Abstract
The electric value chain consists of the following elements: generation, wholesale trade, transmission, distribution, marketing, and metering. In many countries around the world, vertically integrated utilities used to assume all of these functions similar to the vertically integrated companies in other energy sectors (see Sect. 8.2.1). For several reasons, the European Union has mandated the electric industry to unbundle the grid from its other activities along the value chain (see Sect. 13.2.4). Therefore, it seems reasonable to structure the economic analysis of power markets accordingly. In this chapter the economic aspects of electricity generation and sales are discussed, whereas Chap. 13 is devoted to the economics of transmission and distribution.
For the time being, storing electricity is practically impossible in view of its cost. Therefore, electricity generation and electricity consumption must be synchronized continuously. In order to secure the supply of electrical energy for all customers, it is necessary to permanently maintain an amount of capacity in power generation which exceeds the maximum load.
Starting in the 1990s, the electricity industry (especially the generation sector) has been liberalized in many countries. This move, combined with the growing share of electricity from renewable sources and distributed generation, has led to a major transformation that continues to this day. Based on the experience gained from these recent developments, the following issues are addressed in this chapter:
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How might electricity markets work in a competitive business environment, although power has to be delivered through a single grid?
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What does generation dispatch look like in a competitive market?
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What are the particularities and pricing mechanisms of power exchanges?
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How can sufficient investment in backup and excess capacities be secured?
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How can the abuse of market power in the generation market be prevented?
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What are the possibilities to manage the transformation to ‘green’ power generation?
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- 1.
For combined heat and power plants, a distinction is made between thermal capacity (measured in MWth) and electric capacity (measured in MWel).
- 2.
Economic viability of pump storages is highly dependent on geographical circumstances. Also, a lithium battery with a mass of 1 kg can currently store no more than 1 kWh of electricity.
- 3.
In a sense, electricity is still “too cheap to meter”. This may change if smart meters become available at lower cost.
- 4.
In the United States, the day-ahead market is not regarded as a spot but rather a futures market.
- 5.
According to the definition of the European Power Exchange , peak hours are the 12 h between 8:00 and 20:00 from Monday to Friday, while the remaining times are off-peak hours .
- 6.
Must-run capacities are generators with contracts for so-called control power (see Sect. 13.1.3) and combined heat and power plants during the heating period.
- 7.
Accordingly, the residuals of Eq. (12.2) are highly auto-correlated.
- 8.
Average day-ahead wind forecasting errors (measured by the root of mean squared error RMSE) are presently in the range of 6–7%.
- 9.
If oligopolists have differing cost functions, it can be shown that the one with the most favorable cost function has the highest market share in equilibrium.
- 10.
In the case of monopolistic competition with n = 1 (amounting to a monopoly), the optimal solution corresponds to the profit-maximizing solution derived in Sect. 1.2.2.
- 11.
Note that this is nothing but a frequency distribution with frequencies depicted on the x-axis rather than the y-axis.
- 12.
At the beginning of market liberalization, long-term power contracts were seen as an obstacle for competition. In contradistinction with the United States, European markets at the time were characterized by excess capacities which prevented planning for new investment from being an issue. Once these excess capacities in Europe are gone, long-term contracts could prove to be an indispensable tool for relieving investors of part of their risk, inducing them to add generating capacity. An alternative would be governmental guarantees, subsidies, and other types of market intervention.
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Zweifel, P., Praktiknjo, A., Erdmann, G. (2017). Markets for Electricity. In: Energy Economics. Springer Texts in Business and Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-53022-1_12
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