Governance-technology co-evolution and misalignment in the electricity industry

This paper explores some reasons why the alignment between governance and technology in infrastructures may be unstable or not easy to achieve. Focusing on the electricity industry, we claim that the decentralization of governance – an essential step towards a decentralized technical coordination - may be hampered by if deregulation magnifies behavioural uncertainties and asset specificities; and that in a technically decentralized system, political demand for centralized coordination may arise if the players are able to collude and lobby, and if such practices lead to higher electricity rates and lower efficiency. Our claims are supported by insights coming from approaches as diverse as transaction cost economics, the competence-based view of the firm, and political economy.Governance; Technology; Coherence; Competence; Transaction costs; Regulation.

AN ANALYSIS OF SUPPLY CONTRACTS IN THE LIVESTOCK MARKETS OF THE UNITED STATES

In this report, we discuss market relations in the cattle and beef sector of the United States by setting up a sequence of optimization decisions taken by cattle feeders (producers, sellers) and meat packers (processors, buyers) to solve for the equilibrium supply and demand proportions in the contract market in a first stage given the respective degrees of risk aversion for the representative producer and processor. Subsequently we derive the impacts of contracts, namely impacts on the spot market price and the processors’ ability to exercise oligopsony power, in a second stage. Using a model for a fixed-price contract, the equilibrium proportions allocated to the contract market by producers and processors correspond to those in Buccola’s model of decisions under risk (1981). This model is extended to solve for the equilibrium in the case of unequal bargaining power between the producer and processor. The residual supply function is used to derive the spot market price through a conjectural variation model and we refer to the prominent Lerner Index for the downstream processor’s oligopsony power. We find that the use of fixed-priced contracts for risk averse producers and processors can serve to reduce the spot market price offered for cattle given the assumption that the residual supply becomes more inelastic. Hence, the processor enjoys higher oligopsony power in the spot market. We run simulations in a spreadsheet model to derive further insights about key parameters, including the risk aversion coefficients, the spot market price variance, the coefficient of expectations, and the bargaining power weights in the contract market. We observe that when the spot market price is expected to be higher than the equilibrium fixed contract price, increases in the producer’s coefficient of risk aversion cause their optimal share of cattle marketed through contracts to increase and hence it contributes to a higher spot market price. On the other hand, when the expected market price is lower than the equilibrium contracted price, increases in the producer’s coefficient of risk aversion decreases the producers’ optimal share of cattle marketed through contracts relative to the processors’ and hence contributes to lower spot market prices. These two results are due to the fact that increasing risk aversion decreases the sensitivity with which optimal portfolios react to changes in the price parameters. By simulating increasing (decreasing) spot market price variance, we observe the equilibrium contracted proportions to increase (decrease) accordingly. In turn, this causes a lower (higher) spot market price. The simulations on the degree of the processors’ bargaining power in the contract market show that increases in the processors’ bargaining power induces higher demand for contracts by processors and lower supply of contracts by producers. This results in a decline in the contract price and an increase in the spot market price. Finally, a brief exercise in a dynamic decision making reveals that a producer will always choose to contract out a proportion of their cattle as long as they are less than 50% certain that, on average, future market prices will be slightly lower than the offered contract price

Coal markets and hierarchies

Errata sheet inserted.In "Markets and Hierarchies" (1975) Oliver Williamson has developed a heuristic framework (Organization Failures Framework = OFF) to attack the issue of institutional borderlines between markets and firms. Below we discuss this concept and apply it to local coal markets. Differences in larger domestic and international coal markets then cast some doubts on the practical usefulness of the approach

