transmission and generation investment in electricity ... · transmission and generation investment...

Transmission and Generation Investment in Electricity

Markets: the Impact of Market Splitting and Network

Fee Regimes

Veronika Grimm

Barcelona

February 3, 2015

joint work with A. Martin, M. Schmidt, C. Sölch, M. Weibelzahl, and G.Zöttl

Prof. Dr. Veronika Grimm, FAU & EnCN Economy

A Grand Challenge

2

Quelle: Bundesamt für Strahlenschutz

● Abandoning nuclear energy

requires complete reorientation of

power supply schemes.

● Old plants get dismanteld or need

repowering.

● A lot of fluctuating renewable

sources have been installed.

● We need market rules that

generate adequate investment

incentives:

=> adequate capacities

=> at the right locations


Transmission constraints become an issue

Transmission constraints

become relevant – both within

and between countries.

Possible solutions include: gas

power plants, network capacity,

demand side management,

storage facilities and smart

technologies

The locations and capacities of

generation facilities have crucial

relevance for the network

expansion.

3

Congestion

No congestion

Source: EWI, Trendstudie 2022. Case: high wind in-feed.2022.


Related Literature

“Old World”: Integrated planer problem

Optimal expansion for generation and transmission capacities

Gallego et al. (1998), Binato et al. (2001), and others

Investment models for generation facilities (e.g. peak load pricing

literature, “Capacity-market”-discussion).

typically disregards network and network expansion (“copper plate”)

Gaszewicz & Poddar (1997), Murphy & Smeers (2005), Grimm & Zöttl (2013)

Models on optimal transmission planning in anticipation of private

investment

Typically asume optimal management of the network (nodla pricing)

Sauma and Oren (2006, 2009), Jin and Ryan (2011), Jenabi et al. (2013)

# 4 05.02.2015


Related Literature

Models analyzing impact of different network management regimes

(nodal pricing, zonal pricing, redispatch)

typically focus on the short run perspective (given network & generation

facilities)

Hogan (1999), Ehrenmann and Smeers (2005), Neuhoff et al. (2005), …

Analyses of the ability to exercise market power under different network

management regimes

Oren (1997), Jing-Yuan & Smeers (1999), Oggoni & Smeers (2013)

This paper: models transmission planning by a regulator in anticipation

of private investment in an energy only market with redispatch

# 5 05.02.2015


Questions we have in mind (examples)

What is the quantifiable impact of adopting a different transmission

management regime (e.g. price zones,…, nodal pricing) taking into

account long run investment?

what is the impact of changed way of charging network fees on

generation investment and associated network expansion?

This paper: lump sum, capacity based, energy based

Current work: G- and L-Component, regional differentiation

Incentives under Cost Based vs. Market Based redispatch (different

paper, short run)

What are the incentives to invest in responsive consumption units and

what is the impact on optimal transmission investment?

We present a computable equilibrium framework which allows to

analyze those issues

6


Roadmap of this talk

(1) Introduction

(2) Computational Equilibrium Framework

(3) Testexample (6-node-network)

(4) Very first results on Germany&Neighbours

(5) Conclusion

# 7 05.02.2015


What we have in mind

8

Model Components Illustration

Network expansion by social

planner

Competitve Firms invest in

different production technologies

throughout the network

Demand at the nodes (net of

renewable feed-in) can be

fluctuating and uncertain.

We want to explicitly take into

account impact of different

network management regimes

(redispatch, market splitting)

Main purpose: to identify the impact of market rules on investment decisions

(overall system optimization is just a benchmark!)


Model: Timing

The transmission system operator chooses to realize line investments from set of options (integer decisions).

Competitive firms choose how much to invest in available production technologies at each node t=1,2,… ,each technology (kt,ct) has marginal cost of production ct, marginal cost of investment kt at the supply node.

Spot market competition

Management of network congestion by cost based redispatch.

Spot Markets

(with coupling/splitting)

and redispatch after each market

Generation

Investment

(Firms)

Transmission

Investment

(Planner)

05.02.

