http://www.erasmusenergy.com en-us N/A dejong@maycroft.com Fri, 08 Aug 2008 01:45:35 CEST 20 http://www.erasmusenergy.com/articles/165/1/Effective-pricing-of-wind-power/Page1.html Published in: WorldPower 2008
Publication year: 2008
Co-author 1: Hans van Dijken

Effective Pricing of Wind Power - Uncertainties in Wind Production Often Priced at Too Low Levels

This article describes the pricing and hedging of wind power contracts. It demonstrates that substantial discounts relative to baseload power prices are reasonable to cover the negative wind-price correlation and to cover the difficulty of hedging price risks.

In this article, we outline a sound approach to the assessment of wind power projects, based on a careful analysis of project returns. In particular, we describe a number of hedge mechanisms and highlight some common pitfalls in
structuring wind power purchase agreement (PPA) deals. Wind power is one of the most viable options to meet renewable energy targets. The attractiveness to investors depends on investment costs, expected future power price and (heavily) on the subsidy regime. But with the steady increase of wind
production, the ability to secure future cashflows and to manage the risks becomes a key issue as well.

Wind power contracts typically contain discounts relative to the market forward prices. This derives from the difficulty in forecasting wind production and the variability in wind production, the correlation with market prices (imbalance and day-ahead). In the case presented, the correlation between day-ahead prices and wind production was already responsible for a discount of €6/MWh. A typical discount for imbalance costs has about the same magnitude, leading to an expected revenue shortfall of €12/MWh – without
even taking into account the effects of the continuous increase of wind production on spot power prices. The analysis also demonstrates that a
considerable proportion of the price risks, both short-term and long-term, are
unhedgeable and should be incorporated in additional discounts. It is our experience that these risks are easily overlooked and wind power priced too optimistically.
]]> no@spam.com (Cyriel de Jong) Mon, 24 Mar 2008 21:40:16 CET http://www.erasmusenergy.com/articles/165/1/Effective-pricing-of-wind-power/Page1.html http://www.erasmusenergy.com/articles/164/1/Towards-a-European-market-of-electricity-Spot-and-derivatives-trading/Page1.html Published in:
Publication year: 2002

Deregulation of electricity markets is spreading worldwide at a high speed : it has been completed for some years in Scandinavia and the United Kingdom, is well under way in the United States and being embraced in most continental Western Europe outside France. Germany and the Netherlands are quite deregulated, followed by Spain. Italy is establishing power trading in a competitive environment. This represents a multi-billion spot market that is developing very quickly. And the same pattern of evolution as in the financial markets is being observed, with the growth of a variety of derivative instruments such as forward and Futures contracts swaps, plain-vanilla and exotic options.
The main problem associated with the pricing of those derivatives is that the fundamental financial models were established for stocks and bonds and do not capture the unique features of electricity, in particular the non-storability (except for hydroelectricity), the seasonality and spikes of prices, the difficulties of transportation, (existence of high voltage lines, constraints at the hubs imposed by the Kirchoff laws), not to mention the necessity for the European Community to define clear rules for cross-border electricity transmission.
The goal of this paper is to discuss the main features of electricity spot prices and investigate the pricing issues attached to power options.]]> no@spam.com (Helyette Geman) Tue, 19 Feb 2008 13:35:18 CET http://www.erasmusenergy.com/articles/164/1/Towards-a-European-market-of-electricity-Spot-and-derivatives-trading/Page1.html http://www.erasmusenergy.com/articles/163/1/Risk-aversion-and-willingness-to-pay-in-choice-experiments/Page1.html Published in:
Publication year: 2007

This paper extends the linear utility model commonly used for estimating the willingness to pay for non-market goods to a non-linear model with decreasing marginal utility. The proposed approach relaxes the assumption of constant rate of substitution between income and non-market commodities, an assumption which can be especially restrictive in cases when the non-market good is a luxury commodity or a new good whose benefits are not completely known. The adopted non-linear formulation can therefore accommodate risk-averse behavior with respect to nonmarket goods particularly when the non-market attributes are measured by discrete variables. The proposed models have been applied to data from a choice experiment for energy efficiency measures in apartment buildings. The econometric specification is based on a fixed-effect logit model. The results suggest that ignoring consumers’ risk-aversion toward new non-market goods could lead to an underestimation of the marginal willingness to pay. However, consistent with previous studies the non-linear effect of income does not have a considerable effect on the estimation results.]]> no@spam.com (Mehdi Farsi) Fri, 15 Feb 2008 14:03:59 CET http://www.erasmusenergy.com/articles/163/1/Risk-aversion-and-willingness-to-pay-in-choice-experiments/Page1.html http://www.erasmusenergy.com/articles/162/1/Benchmarking-and-regulation-in-the-electricity-distribution-sector/Page1.html Published in:
Publication year: 2007
Co-author 1: Aurelio Fetz
Co-author 2: Massimo Filippini

