Energy Engineering - Energy Economics

Complete course (ENG and some NO)

Complete course

FORMLERENERGYECONOMICSELASTICITYOFDEMAND:Howcostumers are sensitivetoa changeinpriceUNELASTICE < T(E,0)Sexelectricity) Fewcompetitors 7 "Ifichangepricequantitysoldisalmostconstant(consumersdon'tchangetheirbehavior).ELASTICECT (ex.pasta)hotofcompetitorsIf i changepricequantitysoldvary a lotbecauseconsumerswillchangetheirbehavioursCOSTFUNCTION: # ICTC:totalcostfactionMC:marginal costfunctionshowmuchitcosttoproducean X (q) = T,q ) ADDITIONALunit.AC:averagecostfunctionPr>howmuchitcosttoproduce a MCunit.ACUntillMR>MCitisconvenientto39increaseqFocusforFIRMS=>PROFITMAXIMIZATION(M) * Revenues - Costs = p.q-TC(q = p.q - AC(q).q = q(p - AC)Tomaximizedr - 0· a M((q) = 0dtwith # R = 4 >howmuchIearnfromthesell of anadditionalunit.(marginal revenue( Thestrategies offirmshighlydependontheirpositioninthemarket: · PureCompetition:Firms are pricetakerssoMM = p=cost(q) so theycan'tdecidetoveryp of theirgoodsbecauseconsumerswill not buyfromthemanymore(12K1).Tohavethiskind of marked.Lotsofsmallfirmsarenecessarytosatisfytheoveralldemand(thequality of thegooddon'thavetobeimportant).All consumersare wellinformedNODEADWEIGHTLOSS => WereachanEFFICIENTSOLUTIONdr - O>p = rc isreachedwithoutdtexternalinterventionIfM>0 => firms are goingtoenterthemarked 1 r = 0=)firmswon'tenterthemarked purecompetitionInaLONGRUNsituationinPC:M = 0equilibriumconditionIfI'malreadyinthemarked.↓averagevariablecosts ifpAVC => IwillleavethemarkedSHORTRUNS comefromsame eq.p>AVC=>Iwillremaindinthemarked↑ 1leavingMremainingM - FC =>Iwillremaindinthemarked · Monopolist(2:0)Onlyonefirminthemarked-ithasthepowertoDECIDEP.DesitioncomefromMAXIMIZATIONofPROFITS:dr - ⑧>MR(q) = M((q)dtSometimesthiskind of marketisthemostefficientavailable:NATURALMONOPOLY(ex.Tr a n s m i s s i o nofEECThishappenwhentoenterthemarked we havetosubstainHUGEFC markupover marginal cost Monopolist can increasepriceuntilitstaysinUNELASTICPEDEMAND;hehavetopayattentionto not gointheELASTICpart(consumerswon'tbuytheproduct( ~demandcurve=> IntheendoperateinELASTICpartofDC Notpossibletoregulate aMONOPOLISTwith:QUANTITYTA X(goestoconsumerPROFITTA X(nomodification of behaviorsIt'snecessarytoregulate a MONOPOLISTbecausewithhiminthemarketwehave a DEADWEIGHTLOSS=>thereislesssurplusinthemarkedgloballylotlessforconsumerssometimemore formonopolistLoss of surplusDEADWEIGHTLOSS:toevaluateD.C (like a triangle)D=b.h rDEADWEIGHTMC2LossPr⑧ b = (pn - y),h = (qx - qr) Ppc~↑y⑳ DCMRqpc>qMES:MinimumEfficientScale ·des to worses*"benefit thestop.It'snotnecessarytoproduceqofP - MCmin(AC)becausethefocusisnot cost(produceuntilMR = MCC ECOof minimizationbutPROFITMAXIMATIONISCALE Fina MRA>qIMESDCMonopolyismoreefficientthanPCwhen:Tc ( Q )< iTC(q) => thishappenwhenFC are veryhighandwithkfirmsinthemarketit'snotpossibletofullydevelopeECONOMIESofSCALEECO of SCALE:INCREASINGreturntoscaleREGULATIONofNATURALMONOPOLIES · Publicownership"failed(corruption of politicians) · Statutes,failed(infoasymmetries + moralhazard) fare· Franchisefailedbecauseinthecompetitionforthemarket,7ContractsformermonopolisthastheadvantageDemsatztheory of