Reforming the Chinese Electricity Supply Sector by Michael G. Pollitt

Author:Michael G. Pollitt
Language: eng
Format: epub
ISBN: 9783030394622
Publisher: Springer International Publishing

3.5 Effects on Operations and Dispatch

3.5.1 International Experience

The creation of wide area wholesale markets can affect prices in two ways.

First, by exposing the existing prices to challenge it can mean that generators and retailers are forced to set prices which more accurately reflect supply and demand conditions. Thus if there is actually too much generation relative to demand at the initial prices, prices should fall as generators and retailers are forced to reduce prices to bring supply and demand back into balance. This could be as simple as showing up the fact that the previous regulated prices for generation and retail were too high. Thus markets reduce rents (or monopoly power) in the electricity sector (i.e. improve allocative efficiency). Such an effect can be seen in both shorter run (day-ahead) and longer-term (monthly) wholesale markets. However it is important to say that prices might initially be too low relative to supply and demand conditions, as a result of regulation forcing retailers/generators to charge too little. In this case the introduction of a wholesale market will (correctly) raise the price of electricity.58

Second, a wholesale market should bring about an increase in the efficiency of production. This is because whatever the previous system of allocating power between different power plants there are now stronger incentives to allocate power to the least cost power plants first.59 Wholesale markets cause plants to make bids related to costs and to only run if they are part of the least cost group of plants that can meet system demand. Extension of the market across previously non-integrated areas causes competition between plants on the basis of price bids, where the lower price bid plants will be dispatched first. Because being dispatched now depends on the competitiveness of the price bid in the market, individual plants have strong incentives to cut costs in order to remain competitive. This is especially true of similar plants which are in the price setting part of the generation bid curve. Here, slightly higher costs can be the difference between winning a contract in the wholesale market or not, and in the longer run make the difference between being viable or being shut down. Thus markets should incentivise plants to minimise costs (i.e. improve productive efficiency). In turn this gives rise to only invest in power plants which run at least cost and which have a positive net present value (NPV) given expected future market prices. This effect of the introduction of wholesale markets would seem to require short-term markets (normally, day-ahead), as it is in efficient real-time operation that potential dispatch savings relative to current operation are likely to be realised. Once again it is important to say that if prices are initially too low relative to the competitive level, a wholesale market will raise them and cause all plants to be paid more and bring forth more generation from higher-cost plants.

The impact of wholesale power markets on underlying efficiency of operation and investment in power generation is a function of prices being allowed to affect the actual dispatch of power plants.

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