In the last two decades electricity distribution sector have witnessed a wave of regulatory reforms aimed at improving efficiency through incentive regulation. Most of these regulation schemes use benchmarking namely measuring a company’s efficiency and rewarding them accordingly. The reliability of efficiency estimates is crucial for an effective implementation of those incentive mechanisms. A main problem faced by the regulators is the choice among several legitimate benchmarking models that usually produce different results. After a brief overview of the benchmarking methodologies, this paper summarizes the methods used in the regulation practice in several OECD countries, in which the benchmarking practice is relatively widespread. Repeated observation of similar companies over time namely panel data, allows a better understanding of unobserved firm-specific factors and disentangling them from efficiency estimates. Focusing on parametric cost frontier models, this paper presents two alternative approaches that could be used to improve the reliability of benchmarking methods, and based on recent empirical evidence, draws some recommendations for regulatory practice in power distribution networks.]]> no@spam.com (Mehdi Farsi) Fri, 15 Feb 2008 13:57:23 CET http://www.erasmusenergy.com/articles/162/1/Benchmarking-and-regulation-in-the-electricity-distribution-sector/Page1.html http://www.erasmusenergy.com/articles/161/1/Economies-of-scale-and-scope-in-the-Swiss-Multi-Utilities-Sector/Page1.html Published in:
Publication year: 2007
Co-author 1: Aurelio Fetz
Co-author 2: Massimo Filippini

This paper explores the economies of scale and scope in the electricity, gas and water utilities. These issues have a crucial importance in the actual policy debates about unbundling the inte-grated utilities into separate entities, a policy which has often been supported by the ongoing reforms in the deregulation of network industries. This paper argues that the potential im-provements in efficiency through unbundling should be assessed against the loss of scope economies. Several econometric specifications including a random-coefficient model have been used to estimate a cost function for a sample of utilities distributing electricity, gas and/or water to the Swiss population. The estimates of scale and scope economies have been compared across different models and the effect of heterogeneity among companies have been explored. While indicating considerable scope and scale economies overall, the results sug-gest a significant variation in scope economies across companies due to unobserved heterogeneity.]]> no@spam.com (Mehdi Farsi) Tue, 12 Feb 2008 11:22:31 CET http://www.erasmusenergy.com/articles/161/1/Economies-of-scale-and-scope-in-the-Swiss-Multi-Utilities-Sector/Page1.html http://www.erasmusenergy.com/articles/160/1/Experimental-tests-of-competitive-markets-for-electric-power/Page1.html Published in:
Publication year: 2001
Co-author 1: Timothy Mount
Co-author 2: William Schulze
Co-author 3: Robert Thomas
Co-author 4: Ray Zimmerman

Testing the performance of electricity markets using POWERWEB has already shown that relatively inexperienced players can identify and exploit market power in load pockets. When transmission constraints are not binding, however, auctions with six players have been shown to be efficient. There is evidence from operating electricity markets that prices can be driven above competitive levels when the largest supplier controls less than 20% of total installed capacity. This is accomplished by causing price spikes to occur. In experiments, uncertainty about the actual load and paying standby costs regardless of whether or not a unit is actually dispatched contribute to volatile price behavior. The objective of this paper is to investigate characteristics of a market that affect price volatility. The tests consider three different sets of rules for setting price when there are capacity shortfalls, and the following four market structures:
1. Load is responsive to price
2. Price forecasts are made before
market settlement
3 A day-ahead market and a balancing
market auction
4. Suppliers are paid actual offers (a
discriminatory auction)]]> no@spam.com (Simon Ede) Mon, 28 Jan 2008 17:05:24 CET http://www.erasmusenergy.com/articles/160/1/Experimental-tests-of-competitive-markets-for-electric-power/Page1.html http://www.erasmusenergy.com/articles/159/1/Strategic-Behavior-in-Spot-Markets-for-Electricity-when-Load-is-Stochastic/Page1.html Published in:
Publication year: 2000