SUNKCOSTS(FCalreadysubstained) · INDIPENDENTREGULATORYAGIENCYSoforbestsolutionavailableevenwithinfoasymmetries,hasthepowertosetPRICE,usingmanydifferentPRICINGMODELAVA I L A B L ERAMSEYBOITEUXPRICINGMODEL>p = AC · MinimizeDEADWEIGHTLOSSundercondition of Mr = 0 · MaximizeTOTALWELFARECBREAKEVENCONSTRAINT) => ProblemsolvedwithPk - MCk2=PrEx = 1 - xLAGRANGIANMULTIPLIERk=producttypePx - M(x = x1PK7- ExWiththissolutionp>MCandthisMARKUpdepens on Elastic(E1)"smallMARKUPtheelasticity of demandlakUnelastic(24)"bigMARKUPMARKUP:thevaluethataplayeraddstothecostprice of aproductLConsumerswithunelasticdemand aremore chargedEks.Verification of applicationofRB on 2productsp. - MC,2, == P2 - MC2Ez·true>RBVP1P2false non RBXEks.Application of RBGivenproduct7andproduct2 (p - Mc2, = Pc - MC2Ez I findpc = f(p2)↑ n P2(likningssettmedsolveinone pricethenIgettheother2ukjente)TWOPART - ARIFFPRICINGMODEL(T)IAmodel -. avoidtheDEADWEIGHTLoss,todothatwehavedesignetoputp=MC.Inordertohavethissolutionfeasibleconsumersmust gjennonforbar payalsoforthefixedcostssubstainedbymonopolisttheypay,loweringtheirCONSUMERSURPLUSTC(G) = FC + MC.Q7T = E + MC.q = A + p.qcostformonopolistTA R I FF& =numberof consumers G = Accesschargetoenterwhowillbuythegoodthemarket. ThissolutionisbeonlyFLOWERthanthetotalCONSUMERSURPLUS:Otherwisecostumerswon'tbuytheproductIfregulatorhastwotypes of costumers and you can7youhavemoresetjustONETA R I F F.consumersinthe=> SetA = ConsSurplus of LOW-DEMANDproductmarket.TWOPARTTA R I F FVSRBMODELtotalwealthinthemarketishigher(nodeadweightloss)monopolisttookpartall consumer surplustherewillbe moreconsumersinthemarket(GOAL of theAGENCY(PEAK-LOADPRICINGMODEL(mainlyfor el market(Capacity => FCwhoshouldpayforit?PEAKCONSUMERSThissolutionisfeasibleonlyifEisquitesmall(unelasticbehavior( andpeakconsumersmantaintheirbehavior.SolutionfromtheLAGRANGIANMULTIPLIER:Cr:cost of capacityPD = Ce + XDsetbyAGENCYCE:marginaloperatingcostPr = C= + AnID =Ck(x= 2D + AvXr = 0ifQb >QuD= Day time= high demandconsumers=> feasiblesolutionN= Night time=lowdemandconsumers PD = C= + CkPr = CEifNOTsQD = QNandIDAnPx(q) = C= + xepr(q) = cz + An > IresolveIs,Zw,Ihaveq,Ifindp Lequation inAD,Zr( Xp + 2v = CkifQDQuMRD = C= + ADsetbyMONOPOLISTMRN = C= + InXD = Ck => feasiblesolution2k = 2D + ZwXr = 0tells me (Ep14MONOPOLIST E solutionwithsmallerQ(s)and higherP(s) ENVIROMENTALECONOMICDesign aMARKETinwhichfirms are interestedinproducingenergyinacleanerway.InthisconditionevenifwehaveaPCmarket,thereisthepossibilityof not gettingthe most efficientsolution:MARKETFAILUREusuallynegativeIhappenwhenPUBLICGOODexist,and,EXTERNALITIESexist,NON-exludable W>NON-rivalrousproduction of onefirmhave an impactonprofitofothers.Tr y i n gtoavoidmarketfailure wecan behaveasan agencywhowantsto:different possibilities)MAXIMIZESOCIALWELFARE I and policiesCommandandControl(failedbecauseINFOASYMand difficulty incontrollingmechanismFromCoesetheorum7wedecidetoassigntosomeonetheenvironmentasagoodPOLLUTERPAYTHEVICTIMScreate a marketforexternalitieswherevictimssellcertificatetopollute(B)tothepolluter(A)p, cM firm(B)ex.fishermanM1 = P1.a - T(a) - pxXPPPV -....... Mb = Pb.b - T((b) - E(x) + pxXifirm(A) power plantPx = price of certificateFor,X = quantity of externalitiesproduced(andcertificatessold)E(x) = emissioncreditsNBX = f(a)INC:a,b,XSFirmBproduce sameamoundof I dMA I 0, = ↑basnormalcondition.FirmA↑EQ:da = 0 I- Oproduceslessamoundofa POLLUTERPAYTHEVICTIMSPPML PPV-scenario:leadtoanEFFICIENTsolutioninSHORTRUN>Howtopromoteinvestments(LongRundecisions)inGREENTECHNOLOGIES? ~ COSTtosubstaintocreatetheplantBENEFITpaylessamound of certificateforpolluting ⑦: costof introducing a GREENTECH=)COSTofABfinaEMISSIONSdAMCA = payedbythefirmdx:cost"I"havetosubstaintoreduce anADDITIONALunitofexternality. 1 The more IwanttoreduceexternalitiesMCA=> the moreitcoststodothatA(x) &: costofexternalities>A(sparedspark)MCE = dE > ifIdon'thavePPV dx:cast"thesociety"isgoingto 1 paybecauseIproduceanSavingsthanksMCEADDITIONALunitofexternalities zi fromxPPr -> xEMIntroducing aGREENTECH,willreducex:(produced) "¥x spared":MCA"forfirm 13*produced2:MCEforsocietyMCAMCE WELFAREcostofINCREASEemmission " costofabatementreduks;on1 >X XPPV InthisconditionNOFIRMwillintroduceGREENTECHevenifthey are goodforsociety(ofwhicheveryfirmispartof( => FREERIDINGproblemEnvironmentisaPUBLICGOOD so everyfirmdon'tdoanythinghopinganotherfirmwillintroduceGREENTECHand they canstillgetadvantageofitwithoutneedingto pay 1 (Developmentofnew ~ goodforsociet3 &MCAonDMCE↑tech I canreachlowerXEMMMCAvEw· . FREERIDING = PrisonerDilemma>If we alltrytogetmaxadvantage,themarketwon'treachtheefficientsolution(NASHEQUILIBRIUM(Soaninterventionfromoutsideisneeded: - ENVIROMENTALSTANDARDMCA environmentalfeef/S!I MCEby I Ifixthe max X(xst) afirmMCA2 IDLsocietycanproduceusinginfoIgotas Wa regulator an introductionofDeadweightloss:t>Xprod ⑦ . somefirmswillsubstainhigher cost thanthe one forsocietybecausetheyhaveoldtech(dobbelstraff)② . some firms willstop action ofemissionsat star ora pay moreandcontinuetoreduceXlikkeoppmontret)Thissolutioncanbegoodifcoupledwiththecreationofamarketforexternalities(similartoPPVbutnowitisbetweenfirmsthatpollute)EMISSIONTRADINGSYSTEM · TheoreticallyshouldincentivizeINNOVATION· Price of "A l l o w a n c e s "isdecidedinPCmarket ~ MCA · CAP&TRADEsystem noexternalagencyto · Problems :fixaTA X zeri Plownes firmswhotakepartofit(EUmarketnowadays)arein worst positioncomparedtointernationalfirms(whichwon'thavetopaytopollute)westartedthemarketwithpallowancestolowsoitwaseasytobuythemand everybodypreferedthisrathertheninvesttopolluteless.ProblemdesitionofXcapvalueNowre-considerthepossibilityfor an externalinterventionandconsiderit'sthegovernmentthrough a TA X :#pollute(similartoPPV)>ex.PIGOUVIANTA XFirmswhopolluteinternalizeneg.externalities'goalIskattfirmaetmabetalefordeSamfunnsekonomiskekostnadene,denegativeeksternalitetendeproduserer,IdifferentfromMCE(payedbysociety) 0pafareromgivelsene FirstyouhavetoKNOWtotalcostfunction of pollutersandvictims(problem of INFOASYMMETRYS = TCpolluters + TCvictims>thencomparesocialcostSOCIALMARGINCOST:dSCdq polluterMarginalcostSMC = MCpollutors +ofexvictims W theydon'tchangetheirbehaviourpayedbysociety inthiswaypollutersDef:Epigourian = SMC-MCpolluterspayallsocialcosts = f(x)IfyouhavewronginfoatpigcouldleadtoawelfarelossAnotherproblemTA X E Sdon'treducejustemissionsbutalsoPRODUCTION