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Computable Equilibrium Models and the Restructuring of the European Electricity and Gas Markets

Yves Smeers

Year: 1997
Volume: Volume18
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol18-No4-1
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More regulation, not less, is temporarily necessary, if effective, competition is to be established in network industries. This paradox places new requirements on computable models: they should provide realistic descriptions of technologies but also of markets and institutions. Industrial economics and computation of economic equilibrium can help achieve this dual requirement. This paper discusses their potential in the context of the deregulation of the European gas and electricity sectors. Some key elements of the European legislative process are first presented in order to point out the diversity of institutions that can emerge and to highlight the need to model institutions. Perfect competition equilibrium models although institutionally poor are argued to be useful for ex post analysis. Applications of the standard Cournot and' Bertrand paradigms in ex ante analysis of gas and electricity markets are reviewed next. Models combining market power and externalities are then discussed with reference to electricity restructuring. Finally multistage equilibrium models are introduced in the context of investment in gas and electricity. Computation remarks conclude the paper.

Degrees of Coordination in Market Coupling and Counter-Trading

Giorgia Oggioni and Yves Smeers

Year: 2012
Volume: Volume 33
Number: Number 3
DOI: 10.5547/01956574.33.3.3
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Cross-border trade remains a contentious issue in the restructuring of the European electricity market. This paper analyzes the cross-border trade problem through a set of models that represent different degrees of coordination both between the energy and the transmission markets and among national Transmission System Operators (TSOs). We first present a nodal price-like organization of the system, where Power Exchanges (PXs) and Transmission System Operators are integrated to operate the energy and transmission markets. This system is not implemented in Europe but its success elsewhere makes it the natural reference for the study. We then move to a more realistic representation of the European electricity market based on the so-called market coupling design where energy and transmission are operated separately by PXs and TSOs. We consider different degrees of coordination of the national TSOs' activities to assess the range of inefficiencies that the lack of integration can lead to. The paper supposes price taking agents and hence leaves aside the incentive to game the system induced by zonal systems. Keywords: Market Coupling, Counter-Trading, Coordination, Generalized Nash Equilibrium, European Electricity Market

Remuneration of Flexibility using Operating Reserve Demand Curves: A Case Study of Belgium

Anthony Papavasiliou and Yves Smeers

Year: 2017
Volume: Volume 38
Number: Number 6
DOI: 10.5547/01956574.38.6.apap
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Flexibility is becoming an increasingly important attribute of conventional generators due to the challenges imposed by the unpredictable, highly variable and non-controllable nature of renewable supply. Paradoxically, flexible units are currently being mothballed or retired in Europe due to financial losses. We investigate an energy-only market design, referred to as operating reserve demand curves, that rewards flexibility by adjusting the real-time energy price to a level that reflects the value of capacity under conditions of scarcity. We test the performance of the mechanism by developing a model of the Belgian electricity market, which is validated against the historical outcomes of the market over a study period of 21 months. We verify that (i) based on the observed market outcomes of our study period, none of the existing combined cycle gas turbines of the Belgian market can cover their investment costs, and (ii) the introduction of price adders that reflect the true value of scarce flexible capacity restores economic viability for most combined cycle gas turbines in the Belgian market.

Market Design Considerations for Scarcity Pricing: A Stochastic Equilibrium Framework

Anthony Papavasiliou, Yves Smeers, and Gauthier de Maere d'Aertrycke

Year: 2021
Volume: Volume 42
Number: Number 5
DOI: 10.5547/01956574.42.5.apap
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Scarcity pricing is a mechanism for improving the valuation of reserve capacity in real-time electricity markets. The goal of scarcity pricing is to mitigate the missing money problem and enhance investment in flexible resources. The implementation of scarcity pricing is underway in a number of U.S. markets, including Texas and PJM. The implementation is also currently under consideration in Belgium. As the mechanism was originally conceived in the context of a U.S.-style two-settlement system, its implementation in a European setting poses a number of interesting market design dilemmas which can affect the back-propagation of scarcity prices to forward day-ahead markets for energy and reserve capacity. We propose a modeling framework for analyzing these market design choices based on stochastic equilibrium, and use this modeling framework in order to represent and analyze a wide range of market design proposals. We report results on a case study of the Belgian electricity market.

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