In the first part of the paper, daily price data for the past three summer seasons in the PJM wholesale market are used to estimate a stochastic regime switching model. These data show that the average price in 1999, when market-based offers were allowed, was twice as high as it was in the previous two seasons when offers had to be cost-based. The primary cause was that the price spikes in 1999 were much higher than they were in 1997-98, but not more frequent. The second part of the paper derives an optimum set of offers for individual suppliers endowed with different levels of market power. A supplier controlling generation equivalent to 20% of the expected load in the market is shown to submit offers that are up to 80% higher than the true cost. Nevertheless, these offers are still much lower than the offers that set the high prices in the PJM market. The explanation is that suppliers with sufficient market power are indifferent to whether or not marginal units are dispatched, and they can set high offers on these units without forfeiting expected profits.
The author wishes to thank Yumei Ning for research assistance in estimating the price models in Section 2, and Jonell Blakeley and Dan Chapman for help preparing the manuscript. All remaining errors are the responsibility of the author.]]> no@spam.com (Tim Mount) Mon, 28 Jan 2008 16:52:09 CET http://www.erasmusenergy.com/articles/159/1/Strategic-Behavior-in-Spot-Markets-for-Electricity-when-Load-is-Stochastic/Page1.html http://www.erasmusenergy.com/articles/158/1/Market-Efficiency-Competition-and-Communication-Experimental-results/Page1.html Published in:
Publication year: 2002
Co-author 1: C.A. Vossler
Co-author 2: T.D. Mount
Co-author 3: V. Barboni
Co-author 4: R.J. Thomas
Co-author 5: R.D. Zimmerman

Economic theory gives no clear indication of the minimum number of producers necessary for a market to define competitive price-quantity equilibria which approximate price equal to marginal cost. Previous work and FERC Guidelines generally suggest that 6 to 10 generators may be workably competitive. Our experiments with PowerWeb suggest that a higher number of suppliers may be necessary to approximate competitive market solutions, this in the absence of any communication among producers. As communications rules are altered to parallel differing types of antitrust enforcement, market results with 24 participants approach pure monopoly values.]]> no@spam.com (Duane Chapman) Mon, 28 Jan 2008 16:41:47 CET http://www.erasmusenergy.com/articles/158/1/Market-Efficiency-Competition-and-Communication-Experimental-results/Page1.html http://www.erasmusenergy.com/articles/157/1/Auction-Design-for-Competitive-Electricity-Markets/Page1.html Published in:
Publication year: 1997
Co-author 1: Tmothy Mount
Co-author 2: William Schulze
Co-author 3: Ray Zimmerman
Co-author 4: Robert Thomas

Alternatively, the Market Coordinator could ask the private generating firms to furnish their operating cost data (confidentially of course) to facilitate system dispatch. We can see little reason for the private firms to say no or to try to play games and provide incorrect data. - Schweppe et al (1988), pp 115-6.]]> no@spam.com (Robert Ethier) Mon, 28 Jan 2008 16:25:55 CET http://www.erasmusenergy.com/articles/157/1/Auction-Design-for-Competitive-Electricity-Markets/Page1.html http://www.erasmusenergy.com/articles/156/1/Alternative-Auction-Institutions-for-Purchasing-Electric-Power-An-Experimental-Examination/Page1.html Published in: Bulk Power System Dynamics and Control IV – Restructuring
Publication year:
Co-author 1: William Schulze
Co-author 2: Tim Mount
Co-author 3: Ray Zimmerman
Co-author 4: Robert Thomas
Co-author 5: Richard Schuler

This paper reports on research being conducted by a combination of economists and electrical engineers at Cornell University who are examining potential auction institutions for restructured markets for electric power. As it is a report on developing results and analysis, the discussion remains general throughout. The research follows two related but independent strands. The first looks at the performance of various alternative auction mechanisms under different market sizes. The setting is a single sided auction with multiple units being offered and a vertical, multiple unit demand. This was conducted in the absence of a network, the equivalent of a system where transmission of electric power is lossless and costless.]]> no@spam.com (John Bernard) Mon, 28 Jan 2008 16:18:04 CET http://www.erasmusenergy.com/articles/156/1/Alternative-Auction-Institutions-for-Purchasing-Electric-Power-An-Experimental-Examination/Page1.html