of thegood>thiscouldleadtohavelots of smallfirmswhichproducelowamountof X butanoverallxinthemarketsameasbefore.Inadditiontothatwewill not abletofullybenefitofECONOMIESofSCALETheseproblemaresolvedinETSEmissionTr a d i n gSystem ELECTRICMARKETS ,costminimizationlogic, can artificiallymodifycostsPre-LIBERALIZATION:VERTICALINTEGRATEDMONOPOLYInnovationwasn'tincentivized,neitherquality of service oppmuntret Then:UNBUNDLING and PCwherepossible(GEN)Monopolist(forNATURALMONOPOLYactivities.TRANS,DISTRIB)Unbundling adskillelse" mostsimple,thefirmsjusthavetohaveEEmarket1986ACCOUNTINGdifferentBALANCESHEETfordifferent&directiveactivities. "¥ avoidartificialmodification of cost amakedifferentattractions FUNCTIONAL - activities(transmission&distributionshave EEmarket2003 &LEGALtobemadefromdifferententitiesallowing ⑭directive>bedifferentcompanies eachgen.playertopaysomeamountCompanieswhodoan activity cannotdoanyotherOWNERSHIP:DifferentownersfordifferentactivitiesEEmarket2006 (ex.ENEL/ENELdistribuzione) ⑭ I directiveSUPPLYCHAIN:GENTRANS>DISTRIB>METERINGCOMMERCIALPATH:BigEEPRODUCERSWHOLSALESUPPLIERWHOLESALEMARKETregulatedbyno(Marketoperator)40=>determinesprice RETAILSUPPLIERS ENERGYINTENSIVEbigbuyers aresuppliersFIRMSforsmallbuyersRETAILMARKETFINALCOSTUMERS(myhouse) · ee:easytotransportproduct;sometimefirmsfinditconvenienttoproduceinforeigncountry and sellinItalywhy? · possibleover-productioninorigincountry · higherprice of eeinItaly · ThankstoUNBUNDLING:EnlIproductionhasNOADVANTAGEtosell be toEnllenergiesPHYSICALCHAINTSO(TransmissionSystemGENProducer123Operator)isthemainplayerandhisgoalsare:TRANSTSO · SECURITYofSUPPLYInoblackouts) · ADEQUALYOFGRIDDISTRIBSuppliertilstrekkeligorTr a d e rI23 ↑-enkind of contracts:Finalcostumers1,2,3,4,5, ... ·Dispatchandsettlementcontracts · Balancing andsettlementcontractsFOCUS:WHOLESALEMARKET:runbyMoand ISOis a result of POST-LIBERALIZATIONScenariohere: · maximize of gainsfromeachtradeconsideringphysicalconstrain-EFFICIENTPRICEMECHANISM(SeeSMP,systemMarginalPrice) · madeby:ORGANIZEDMARKET+OTC(OTC -over-the counter I decisiononPowerPlanttodispatchtosatisfyDAM+ (IM)theoveralldemand(knownbyforcast(DayAheadMarkettimeI trading of ANCILLARYSERVICESClinkedtoTSOLhjalpemiddelBMIf-regulation and balancing, reserve.... (BalancingMarketW >price eeinDAMCisaSIGNALyoushouldconsiderOTC(OvertheCounter)market 7thesignalProducer and costumerhavetheirdealwithprice of sebuttheystillneed acontractwithisoforbalacingthesystemh WHOLESALEProducersI234MARKET>COUNTERPARTYRISKtakenbyMOORGANIZEDOTCORGANIZEDMARKET:MARKET · Multilateralplatform:Suppliers/I23Tr a d e r sY manysellers,manyproducers deKjeperofsellerFinalICostumersimportantaspectforpricedetermination · StandardcontractsforBaseloadprofile:usuallydonebyprogrammableplantstoutilizerenuables(nonprogrammable):NEEDspecificcontracts · Anonymousparticipationyoudon'tknowthebehaviour of counterparty:itisusefulltoavoiddistorption and fairpricedetermination · Samerequirementsforallparticipants"NODISCRIMINATIONOTCMARKET:2counterparty or platformFOM · Contractcharacteristicsagreedbetweenthetwopartiesmoreflexible,lesscomplexmorerisky=>COUNTERPARTYRISKPRICEDETERMINATION(inDAMLbyAUCTIONbyCONTINUOSTRADING · differentBiddingphase ·noMarketOperatorwhenselling p--------⑳ Tr a d i n gphase I bid and buyingbidPmatch>DEALISDONE1DEMANDimadebyMOsupply >Q (DAM - DayAheadMarket(C organizedwithAUCTIONbecauseduringentireday newsdriveand modifyplayersbehaviorMOSTRELEVANTPRICE(FINALPRICEWeare selling inafuturemarket UNCONSTRAINDSMP(SystemMarginalPrice)(inDAM) · eachsellplayerbuyplayermake a bid:>SELLBID:hour-by-houripsier"minimum bee, I would liketee"to provideBUYBID:hour-by-hour·Puyer. : maximumpriceIwouldliketobuygboyer:maximumquantityI am committedtobuyInthisscenario.CAPACITYCONSTRAINSarenot considered, and eachplayerisinPuracompetitivelogic:·Pseller · MC of generation(Marginalcost(·PayerWTP(Willingto Pay)forenergypurchasedMA(MarketAdministration)collectsallP 1 thebidsandcreatessomethinglikeD1D2a demandcurveand asupplycurve54supply curveD3⑧3priceintheoverallmarketisthe i D4demandcurveresultofthisequilibrium(FSMPCS27Q:totaldispatched · Ifyouhavebeenableto cover allthiscostswithpaidthentheremainingpartfromyourpaidtoSMPiscalledMARKUP SMPPROS:IncreasecompetitionreducinginfoasymmetrybetweenformermonopolistandotherplayersIncentivetodiscoveractualproductioncostsandtotrytodevelope new tecnologiestolowerthesecosts strongpricesignalClinkedtooversupply - shortage(SMPCONS: · Loweringproductioncostsmay not betheprecedingbehaviourStrategicbehaviour of multi-plants owner witholdingcapacityPAYASBID(alternativetoSMPLHeresellersbidaremadetryingtoguessthehigherpriceisgoingtobeacceptedinordertomaximizetheirMARKUP:CONS->infoASYMMETRYwithformermonopolistThismechanismisusedtodetermine4inBALANCINGMARKETbyTSOdealingwithANCILLARYSERVICEShjelpemiddelCONSTRAINEDSMPSameasbeforebutnowyouhavetoconsiderCAPACITYGrid.Hereyouhavetoforecastwerecongestionwill occurandevaluate on any of theCONGESTIONCOSTS.NODALPRICE:considerallconstrainspriceisdifferentinevery zone (complextoevaluate(mostefficientsolutionfrequentZONALPRICE:consideronlyMORERELEVANTconstrainspriceisdifferentineachzonebuteasiertomanagewithrespecttoNODAL(butlessefficient(ACTUALPROCEDURE · Tr ytosolvethemarketasUNCONSTRAINEDanddetermineSMDI · Nowconsiderusage of grid andifitmarketresultviolatePHYSICALCONSTRAINS->splitthemarketineachzone/node · Artificiallymodifydemandineachnode and youwillobtain>EXPORTINGNODE:WhereSMPEXPIMPORTINGNODE:WhereSMPp>SMP1 NOBENEFITforexport activity · SellerswouldliketoinvesttogoinIMPORTINGZONESPRICESIGNAL· Costumerswouldliketohaveplantsnearthemtopayless. Problem:IfweintroducePUN(madetoreduceNorth-Southgapconsideringplants(Consumerspay same price even ifplantis near them>leadtoNIMBYNotInMyBackYa r d· Thissolutionisnotthe most efficientone: are partCONGESTIONRENT:GridCapacityPbetweenof total zones surplusTSOmonopolistwhohavetoinvest elong term:TRANSMISSIONEXPENSION tohavelesscapacityconstraints arenot incentivizedtodothatREGULATEDMONOPOLISTToavoidover-usage of OTCmarketbetweenseller of exporting zoneand buyerfromimportingzone! >theycoulddeal a pricepriSMPExpp* wayto not paycongestionrentof grid.weintroduceCCT,additionalcostforOTCcontractshavetobepayedtoGMEinordertomantainORGINIZEDMARKETpriceSOLIDCCT = PUNPinjection · CCT>0forsellersinEXPORTINGZONEzone>CCT