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Review of experience with electricity industry restructuring in UK, USA & WA

© CEEM 2006

2Review of experience with electricity industry restructuring in UK, USA & WA © CEEM 2006

Outline

Principles of electricity industry restructuringMarket design types - net or gross poolUK: experience with NETAUSA: California & East Coast blackoutIssues:– Government concerns: energy security & climate change– End-user concerns:- quality, availability, flexibility, price– Future challenges for Australia


The electricity industry restructuring process

Variable RE energy flux;End-user engagement; Accountability

From direct costTo full costs

Sustainability

Multiple objectives; Measuring outcomes; Accountability

From rate of return To Incentive Reg’n

Industry regulation

Market power; Market design fidelity; End-user engagement;Accountability

From cost recovery To market prices for

buyers & sellers

Commercial framework

Cultural change; Adequate competition;Accountability

From monopoly To competing firms

& active end-users

Industry structure

Key challengesTransitionIssue


An electricity trading framework

transmissionnetwork

distributionnetwork

Interchange to other

wholesale market regions

WholesaleMarket region

distributionnetwork

distributionnetwork Retail

Market 3RetailMarket 1

Retail Market 2large consumer

• Wholesale & retail market designs should be compatible• Both should include network models

Primary energy markets

• Small consumers, embedded generators & storage should be supported by energy service advisers

risks to end-useenergy service

delivery

most consumers

large generators

embedded generators


Decision-making regimes for an electricity industry

The task, assigned to one or system operators, of maintaining the integrity of a local or system-wide core of a power system against large disturbances.

Security regime

The set of engineering rules that allow components of an electricity industry, when connected together, to function as a single machine.

Technical regime

Formally designed electricity markets & regulated pricing arrangements. Informal markets that interface to the industry - eg primary energy, equipment, buildings, land.

Commercial regime

Formal institutions, legislation, policies & regulation.Informal social contexts that influence decision-making

Governance regime


Ideal decision making in the stationary energy sector: led by the end-user

End user End-userenewable

Electricityretailer

Equipmentprovider

Gasretailer

Buildingprovider

End-userenewable energy

End-use efficiencyenhancements

End-use efficiencyenhancements

NEM & NSP(s):electricity supply

Gas industry:gas supply

Localinfrastructure

Remoteinfrastructure

plus flow


Barriers to good end-user decision-makingLocal infrastructure options:– Knowledge, cash flow, innovation & risk exposure– Limited influence over options (dependence on others)– Need for coordinated decision making (scale effects)

Remote infrastructure & flow options:– Limited knowledge & influence (dependence on others)– Revenue recovery tariffs (tax rather than price)– Business as usual (status quo rather than innovation)– Regulators & system operators take key decisions

To maintain availability & quality of energy flowFor which end-users bear most of the costs


Electricity market modelsGross pool (eg NEM):– Temporal & location risk managed collectively:

Ancillary services, spot market, PASA, SOO

Net pool (eg UK NETA):– Long term & location risk managed bilaterally

Network not modelled in trading arrangements

– Short-term operational risk managed collectively:System operator given only one day’s notice of bilateral trades

Resource adequacy:– Call options (Gross pool)– Capacity markets (Net pool)


Resource adequacy solutions(Oren, 2006)

NEM

WA SWIS?

Capacity paymentsare proving to beproblematic as

not based on spotperformance/value


UK: limited success with the initial pool(E Marshall, England & Wales wholesale market 2 years on, Ofgem, 2003)


UK: perceived problems with the Pool(E Marshall, England & Wales wholesale market 2 years on, Ofgem, 2003)

Marshall regarded these problems as fixable but easier to introduce NETA instead. 12Review of experience with electricity industry restructuring in UK, USA & WA © CEEM 2006

Key features of NETA (www.ofgem.gov.uk)Bilateral forward trading:– Compulsory notification of contract position to System

Operator (NGC) by “Gate Closure”:Initially 3.5 hour then 1 hour ahead from 2/7/02

Voluntary offers to provide balancing servicesSettlement process for mismatches:– Under contracted generators & over contracted retailers

receive “system sell” price (SSP)– Over contracted generators & under contracted retailers

pay “system buy” price (SBP)Normally expect that SBP > SSP


Key features of NETA(Ofgem 1 year review of NETA, July 2002)


Daily average system buy & sell balancing prices and current day forward price (UKPX)(S Brown, England & Wales wholesale market 2 years on, Ofgem, 2003)


Ownership of UK coal-fired generation 1990-2001(D Newbery, England & Wales wholesale market 2 years on, Ofgem, 2003)


Trend towards vertical integration reduces reliance on balancing mechanism(Ofgem 1 year review of NETA, July 2002)


Some UK perspectives on NETA(England & Wales wholesale market 2 years on, Ofgem, 2003)