Generation Adequacy and Investment Incentives in Britain: from the Pool to NETA

Three years after the controversial change of the British market design from compulsory Pool with capacity payments to decentralised energy-only New Electricity Trading Arrangements (NETA) market framework, we compare the two designs in terms of investment incentives. We review the biases of the Pool capacity payments design, the drought of investment following the introduction of NETA, and the reaction of the market during the first “stress-test” of NETA during the winter 2003. In an energy-only market such as NETA, it is essential that price signals are right and the system operator has a crucial role in contracting ahead for reserve. We recommend that NETA adopt a single marginal imbalance price as dual imbalance pricing distorts price signals in times of scarcity. The lack of long-term contracting that causes hedging and financing difficulties for power projects can becompensated by vertical and horizontal reintegration at a cost of increased market power

Evolution and reform of UK electricity market

Electricity Market is structured to fund reliable electricity supply, meet the need of consumers, ensure the affordability of end-users, and support national economic development. In recent years, to meet challenging emission target set by Government, power system in the UK has a rapid increase of integration with various-scale Renewable Energy Sources (RESs) and energy storage systems (ESSs), which pushes the electricity market reform to accommodate the changes, encourage renewable energy integration, adopt new technologies, stimulate consumers participation, and ensure the power system resilience. The paper reviews the history of UK electricity market evolution, driving factors of reform, and the trend of current electricity market reform. In history, the UK electricity wholesale market has experienced three significant reform stages, which are introducing the Electricity Pool of England & Wales (the Pool) in the 1980s, implementing the New Electricity Trading Arrangements (NETA) in the 2000s, and performing the Electricity Market Reform (EMR) in 2013. To address the new emerging challenges in decarbonising power generation, the paper explains and analyses on-going electricity market changes and the trend for future electricity market reform

Capacity expansion in liberalized electricity markets with locational pricing and renewable energy investments.

We study the long-term incentives for expanding production capacity in liberalized electricity markets. How does electricity market design affect the prices of energy, capacity and social welfare? And how is this capacity market affected by the geographical features of the electricity market? Should the system operator design the capacity market to provide incentives for investment in renewable technologies? We analyze the conditions under which capacity payments and markets enable higher investment relative to an energy-only market in which generators sell electricity but not capacity. We show that capacity markets benefit consumers and investors by increasing investment and reliability and capping peak prices. We prove that generators benefit from owning a portfolio of peak and baseload plants and show that investment strategies must consider regional capacity auctions. We demonstrate that a capacity payment per technology increases investment in renewable technologies and leads to the early retirement of older, carbon-emitting technologies. Regional capacity investment targets effectively decrease energy prices and significantly increase investment in renewable technologies

On investment, uncertainty, and strategic interaction with applications in energy markets

The thesis presents dynamic models on investment under uncertainty with the focus on strategic interaction and energy market applications. The uncertainty is modelled using stochastic processes as state variables. The specific questions analyzed include the effect of technological and revenue related uncertainties on the optimal timing of investment, the irreversibility in the choice between alternative investment projects with different degrees of uncertainty, and the effect of strategic interaction on the initiating of discrete investment projects, on the abandonment of a project, and on incremental capacity investments. The main methodological feature is the incorporation of game theoretic concepts in the theory of investment. It is argued that such an approach is often desirable in terms of real applications, because many industries are characterized by both uncertainty and strategic interaction between the firms. Besides extending the theory of investment, this line of work may be seen as an extension of the theory of industrial organization towards the direction that views market stability as one of the factors explaining rational behaviour of the firms.reviewe

Mathematical modelling and risk management in deregulated electricity markets

In this thesis we aim to explore how electricity generation companies cope with the transition to a competitive environment in a newly deregulated electricity industry. Analyses and discussions are generally performed from the perspective of a Generator/Producer, otherwise they are undertaken with respect to the market as a whole. The techniques used for tackling the complex issues are diverse and wide-ranging as ascertained from the existing literature on the subject. The global ideology focuses on combining two streams of thought: the production optimisation and equilibrium techniques of the old monopolistic, cost-saving industry and; the new dynamic profit-maximising and risk-mitigating competitive industry. Financial engineering in a new and poorly understood market for electrical power must now take place in conjunction with - yet also constrained by - the physical production and distribution of the commodity