ONS SDDP Workshop, August 17, 2011 Slide 1 of 31

Andy PhilpottEPOC

(www.epoc.org.nz)

joint work with

Ziming Guan (now at UBC/BC Hydro)

Electricity Market Benchmarking Exploring

Risk

ONS SDDP Workshop, August 17, 2011 Slide 2 of 31

•Before 1996, the New Zealand wholesale electricity system was operated as a state monopoly.

•Since October 1996 this has been run as an electricity pool market.

•Generation ownership last changed in 1999 when ECNZ was broken up.

•The system is dominated by generation from hydro-electric reservoirs.

•This leads to unique and interesting problems when trying to understand how pool markets

should operate.

Electricity Supply in New Zealand

ONS SDDP Workshop, August 17, 2011 Slide 3 of 31http://www.electricityinfo.co.nz/

New Zealand national reservoir storage

ONS SDDP Workshop, August 17, 2011 Slide 4 of 31

NZ wholesale electricity market • Generators specify supply

curves defining prices at which they will generate.

• Curves fixed for each half hour

• Linear programming model runs every five minutes to determine – electricity generated– electricity flows in network– spot price (shadow price) of

electricity at 244 out of 470 network nodes

Waikato River

Waitaki system

ONS SDDP Workshop, August 17, 2011 Slide 5 of 31SPXII, Halifax, August 20, 2010 Slide 5 of 50

ONS SDDP Workshop, August 17, 2011 Slide 6 of 316/42

The economic dispatch problem

New Zealand electricity market

ONS SDDP Workshop, August 17, 2011 Slide 7 of 31

New Zealand electricity marketLake storage (blue) and price (pink)

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Questions

• How should this system be operated to provide security of supply at low cost? As a pool market or some alternative?

• Do generators manage hydro-reservoir storage to minimize overall national thermal fuel cost or are they behaving strategically? (as discussed in Bushnell, 2003).

• If market power gives higher prices, is this accompanied by a deadweight loss from inefficient dispatch?

• The NZ Electricity Commission maintains a Centralized Data Set that can be used to address some of these questions.

ONS SDDP Workshop, August 17, 2011 Slide 9 of 31

(New Zealand Herald May 21, 2009, downloaded from site: http://www.nzherald.co.nz)

New Zealand Commerce Commission on Market Power

“There is something fundamentally wrong in the way in which we’re marketing electricity in New Zealand,” Mr Brownlee said.

Power generators overcharged customers $4.3 billion over six years by using market dominance, according to a Commerce Commission report.

This has already been done

ONS SDDP Workshop, August 17, 2011 Slide 10 of 31Source: CC Report, p 177

The view from economicsNew Zealand electricity market

ONS SDDP Workshop, August 17, 2011 Slide 11 of 31

Deadweight loss = empirical price of anarchy

Offered cost curve

True cost curve

New Zealand electricity market

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Deadweight loss = empirical price of anarchyNew Zealand electricity market

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Deadweight loss = empirical price of anarchyNew Zealand electricity market

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Deadweight loss = empirical price of anarchyNew Zealand electricity market

ONS SDDP Workshop, August 17, 2011 Slide 15 of 31Source: CC Report, p 200

The view from economics againNew Zealand electricity market

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What is counterfactual 1?

– Fix hydro generation (at historical dispatch level).– Simulate market operation over a year with thermal plant

offered at short-run marginal (fuel) cost.– “The Appendix of Borenstein, Bushnell, Wolak (2002)* rigorously

demonstrates that the simplifying assumption that hydro-electric suppliers do not re-allocate water will yield a higher system-load weighted average competitive price than would be the case if this benchmark price was computed from the solution to the optimal hydroelectric generation scheduling problem described above” [Commerce Commission Report, page 190].

(* Borenstein, Bushnell, Wolak, American Economic Review, 92, 2002)

New Zealand electricity market

ONS SDDP Workshop, August 17, 2011 Slide 17 of 31

Counterfactual 1

Now set y=y0 not equal to y* (“fix hydro generation”)

(x*,y*,*)

(x0,y0,0)

Linear programming interpretation

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Counterfactual 1What about uncertain inflows?

wet

dryStochastic program counterfactualThe optimal generation plan burns thermal fuel in stage 1 in case there is a drought in winter. The competitive price is high (marginal thermal fuel cost) in the first stage, but zero in the second (if wet).

Counterfactual 1In the year under investigation, suppose all generators optimistically predicted high inflows and used all their water in summer. They were right, and no thermal fuel was needed at all. Counterfactual prices are zero.

summer winter

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What is a better counterfactual?

– Solve a multistage stochastic linear program (MSLP) to compute a centrally-planned generation policy, and simulate this policy.

– Previous work does this with a dynamic program for Nordpool (Kauppi & Liski, 2008).

– In our model, we re-solve the MSLP every 13 weeks and simulate the policy between solves using a detailed model of the system.

• includes transmission system with constraints and losses• river chains are modeled in detail• historical station/line outages included in each week• unit commitment and reserve are not modeled

New Zealand electricity market

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Yearly problem represented by this system

S

N

demand

demandWKO

HAW

MAN

H

demand

Stochastic Counterfactual

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Rolling horizon counterfactual

– Set s=0– At t=s+1, solve a DOASA model to compute a

weekly centrally-planned generation policy for t=s+1,…,s+52.

– In the detailed 18-node transmission system and river-valley networks successively optimize weeks t=s+1,…,s+13, using cost-to-go functions from cuts at the end of each week t, and updating reservoir storage levels for each t.

– Set s=s+13.

Application to NZEM

ONS SDDP Workshop, August 17, 2011 Slide 22 of 31

We simulate an optimal policy in this detailed system

MAN

HAW

WKO

Application to NZEM

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Thermal marginal costs Application to NZEM

Gas and diesel prices ex MED estimatesCoal priced at $4/GJ

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Gas and diesel industrial price data ($/GJ, MED)Application to NZEM

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Load curtailment costsApplication to NZEM

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Market storage and centrally planned storage New Zealand electricity market

2005 2006 2007 2008 2009

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Risk aversion and competitive equilibrium New Zealand electricity market

Is the central plan the competitive equilibrium? • yes, if all agents are risk neutral, and share the

same probability distribution as the central planner

• no, if agents are risk averse• so the behaviour we are seeing could be risk

aversion in a perfectly competitive market

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New Zealand electricity marketEstimated daily savings from central plan

$481,000 extra is saved from anticipating inflows during this week

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Savings in annual fuel costTotal fuel cost = (NZ)$400-$500 million per annum (est)

Total wholesale electricity sales = (NZ)$3 billion per annum (est)

New Zealand electricity market

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Benmore half-hourly prices over 2008 New Zealand electricity market

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FIM