in these hours.
One behavioral index that may be helpful in market poweranalyses is high bid price ratio (HBPR). HBPR can be defined as theproportion of the times when the bid price is close to apredetermined threshold or the price cap over the all the times.
Fig. 11. Daily averages of WAPs and averages of RL in peak load hours of the observed period.
Fig. 12. Daily averages of WAPs and averages of RL in low load hours during the considered period.
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This metric can be applied to measure both the market and theindividual suppliers through selecting different subjects (Dun-nanet al., 2004; Sheffrin, 2002). For individual suppliers’ screening,the threshold may be different for various types of generators(hydro, combined cycle, steam, etc.). Determining the threshold isa controversial issue and is not an easy task. The determination ofthe maximum acceptable profit margin and some other detaileddata like marginal costs of generation units are required forassigning the threshold.
For the whole market screening by HBPR in a market withdiscriminatory payment, the average of WAPs is compared withthe threshold. The thresholds in this case are usually among90–95% of the price cap. Generally, the high value of HBPR in bothmarket and individual suppliers’ screenings may imply thelimited competition and the existence of economic withholdingin the market.
The other useful indices for analyzing market results that canhelp market monitors in calculating the whole market HBPR areprice duration curves and load duration curves. Price durationcurve is a curve of prices, plotted in descending order ofmagnitude, against time intervals for a specific period. The curveindicates the period of time where price was above a certainmagnitude. Load duration curve is similar to price duration curvebut in that curve the levels of load are ranked by duration ofoccurrence over the year. A relatively flat duration curve meansthe values tend to fall within a small range but steep curve meansthat usage fluctuates widely over a time period.
In Figs. 13 and 14, the load duration curve and price durationcurve of Iran’s electricity market are shown, respectively. A loadduration curve is used in electric power generation to illustratethe relationship between generating capacity requirements andcapacity utilization. In other words the load duration curve shows
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the capacity utilization requirements for each increment of load.Due to Iran’s relatively low load factor of 67.3% (Electric PowerIndustry Statistics, 2008), the load duration curve is steep
Fig. 13. Load duration curve of Iran’s power system.
Fig. 14. Price duration curve of Iranian electricity market.
Fig. 15. Daily averages of WAPs in peak load, medium load,
compared to other power systems. This steep curve demonstratesthe disproportional electricity consumption pattern duringdifferent periods in the country. As shown, despite the steep loadduration curve with comparatively wide range the country’s priceduration curve is a flat curve with a narrow range.
The price duration curve of Iranian electricity market revealsinteresting facts. By assuming 90% of the price cap as thethreshold of HBPR, this curve shows that approximately in 56%of hours during March 2007–March 2008 the WAPs of markethave been more than the threshold that is actually a highproportion. This means in more than half of the operation hoursthe suppliers’ bids are too close to the price cap. As one mayexpect, this ratio in peak load hours is higher. Fig. 15 describesthat during the observed period the daily averages of WAPs inpeak load, medium load, low load and all day hours in 339, 201,77 and 167 days are more than 90% of the price cap, respectively.
Flat price duration curve of Iranian electricity market in peakload hours demonstrates that WAPs vary in a very small range(between 84.27% and 99.67% of price cap), in other words thelimited competition is anticipated in peak load hours. In thesehours, suppliers confidently and with less risk bid very high andclose to the price cap.
In Fig. 16, the daily averages of system load in the observedperiod for peak load hours, medium load hours, low load hoursand all day hours are illustrated. It is observed that in 103 daysthe daily averages of system load in peak hours have been morethan 90% of the maximum daily averages of system load in peakload hours (i.e. 33,293 MWh). These market results and the tightsituation of supply/demand along with the adverse situation ofResidual Supply Index of Iranian electricity market confirm thehigh possibility and high potential of exercising market power.
7. Looking at market power sources, countermeasures andfulfilled activities for market power mitigation in Iran’selectricity market
As discussed in Section 5, calculating market based measuresfor Iranian power market demonstrate that the market is not soconcentrated and the total installed capacity is distributed in a
low load and all day hours during the observed period.
Fig. 16. Daily averages of system load in peak load, medium load, low load and all day hours during the observed period.
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relatively admissible way amongst various parties. On the otherhand the country’s electricity market RSI implies the reliance ofmarket on generation of some pivotal suppliers. These structuralindices show that despite permissible values of concentrationratios due to supply scarcity, during periods when the systemdemand is close to the total available capacity, some suppliers canbecome pivotal and exercise market power even with a relativelysmall market share. In other words, generation shortage in Iranianpower market provides many opportunities for some suppliers tohamper healthy competition (high potential for market powerexertion).