Newbery (Cambridge University):– Increased competition in fuel & generation may be the

key driver on wholesale price reductions– NETA very expensive to implement

Yarrow (Oxford University):– How will security of supply be maintained?– Demand side more clearly involved– Transmission losses & constraints difficult under NETA


UK electricity price modelling by Evans & Green, 2005:Divestiture the most important influence on price

Price reduction largely due to divestiture of generation


Reduction in prices “not due to NETA”(Mirrless-Black, IEE Ireland colloquium, 2004)

Real electricity and fuel costs 1990-2003

0

5

10

15

20

25

30

35

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

£/M

Wh

0

1000

2000

3000

4000

5000

6000

7000

HH

I

Electricity

coal cost

gas cost

Coal HHI

NETA

Price control Profit maximisingTacitCollusion

Restraint


Some Australian perspectives on NETACOAG energy market review final report (2003):– NETA’s requirement for individual balancing:

“a significant inefficiency that adds cost to the system”

– Gross pools have advantages over net pools:Encourage generators to supply at marginal costReduce barriers to entryTransparent data supports informed decisions

ACCC:– Market power not reduced by moving to net pool

Outhred:– Biased against intermittent generators & distributed

resources


European blackout, 4/11/06

HV line across Ems river, Germany de-energised to allow tall ship to sail under itCascading blackout affected 10 million end-users in 9 countries, as far away as PortugalBlamed on “human error”Indicative of weak security management regime:– Many (joint) system operators– Ambiguous authority & accountability– Inadequate to manage high wind energy penetration


North America (USA, Canada, Mexico): Three interconnected power systems


Electricity industry restructuring in USAFederal level (inter-state trade):– PURPA (1978) required utilities to buy from “qualifying

facilities” within their service territories– EPA (1992) mandated transmission access for wholesale

transactions (buyers must be utilities):Access & “wheeling” charges (a bilateral trade model) regulated by Federal Energy Regulatory Commission

State level (intra-state trade):– Some states began EI restructuring:

Bilateral trade (eg California) or pool (eg PJM)Single state (California) or groups of states (PJM)


Comparison of day-ahead ave. electricity prices in California & New York for 2000 (Flaim, 2003)

$0

$50

$100

$150

$200

$250

$300

Jan-00

Feb-00

Mar-00

Apr-00

May-00

Jun-00

Jul-00

Aug-00

Sep-00

Oct-00

Nov-00

Dec-00

Jan-01

$/M

Wh

SP15 DA (PX) NYC DA WEST DA

Source: NYISO MIS 3/1/01; UCEI Berkeley web site

California

New York City

Buffalo, NY


Comments on California restructuringA politically influenced bilateral trading model:– Compromises, inconsistencies & complexity

Many non-ideal features:– Not consistent across Western System:

Or even within California

– Economic & technical regulation separated– No coordinated support for investment decisions:

eg IOUs were forbidden to forward contract

– Poor market design (CaISO became the default market)– Short horizon for managing system operation– Large residual task for ancillary services


Other contributing factorsHydro reserves had been run down:– California still ~25% hydro energy

Gas & NOx permit prices were rising:– Allegations of market power in gas market

Approval difficult for new generation & networkContinuing growth in demand, including:– Temperature sensitive residential air-conditioning– High-value commercial & high-tech industrial

High wholesale prices & regulated retail tariffs:– PG&E and SCE eventually went bankrupt


Tests of automated demand-price response in commercial buildings (LBL, 2004)http://www.energy.ca.gov/demandresponse/documents/2004-06-08_workshop/index.html


Detail of Roche building response (2004)http://www.energy.ca.gov/demandresponse/documents/2004-06-08_workshop/index.html


SMUD experiments with non-predetermined residential pricing (2004)http://www.energy.ca.gov/demandresponse/documents/2004-06-08_workshop/index.html

(71% of time)

(23% of time)

(6% of time)

(1% of time)


SMUD experiments with non-predetermined residential pricing (2004)http://www.energy.ca.gov/demandresponse/documents/2004-06-08_workshop/index.html


The North America Blackout of 14/8/03 (www.spectrum.ieee.org/webonly/special/aug03/black.html)

DOE studies had predicted trouble since ‘98:– Inadequate regional oversight & control

Operators unable to stop problem escalating:– Midwest ISO had less authority than PJM &

New England counterparts– Human errors & loss of institutional capacity

Proposed remedies:– Create regional ISO’s– Build network capacity & institutional skills– Slowly evolving towards the Australian NEM design


August 2003 North American Blackout(final report summary)

Transmission Lines

765 kV500 kV345 kV230 kV

Transmission Lines

765 kV500 kV345 kV230 kV

North to South 345kV Voltage Profile Locations

AllenJunction

Lemoyne

AvonLake

Star

HardingJuniper

Chamberlin

Brownstown

St. Clair

SouthCanton

Sammis


Voltage collapse in 2003 blackout due to weak security regime Source: Overbye & Wiegmann, 2005

Early intervention to shed load in the affected area would have prevented the problem from escalating


16:05:57 16:05:58 16:09:25

16:10:37 16:10:39 16:10:40 16:10:41

16:10:44 16:10:45 16:13:00

1. 2. 3.

