DEPARTEMENT OF DECISION SCIENCESPierre-Olivier Pineau

Department of Economics: Visiting Speaker SeriesNovember 20th, 2015 – 3 to 4:30pmRoom A2065 Arts and Administration BuildingMemorial UniversitySt-John’s

The Benefits of Integrating Electricity Markets – Why and How Canadian Provinces Should Reform their Electricity Sector

PRESENTATION BASEDON TWO PAPERS

• "Fragmented Markets: Canadian Electricity Sectors' Underperformance" (Chapter 13), in Evolution of Global Electricity Markets: New paradigms, new challenges, new approaches, ed. by F.P. Sioshansi, Elsevier, 2013.

• "Integrating Thermal and Hydro Electricity Markets: Economic and Environmental Costs of not Harmonizing Pricing Rules" (open access article), Billette de Villemeur E. and Pineau P-O., The Energy Journal, vol. 37 (1) 77-100, 2016.

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OUTLINE

1. Introduction: Energy in Canada and RegionalPower Integration

2. Model3. Calibration4. Results5. Discussion

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1. INTRODUCTION: CANADA AND ENERGY PRODUCTIONOil Natural

GasCoal Hydropower

1. Saudi Arabia2. Russia3. US4. China5. Canada

(2013)

1. US2. Russia3. Qatar4. Iran5. Canada

(2011)

1. China2. US3. India4. Indonesia5. Australia…11. Canada

(2013)

1. China2. Brazil3. Canada4. US5. Russia

(2012)

IEA (2014)

4

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

45 000

NL PE NS NB QC ON MB SK AB BC

Internal combustion turbine (Diesel)Combustion turbine (Natural Gas)NuclearConv. steam turbine (Coal)SolarTidalWindHydro

INSTALLED CAPACITY, 2013 (MW)

Statistics Canada (2015)

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NL

PE

NS

NB

QC

ON

MBSK

AB

BC

0

5 000

10 000

15 000

20 000

25 000

0,06 0,08 0,10 0,12 0,14 0,16

kWh

/ ca

pita

$ / kWhStatistics Canada (2015)

TOTAL ELECTRICITY SALES PER CAPITA BY AVERAGE ELECTRICITY VALUE (2013)

Max = 15.91 ¢Min = 6.42 ¢

Ratio: 2.47

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NRCan (2015)

REGULAR GASOLINERETAIL FUEL PRICES ON 29-SEP-2014 (¢/LITRE)

Calgary109.2

Vancouver116.5

Winnipeg101.4

St. John98.7

St. John’s103.5

Halifax99.4

Toronto101.9

Montreal112.2Regina

104.7

Max = 116.5Min = 98.7

Ratio: 1.18

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NATIONAL ENERGY PROGRAM (1980-1984)Main elements of the program:

• a blended “made-in-Canada” price of oil consumed in Canada:

$18.50 versus $35 (Sept. 1980 world price)• a petroleum and gas revenue tax of 8% on all production of oil

and gas in Canada• a federal share of petroleum production income rising from 10 to

24%

Scarfe (1981) and Bregha (2013)

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Industrial Processes7%

Agriculture8%

Waste4%

Electricity and Heat Generation 12%

Other uses (7 categories)

33%

Transport28%

Fugitive Sources 8%

Energy81%

Environment Canada (2015)

GHG EMISSIONS IN CANADA BY SECTOR (2013)NL1%PE0%NS

8% NB5%

QC1%

ON13%

MB0%

SK18%

AB53%

BC1%Provincial Electricity GHG

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44% natural gas in 2014(<15% in 2000)

56% natural gas in 2014

13% natural gas in 2013

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WHEN ABSURDITY DEFEATSECONOMICS

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GENERIC BENEFITS OF ELECTRICITY MARKET INTEGRATION

1. Improving reliability and pooling reserves2. Reduced investment in generating capacity3. Improving load factors and increasing demand

diversity4. Economies of scale in new construction5. Diversity of generation mix and supply security6. Economic exchange7. Environmental dispatch and new plant siting8. Better coordination of maintenance schedules

CEC (2002), UN (2006) and ESMAP (2010)12

REGIONAL POWER INTEGRATION

World Bank / ESMAP (2010)13

REGULATORY BARRIERS

•Few unified markets or “deep integration”•Mostly bilateral trade agreements•Many regulatory challenges:

• Possibility to trade interconnection capacity day-ahead and intraday

• Technical features (e.g. technical losses) properly modelled in the allocation process

• Gate closure time as close to real time as possible• Integration of electricity balancing markets

(Teusch et al., 2012)

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LITERATURE REVIEW FINDINGS

“It was notable in carrying out the literature review that many of the papers on regional power are descriptive rather than analytic. There are

comparatively few academic studies which have real theoretical depth.”