Analyzing market results in Section 6 confirms the limitedcompetition in many hours and implies the existence of economicwithholding especially in peak load hours. Comparing closelyunchanged average of weighted average prices (WAPs) duringdifferent peak load periods (regardless of the system demand)denotes the pivotal players’ abuses of the tight supply/demandsituation.
In this section, the main reasons of the existence of marketpower, countermeasures and fulfilled activities for mitigatingmarket power in Iranian electricity market are briefly discussed.
As mentioned earlier, the major problem of Iran’s electricitymarket is supply scarcity and generation shortage. The availablereserve capacity in Iran is relatively low, reported at about 7%(Electric Power Industry Statistics, 2008); this value may evendecline due to lack of water or fuel for hydro and thermalgeneration on account of natural conditions and the growth of therates of forced outages in peak load hours. On the other hand, onaverage Iran witnesses nearly 10% rise in electricity consumption,annually. Governmental budgets cannot solely provide therequired monetary resources for generation expansion and copewith Iran’s rising demand. In accordance with the state statistics,an extensive investment is required ($3.75 billion US in each year)for keeping pace with Iranian demand increases (Electric PowerIndustry Statistics, 2008).
Thus, to encourage the private sector, the government hasoffered many motivations through passing the law for supportingthe private investors, assuring the return of investments, openingLC mechanism, determining the investment rate of return as 16%,
purchasing the generated electricity with guaranteed price andcoverage of all risks with governmental origin (Sobhiyah andKashtiban, 2008).
Signing guaranteed purchase contracts with private powerstations is another method for mitigating market power. Long-term contracts intuitively decrease the incentives of the dominantsuppliers to exert market power. This is because the more thesupplier’s output that is covered by contracts, the less theincentive it will have to participate in the market. These typesof contracts not only can support investors by guaranteeing thereturn of their investments but also can benefit all buyers byreducing the incentives of these contracting parties to exertmarket power.
It is noteworthy that despite extensive efforts of governmentto contribute private sector in supplying electricity demandthrough various financial incentives, the traded volume of theguaranteed purchase contracts in comparison with the totaldemand of Iran’s power system is not considerable. In 2006, lessthan 4% (1750 MW) of the electricity of the country was producedby the private sector based on guaranteed purchase contracts(Electric Power Industry Statistics, 2008).
Congested transmission lines are one of the other limiting factorsof competition in Iranian electricity market. Generally, transmissionconstraints can isolate markets, create local submarkets and putsome suppliers at the position of monopoly. In regions where thereis limited ability to import less expensive energy from outside,domestic suppliers will be able to set prices and exercise localmarket power. The transmission limitations that create local marketpower may occur naturally or by the manipulation of transmissionfacilities or generator dispatch patterns.
In some regions of Iran, weak transmission infrastructures canresult in exercising local market power. For instance, highgeneration capacity (larger than regional demand) and sometransmission network constraints in Khorasan province (northeast of Iran) have led to the supply surplus in that region. On theother hand, congestion is one of the major limitations in Sistanand Balochestan province (south east of Iran) for receiving lessexpensive electricity from national grid (Iran Power IndustryInformation and Data Center, 2008). Reinforcing and expanding
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transmission networks can also decrease the opportunities ofexercising market power in Iran.
The pricing mechanism is a significant topic in the powermarkets. One of the main reasons for the selection of pay-as-bidenergy pricing (discriminatory pricing method) by Iranianelectricity market designers is that, in the pay-as-bid markets,the possibility of exercising market power is less than the uniformpricing markets (Ghazizadeh et al., 2007).
The pay-as-bid mechanism may lead to reduction of partici-pant’s physical withholdings. Selection of discriminatory pricingmethod in designing of a market is a controversial issue and has anumber of cons and pros. Proponents claim that discriminatorypricing can mitigate market power and reduce inadvertent costsdue to unavoidable errors in the market operator’s demandforecasting. They suggest this method especially at the marketstart-up. On the other hand, opponents argue that discriminatorypricing decreases economic efficiency of market and it also reducesthe incentives of market participants to bid in their marginal cost.
Although advocates of pay-as-bid pricing claim this methodmitigates market power, it should be noted this claim is true as longas market participants are not aware of the dependence and relianceof market on their generation. Just in this situation they do notwithhold their generation capacity and bid close to their marginalcost. If participants understand their pivotal role and estimate thattheir generation is needed for meeting demand, even with less riskthey will exercise financial and physical withholding.