7.6.5.4.

10.9.8.

August 2003 North American Blackout(final report summary)

Final collapse due to:• Low voltages• High currents• Dynamic instability• Protection trips


Affected areas(T Mount, Cornell University, 2004)

At 4:13pm, 62GW & 50m people were blacked out in Ontario & northeast USA. It took nearly 30 hours to restore power.


Conclusions on blackout 1(T Mount, Cornell University, 2004)

The blackout was not caused by:1. An Act of God (extreme weather)2. Malicious acts (sabotage or a computer virus)3. Insubordination (failure to provide reactive power)4. System conditions (wheeling power)But:– Limited control effectiveness in some regions (3) &– The long distance transfer of power (4)Increased the complexity of system operation & reduced ability to maintain reliability


Conclusions on blackout 2 (T Mount, Cornell, 2004)

The blackout was caused by:– A series of typical contingencies that were not

recognised & managed locally by First Energy (FE):Initial line sags & tree strikes (poor maintenance)Many adjacent lines then tripped sequentially (poor monitoring)

– The problem was not contained locally by FE and surrounding system operators (poor coordination)

– Unpredictable trips and power surges then led to an inevitable cascading collapse:

High costs due to supply interruption but minimal damage to power system equipment

Recommendations following 1965 blackout should have prevented this one but were not followed


US responses to the 2003 blackoutFERC now has authority to appoint a single reliability organisation with legal powers:– Previously the voluntary North America Electricity

Reliability Council (NERC) - now NROMarket design concepts are being reviewed:– Bilateral trading & capacity markets now perceived as

too artificial & inadequate - more emphasis now on:Locational spot & derivative markets & end-user participation

Likely to evolve steadily towards the NEM design:– Texas now has energy-only market– MISO considering one


Increasing summer peak demand in the USA will continue to test the robustness of electricity industry restructuring(Platts, August 2005)


Conclusions from North American experience (Massey, 2003)

Electricity doesn’t respect political boundariesFundamental design principles:– Real-time spot market with locational pricing signals– Independent grid and market operation– Consistent rules over entire market region– Firm transmission rights– Market monitoring and mitigation of market power

Enlarging market scope by interconnection:– Reduces supply-side market power– Requires consistent rules & regulation


Electricity industry structure in WA:- Western Power now disaggregated

SWIS:– WP Electricity Generation Corporation (Verve Energy)– WP Electricity Network Corporation (Western Power):

With ring-fenced System Management

– WP Electricity Retail Corporation (Synergy)– Independent Market Operator (IMO)

Elsewhere than the SWIS (regional):– Still vertically integrated (Horizon Power)


SWIS structure from April 2006 (WP, 2006)

Also transmission


SWIN wholesale market structure (Office of Energy, 2004)

Auction only if bilateral trading insufficient; otherwise capacity credit value set to 85% of auction reserve price = $150/kW for 2007/8(one CC price is not appropriate for all available technologies) 44Review of experience with electricity industry restructuring in UK, USA & WA © CEEM 2006

General implications for Australian NEMBasic design is sound but industry structure & market design both need attention:– Electricity & gas consistency, barriers to entry, market

power, pressure to reveal preferencesConsistent wholesale & retail market design:– For ancillary service, spot & derivative trading:

Consistency between engineering & economic models– Across the full scope of a transmission network

Governance must be independent from participantsRegulation essential but implement carefully:– Inappropriate intervention can exacerbate dysfunction &

increase uncertainty


Use of natural gas for electricity generation

Electricity gen’n has highly variable gas demand:– Gas pipeline network has limited storage– Traditional gas market model not good at

rationing scarce pipeline capacityNew gas trading arrangements needed:– The NEM provides an appropriate model for existing

gas networks– Special arrangements may be needed to support green-

fields gas infrastructure investment


Future challenges for AustraliaElectricity industry restructuring:– Enhanced demand side participation– Uniform governance & regulation– Efficient network investment that gives equal

consideration to distributed resource optionsGas industry restructuring:– Efficient market design for existing gas network– Efficient investment in gas infrastructure

Sustainability of the stationary energy sector:– Dramatic reduction in climate change emissions

Government policy: must be of the highest quality


Many of our publications are available at:www.ceem.unsw.edu.au

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