Electricity Market

Benchmarking Exploring
Risk
Andy Philpott
EPOC
(www.epoc.org.nz)

joint work with

Ziming Guan
(now at UBC/BC Hydro)

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

Electricity Supply in New Zealand

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.

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

New Zealand national reservoir storage

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

NZ wholesale electricity market
Generators specify supply
Waitaki system
curves defining prices at
which they will generate.
Waikato River
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

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

ONS SPXII,
SDDPHalifax,
Workshop, August
August 17, 2011
20, 2010 Slide 5 of 50
31
New Zealand electricity market
The economic dispatch problem

ONS SDDP Workshop, August 17, 2011 Slide 6 of 31

6/42
New Zealand electricity market
Lake storage (blue) and price (pink)

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

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 8 of 31

This has already been done
New Zealand Commerce Commission on Market Power

There is something fundamentally wrong in the way in which were

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.

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

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

New Zealand electricity market
The view from economics

ONS SDDP Workshop, August 17, 2011 Source: CC Report, p 177 Slide 10 of 31
New Zealand electricity market
Deadweight loss = empirical price of anarchy

Offered cost curve

True cost curve

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

New Zealand electricity market
Deadweight loss = empirical price of anarchy

ONS SDDP Workshop, August 17, 2011 Slide 12 of 31

New Zealand electricity market
Deadweight loss = empirical price of anarchy

ONS SDDP Workshop, August 17, 2011 Slide 13 of 31

New Zealand electricity market
Deadweight loss = empirical price of anarchy

ONS SDDP Workshop, August 17, 2011 Slide 14 of 31

New Zealand electricity market
The view from economics again

ONS SDDP Workshop, August 17, 2011 Source: CC Report, p 200 Slide 15 of 31
New Zealand electricity market
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)

ONS SDDP Workshop, August 17, 2011 Slide 16 of 31

Counterfactual 1
Linear programming interpretation

(x*,y*,p*)

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

(x0,y0,p0)

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

Counterfactual 1
What about uncertain inflows?

Counterfactual 1
In the year under investigation,
suppose all generators optimistically
wet 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.

Stochastic program counterfactual

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

ONS SDDP Workshop, August 17, 2011 Slide 18 of 31

New Zealand electricity market
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

ONS SDDP Workshop, August 17, 2011 Slide 19 of 31

Stochastic Counterfactual
Yearly problem represented by this system

demand
demand WKO

MAN
N
H

HAW

demand

ONS SDDP Workshop, August 17, 2011 Slide 20 of 31

Application to NZEM
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.

ONS SDDP Workshop, August 17, 2011 Slide 21 of 31

Application to NZEM
We simulate an optimal policy in this detailed system

WKO

MAN

HAW

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

Application to NZEM
Thermal marginal costs

Gas and diesel prices ex MED estimates

Coal priced at $4/GJ

ONS SDDP Workshop, August 17, 2011 Slide 23 of 31

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

ONS SDDP Workshop, August 17, 2011 Slide 24 of 31

Application to NZEM
Load curtailment costs

ONS SDDP Workshop, August 17, 2011 Slide 25 of 31

New Zealand electricity market
Market storage and centrally planned storage

2005 2006 2007 2008 2009

ONS SDDP Workshop, August 17, 2011 Slide 26 of 31

New Zealand electricity market
Risk aversion and competitive equilibrium

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

ONS SDDP Workshop, August 17, 2011 Slide 27 of 31

New Zealand electricity market
Estimated daily savings from central plan

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

ONS SDDP Workshop, August 17, 2011 Slide 28 of 31

New Zealand electricity market
Savings in annual fuel cost
Total fuel cost = (NZ)$400-$500 million per annum (est)
Total wholesale electricity sales = (NZ)$3 billion per annum (est)

ONS SDDP Workshop, August 17, 2011 Slide 29 of 31

New Zealand electricity market
Benmore half-hourly prices over 2008

ONS SDDP Workshop, August 17, 2011 Slide 30 of 31

 FIM

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