Research gap: “theoretical analysis of the way in which benefits are distributed”

ECA (2010) The Potential of Regional Power Sector Integration: Literature Review

Billette de Villemeur and Pineau (2012) “Regulation and electricity market integration: When trade introduces inefficiencies”, Energy Economics

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2. MODEL

Th thermal jurisdiction, marginal costH hydro jurisdiction, average costet

Th hourly production, in MWh at tCTh(et

Th) cost of producing etTh in Th at t

ptTh price in Th at t (= C’Th(et

Th))xt

Th export from Th into H at ttransmission capacity at t

DtTh(pt

Th) demand in Th DtTh = et

Th+ xtH-xt

Th�̅�𝑥𝑡𝑡𝑇𝑇𝑇, �̅�𝑥𝑡𝑡𝐻𝐻

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THREE REGIMES

Regime 1: No transmission, competitive market in Th and regulated in H

Regime 2: Transmission and trade, competitive market in Th and regulated in H

Regime 3: Transmission, competitive market in both Th and H

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PROBLEM FORMULATION FOR R1&R2

Transmission cost

Shadow value of waterλ

Shadow value of transmission capacity

µt

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REGIME 2 PRICES

• When Th exports, 𝑝𝑝𝑡𝑡𝑇𝑇𝑇 = 𝜆𝜆 − 𝑐𝑐𝜏𝜏 − 𝜇𝜇𝑡𝑡and is at most 𝒑𝒑𝑻𝑻𝑻𝑻 = 𝝀𝝀 − 𝒄𝒄𝝉𝝉

With 𝑝𝑝𝑅𝑅𝐻𝐻 at average cost• When Th imports, 𝑝𝑝𝑡𝑡𝑇𝑇𝑇 = 𝜆𝜆 + 𝑐𝑐𝜏𝜏 + 𝜇𝜇𝑡𝑡

and is no less than 𝒑𝒑𝑻𝑻𝑻𝑻 = 𝝀𝝀 + 𝒄𝒄𝝉𝝉

• When xtTh = xt

H = 0, 𝑝𝑝𝑇𝑇𝑇 < 𝑝𝑝𝑡𝑡𝑇𝑇𝑇 = 𝐶𝐶′𝑡𝑡 (𝑒𝑒𝑡𝑡𝑇𝑇𝑇) < 𝑝𝑝𝑇𝑇𝑇

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PROBLEM FORMULATION FOR R3

Shadow value of waterλ

Shadow value of transmission capacity

µt

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REGIME 3 PRICES

• When Th exports, 𝑝𝑝𝑡𝑡𝑇𝑇𝑇 = 𝑝𝑝𝑒𝑒𝐻𝐻 − 𝑐𝑐𝜏𝜏 − 𝜇𝜇𝑡𝑡and is at most 𝒑𝒑𝑻𝑻𝑻𝑻 = 𝒑𝒑𝒆𝒆𝑯𝑯 − 𝒄𝒄𝝉𝝉

With 𝑝𝑝𝑒𝑒𝐻𝐻 = 𝜆𝜆• When Th imports, 𝑝𝑝𝑡𝑡𝑇𝑇𝑇 = 𝑝𝑝𝑒𝑒𝐻𝐻 + 𝑐𝑐𝜏𝜏 + 𝜇𝜇𝑡𝑡

and is no less than 𝒑𝒑𝑻𝑻𝑻𝑻 = 𝒑𝒑𝒆𝒆𝑯𝑯 + 𝒄𝒄𝝉𝝉

• When xtTh = xt

H = 0, 𝑝𝑝𝑇𝑇𝑇 < 𝑝𝑝𝑡𝑡𝑇𝑇𝑇 = 𝐶𝐶′𝑡𝑡 (𝑒𝑒𝑡𝑡𝑇𝑇𝑇) < 𝑝𝑝𝑇𝑇𝑇

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3. CALIBRATION

• We calibrated the Th and H jurisdictions unsing 2007 hourly data from Ontario and Quebec

• Linear demand curve with a -0.15 elasticity (at the observed price-quantity pair)

• Marginal cost is linear, from observed price-quantity pairs

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3. CALIBRATION

• H has 184.705 TWh of hydropower (but also imported from Th to meet its demand)

• Th exports were limited to 720 MW and H exports to 1,295 MW. These capacities have been adjusted to reflect actual trade

• Transaction cost of $2/MWh

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4. PRICE RESULTS

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4. QUANTITY RESULTS

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4. WELFARE IMPACTS

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4. WELFARE IMPACTS (2)

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4. DOUBLING TRANSMISSION / PRICE

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4. DOUBLING TRANSMISSION / QUANTITY

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4. DOUBLING TRANSMISSION / WELFAREIMPACTS

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4. DOUBLING TRANSMISSION / WELFAREIMPACTS

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CONCLUSION

• Model to study regime change and trade between two jurisdictions –our main contribution.

• Welfare gains + environmental gains• Shortcomings:

• Only 2 jurisdictions are included• Perfect knowledge is assumed (e.g. hourly demand)

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5. DISCUSSION:RECOGNIZING OBSTACLES

1. Structure of political and electoral incentives in the provinces and the federal government

2. Redistribution of the gains from a partial or complete integration

3. Lack of recognition of the environmental benefits resulting from integration

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5. DISCUSSIONWORKING TOWARDS INTEGRATION

• Awareness and information• Redistribution and compensation • Inspiration from the Canada Health Act• Expand the concept of the “Atlantic Energy Gateway”• Bi-lateral agreements (as QC and ON are currently

exploring)• Agreement on Internal Trade• A credible Federal approach on GHG

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