Spot Markets in Electric Power Network: Theory
The movement toward market competition in the U.S. began in the 1970’s with some capital intensive network-based industries such as transportation, energy, and telecommunications. The potential for increased competition in the electric power industry has long been discussed. Back when interconnected systems took shape after the innovation of high voltage transmission, the electric power system exhibited notable characteristics of natural monopoly. In general, as a network system becomes bigger and better connected, die number of potential options available to customers increases, and the pressure for greater reliance on market mechanisms grows stronger. In the 1990’s, as competitive forces sweep across the electric power industry around the world, access and pricing policy for transmission will play a pivotal role in shaping future market structure and performance. However, pricing for the electric power transmission system is complicated by some unique characteristics of the electric power network. An electric power grid differs technologically from other types of network in that power flows must observe Kirchoffs laws. This gives rise to the ‘loop flow’ phenomenon, creating widespread externalities in die markets for electric power, whose complexity only grows with the size of the system. Therefore, it is commonly assumed that horizontal integration of transmission is necessary to coordinate resource allocation efficiently. Joskow and Schmalensee (1983) point out the fundamental importance of the externality problem in evaluating alternative proposals for restructuring.
KeywordsPower Flow Competitive Equilibrium Transmission Capacity Spot Market Trading Rule
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