2015 # 9


Model Components: modelling the physical network

● We consider the usual linear lossless DC-Approximation:

10

100 MW

resistance : 1

therm. capacity: 80 MW

flow: 75 MW

100 MW

resistance: 2


flow: 25 MW resistance : 1


flow: 25 MW


Model Components: Network Management Regimes Cost based Redispatch:

All bids at the spot markets are made entirely independently of network

constraints, we obtain a uniform price accross the entire market.

Quantities traded may be physically unfeasible. Then the TSO has to find

the cheapest possible re-dispatch to make final quantities physically

feasible.

Market Splitting:

The market region is divided into price zones, potential congestion among

zones (but not within zones!) is already taken into account at the spot

markets.

Remaining physical infeasibilities are still resolved through redispatch.

11


Model Components: Network Fees

The TSO is facing the following cost:

Network expansion investment

Cost of redispatch

In our framework TSO is supposed to not make any profits, the above

spendings have to be recovered by network fees. We consider the following

cases:

lump sum

energy based fees (e.g. Germany, 5 €ct/KWh)

capacity based fees

Fees payed either by generators or by consumers

12


Illustration of our 3-stage approach

13

Network Expansion

(social planner)

Investment in Generation Facilities

Trading at Spot Markets

(competitive companies)

Redispatch taking into account renewable production

(social planner)


Our 3-stage approach, more formally

14

Max Welfare(N,K,S,R) s.t.

Network expansion-stage: Social planner chooses network(expansion) maximizing WF

K,S is competitve equilibrium, s.t.

Market-stage: Competitive Firms choose capacities and Spotmarket-bids to maximize profits.

Min REDCost(N,K,S,R) s.t.

quantities can be transmitted by network and can be produced by plants

Traded quantities S can be produced by capacities K

Redispatch-stage: Social planner chooses Redispatch R to minimize Redispatchcost REDCost, s.t. all quantities are feasible.


Benchmark: system optimization / first best

15

Max Welfare(N,K,S,R) s.t.

Integrated perspective: Social planner chooses network(expansion), generation investment and production to maximize Welfare

Transmission is feasible

s.t. feasibility constraints.

Production schedule is feasible


Computational Results, 6 node test example

● To test our equilibrium framwork we consider a

common 6-node-example (adapted for long

run decisions).

● Lines connecting nodes 1,2,3 and nodes 4,5,6

have sufficient capacities. Only lines 1-6 and

2-5 cause problems. Potential line investment

1-6 and 2-5.

● Three demand nodes (3,5,6).

● Investment in generation facilities only at the

supply nodes (1,2,4)

● Notice: Storage facilities are not (yet) included.

16

3

Demand

Supply 2

5

4

1

6

Supply

Supply

Demand Demand

1

1 1

1

1 1

2 2

existing line candidate line


Computational Results, 6 Node Test Example

17

3

Demand

Supply 2

5

4

1

6

Supply

Supply

Demand Demand

1

1 1

1

1 1

2 2

Inv.: 600 €/MW

Var.: 15 €/MWh

Inv.: 700 €/MW

Var.: 10 €/MWh

Inv.: 200 €/MW Var.:

42.5 €/MWh


● We used German spot market data

from 2011 to generate 52 demand

scenarios.


6 node test example, scenarios analyzed

18

Scenario: Single Zone

Zone North

Scenario: Two Zones

Zone South

Spot- & Redispatch-Markt


Computational Results, 6 Node Test Example

19

Benchmark (fist best) Single Zone Two zones Welfare (norm.): Generation. Invest.: Network Invest.:

1

All locations Build no line

0.93

Only node 1 Build both lines

0.98

Only nodes 1 and 4 Build 2-5


20

Redispatch leads to underinvestment in nodes 2 and 4.

Energy based fees could potentially aggravate problems of

overinvestment in node 1.

Splitting in separate zones (only) partially overcomes those problems!


Summary of Results

21


Prices

22


6 node test example, Summary of Results

● Under Cost Based Redispatch Regime

investment in generation facilities in the

„South“ is too low and network investments are

too high (relative to the first best).

● Energy based fees potentially aggravate

problems of overinvestment in the „North“.