Considering the low reserve margin in Iran and the fact that inmany hours there are many pivotal suppliers in market, it seemsthat the pay-as-bid pricing has lost its preventive function inIran’s electricity market.
Setting a hard price cap is another attempt to mitigate marketpower in Iran’s electricity market. A price cap provides an upperlimit to the market price. Artificial nature of price cap and sendingwrong signals for investors and new entrants are the maindrawbacks of this market power mitigation tool. In Iran, price capis determined annually by the energy minister.
The significance of enhancing price-elasticity of demand inmarket power mitigation has been well recognized. Givingdemand side participants the opportunity to bid in power poolis the initial step for increasing responsiveness of loads. Atpresent, some activities are performing for preparation of demandside bidding in Iran’s electricity market.
By establishing power exchange in the country in the nearfuture and implementing and issuing financial hedge contractssuch as contract for difference (CFD), future, and forwardcontracts, it is anticipated that the competitiveness of Iran’spower market enhances.
Segregating Regional Electric/Water Companies to morecompetitive firms and releasing and transferring the ownershipand management of governmental companies to the privatesector (in accordance with Article 44 of Iran’s constitutional law)are other activities that will improve the competitiveness ofIranian electricity market.
8. Conclusion
This paper addresses market power problem in Iranianelectricity market. To fulfill this aim, after introducing restructuringprocess and characteristics of Iranian power market the paper triesto assess the intensity of competition in the country’s electricitymarket. This paper by using various structural indices of marketpower and reviewing market results examines whether Iran’selectricity market is functioning at a workable level of competition.In this study, the most known structural indices of market power(such as 4- and 8-firm concentration ratios, HHI, entropy
coefficient and RSI) are calculated in two approaches (capacitybased method and energy based method) for two differentscenarios (current situation and future outlook of generationsector’s ownership in Iran’s power industry). Comparing the resultsof these two scenarios demonstrates that by implementing thefinal step of horizontal unbundling in Iran’s power industry to whatextent the competitive level of the market will improve.
Looking at the market share based structural indices in Iran’selectricity market implies that these measures are withinacceptable range. In other words, the power market is not soconcentrated and the total installed capacity is distributed in arelatively admissible way among various entities. On the otherhand the country’s electricity market RSI denotes the reliance ofmarket on the generation of some pivotal suppliers. CalculatingRSI for Iran’s power market shows that despite permissible valuesof concentration ratios due to supply scarcity, during periodswhen the system demand is close to the total available capacity,some suppliers can become pivotal and exercise market powereven with a relatively small market share. RSI results for bothscenarios are too far from prevalent standards. These resultshighlight the generation shortage (high potential for exercisingmarket power) in Iran’s electricity market and this is a warningsignal about competitiveness of the market. Due to increasing rateof demand growth and slow and unfavorable mechanism ofattracting private investments in Iran’s power infrastructures, itdoes not seem this index will improve in the near future.
Analyzing the country’s electricity market results confirms thelimited competition in many hours and implies the existence ofeconomic withholding especially in peak load hours. Reviewingmarket results particularly weighted average prices of energy inpeak hours demonstrates actually there is no competitionamongst parties in these hours. In peak load hours, submittedbids of many suppliers are close to the price cap. Comparing priceduration curves in low load, medium load and peak load hourscertifies these facts.
The other section of this study analyzes the main reasons of theexistence of market power and the most significant implementedcountermeasures for mitigating market power in Iranian electricitymarket. Generation shortage (tight supply/demand situation) as themain source of market power in Iranian electricity market providesmany opportunities for some suppliers to keep prices high, exerciseeconomic withholding and hamper healthy competition. On theother side, the weak transmission infrastructure particularly insouth and south eastern parts of the national grid provides suitableopportunities for some suppliers to exert local market power.Selecting pay-as-bid mechanism for payment to suppliers, settingprice cap, signing guaranteed purchase contracts with private powerstations, reinforcing transmission networks, offering motivations forprivate investors to invest for expanding the country’s generationcapacity are most important fulfilled activities for mitigating marketpower in the country’s electricity market. Giving demand sideparticipants the opportunity to bid in power market, implementingand issuing financial hedge contracts, segregating Regional Electric/Water Companies to more competitive firms and releasing andtransferring the ownership and management of governmentalcompanies to the private sector are next activities that will improveand enhance the competitiveness of Iranian electricity market.
Acknowledgments
The authors would like to thank Mr. Hojjat the C.E.O. of IranGrid Management Company (IGMC), for his valuable supports andinsightful comments. Thanks are also due to the staff of Iran’spower market, especially Mr. Mehdizade, for their collaboration,suggestions and data providing.
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