● Consideration of different regions already at

the spot market (market splitting) would

aleviate but not eliminate distortions

● Perspective: Our framework allows to

precisely quantify all those differences, also for

detailled calibration of specific market regions.

23

3

Demand

Supply 2

5

4

1

6

Supply

Supply

Demand Demand

1

1 1

1

1 1

2 2


Prof. Dr. Veronika Grimm, FAU & EnCN Economy 24

Regional Model "Electricity Transport 2013" 8784 hours (= year 2012)

20 regions for Germany:

2 regions for off-shore wind energy

plants (North and Baltic Sea),

18 regions on the German mainland

9 regions for neighboring countries:

Austria,

Belgium,

Switzerland,

Czech Republic,

Denmark (West),

France,

the Netherlands,

Poland,

Northern Europe (Denmark East,

Norway, Sweden)


First Results II

25


First Results II

26 26

3

5 4

8

7 6

9

2 1

10

11 12 13

14

15

16 17

18 19 20

26

21 27

25

22

23 24

3

5 4

8

7 6

9

2 1

10

11 12 13

14

15

16 17

18 19 20

26

21 27

25

22

23 24

First best Solution Market Solution (Cost based redispatch)


Summary

● We have established a framework where a planner chooses transmission line

investment and competitive firms invest in generation facilities.

● The framework allows to explicitly analyze the impact of different network

management regimes (network fees, price zones,…) on generation and

network investment.

● First qualitative results based on test example:

1) Redispatch leads to underinvestment in the „South“.

2) Energy based fees aggravate problems of overinvestment in the

„North“.

3) Splitting in separate zones only partially overcomes those problems!

● Future work: analyze regional differentiation of transmission fees, those might

at least partially heal the problems!

# 27 05.02.2015

Thank you for your Attention!


Used data and parameters

Type Investment cost (€ / (MW * a)) Variable cost (€)

Nuclear no new investment 10,00

Lignite 235730 27,32

Hard coal 202330 40,69

Gas 80100 73,68

Parameters:

Price elasticity: -0.25

=> slope of demand function: -4

Generation technologies:

Data for 2012 from:

eex.com (German prices)

entsoe.eu (Consumption)

Transparency homepages of TSOs (solar, wind, cross border

physical flow)

Electricity market homepages of neighboring countries (prices)

…


First Results I

First best model vs. Redispatch model (single zone, lump sum)

Without net investment vs. (forced) investment in 1 line: high-voltage

DC-link

start: Lauchstädt (Saxony-Anhalt)

end: Meitingen (Bavaria)

capacity: 2 GW

length: 450 km

cost: 1.40 m €/km

annuity: 0.11 m €/(km*a)


Benchmark (first best) Single Zone Welfare (p.c.): No line invest. Forced line invest. Generation. Invest.: No line invest. Forced line invest.

100.00 % 99.99 %

Build Gas (596 MW) in Baden-Wuerttemberg Build Gas (414 MW) in Baden-Wuerttemberg

96.37 % 96.38 %

No investment

No investment

First Results I


Complex Solution

33

What is the best mix of the

available technologies

in the short run and

in the long run?

Solution to a central planer problem

How does a market environment

look like that makes us achieve

those goals?

We analyze investment incentives

in different market environments


Neighboring Countries

Derivation of the Export Function


Neighboring Countries

Welfare Maximization

Pr ice

Quant ity

Expor t pr ice

Expor t

Pr ice

Quant ity

impor t

pr ice

impor t

a) The expor t case b) t he impor t case


Prices (first best model without line investment) in hour 8784

price#8784#1 27.223569

price#8784#2 10.841658

price#8784#3 27.455101

price#8784#4 27.301276

price#8784#5 27.758322

price#8784#6 27.701336

price#8784#7 27.836173

price#8784#8 27.589864

price#8784#9 28.097541

price#8784#10 27.731295

price#8784#11 27.851197

price#8784#12 27.702865

price#8784#13 27.700879

price#8784#14 27.699153

price#8784#15 28.094892

price#8784#16 27.719492

price#8784#17 27.845780

price#8784#18 28.048212

price#8784#19 27.515344

price#8784#20 27.757710

priceforeign#8784#21 27.728219






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