Imperfect Markets and Imperfect Regulation

An Introduction to the Microeconomics and Political Economy of Power Markets

by Léautier

ISBN: 9780262039284 | Copyright 0

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The first textbook to present a comprehensive and detailed economic analysis of electricity markets, analyzing the tensions between the microeconomics and political economy.

The power industry is essential in our fight against climate change. This book is the first to examine in detail the microeconomics underlying power markets, stemming from peak-load pricing, by which prices are low when the installed generation capacity exceeds demand but can rise a hundred times higher when demand is equal to installed capacity. The outcome of peak-load pricing is often difficult to accept politically, and the book explores the tensions between microeconomics and political economy.

Understanding peak-load pricing and its implications is essential for designing robust policies and making sound investment decisions. Thomas-Olivier Léautier presents the model in its simplest form, and introduces additional features as different issues are presented. The book covers all segments of electricity markets: electricity generation, under perfect and imperfect competition; retail competition and demand response; transmission pricing, transmission congestion management, and transmission constraints; and the current policy issues arising from the entry of renewables into the market and capacity mechanisms. Combining anecdotes and analysis of real situations with rigorous analytical modeling, each chapter analyzes one specific issue, first presenting findings in nontechnical terms accessible to policy practitioners and graduate students in management or public policy and then presenting a more mathematical analytical exposition for students and researchers specializing in the economics of electricity markets and for those who want to understand and apply the underlying models.

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Contents (pg. ix)
Foreword (pg. xiii)
Acknowledgments (pg. xvii)
Academic Influence (pg. xvii)
Practitioners’ Influence (pg. xix)
1. Introduction (pg. 1)
1.1 Why Electricity? (pg. 1)
1.2 The Challenge (pg. 4)
1.3 The Answer: The Toolbox (pg. 6)
I. WHOLESALE MARKETS (pg. 15)
2. Marcel Boiteux Forever: Peak-Load Pricing (pg. 17)
2.1 The Simplest Peak-Load Pricing Story (pg. 17)
2.2 A More Realistic Story (pg. 30)
2.3 The Simple Equations behind the Story (pg. 55)
2.4 Completely Inelastic Demand (pg. 59)
2.5 A More Realistic Peak-Load Pricing Story (pg. 63)
2.6 Operating Reserves (pg. 75)
2.7 An Illustrative Example (pg. 77)
3. From Enron with Love (pg. 85)
3.1 Prelude: The California Crisis (pg. 85)
3.2 How Is Market Power Exercised? (pg. 87)
3.3 Why Is Exercise of Market Power a Serious Issue in Power Markets? (pg. 93)
3.4 How Can Exercise of Market Power Be Mitigated? (pg. 99)
3.5 Academic Models of Imperfect Competition in Spot Markets (pg. 104)
3.6 Imperfect Competition at the Investment Stage (pg. 112)
3.7 Impact of Price Cap on Investment and Net Surplus (pg. 116)
II. RETAIL MARKET (pg. 123)
4. Selling Power to the People: Retail Competition and Vertical Structure of the Power Industry (pg. 125)
4.1 Introduction (pg. 125)
4.2 Retail Electricity Markets (pg. 126)
4.3 Forward Commitments (pg. 131)
4.4 Horizontal Differentiation and Imperfect Competition (pg. 138)
4.5 Economic Analysis of Forward Commitments (pg. 142)
5. A Kuhnian Paradigm Shift: Price-Responsive Electricity Demand (pg. 151)
5.1 Introduction (pg. 151)
5.2 An Economic and Technical Reality (pg. 153)
5.3 Which Contractual Approach for Demand Response? (pg. 155)
5.4 Which Customers Should Be Incentivized to Respond to Spot Prices? (pg. 160)
5.5 Policy Implications (pg. 168)
5.6 Peak-Time Resale: An Economic Representation (pg. 169)
5.7 An Economic Model of Switching to Real-Time Pricing (pg. 171)
III. NETWORK ISSUES (pg. 177)
6. Fred Schweppe Meets Marcel Boiteux: Transmission Pricing (pg. 179)
6.1 Introduction (pg. 179)
6.2 Short-Term Congestion Management (pg. 190)
6.3 Optimal Generation and Transmission Expansion (pg. 201)
6.4 Generation Investment under Different Congestion Management Regimes (pg. 208)
6.5 Transmission Grid Expansion under Different Regimes (pg. 212)
6.6 Loop Flows and Nodal Pricing on a Three-Node Network (pg. 218)
6.7 Extension to a General Network (pg. 225)
7. Serious Games: Market Power and Transmission Constraints (pg. 239)
7.1 Introduction (pg. 239)
7.2 Models of Local Market Power (pg. 241)
7.3 FTRs and Local Market Power in the Simplest Setting (pg. 249)
7.4 FTRs and Local Market Power in a Richer Setting (pg. 253)
IV. POLICY ISSUES (pg. 265)
8 Gone with the Wind (and the Sun): Renewable Energy Sources Entry into Electricity Markets (pg. 267)
8.1 Introduction (pg. 267)
8.2 The Energy-Transition Challenge (pg. 267)
8.3 The Tools to Fight Climate Change (pg. 275)
8.4 A Model of the Electric Power Market with RES (pg. 300)
8.5 Marginal Impact of Renewables (pg. 305)
8.6 Application to the Case of Great Britain (pg. 317)
9. The Highly Visible Hand: Capacity Mechanism (pg. 325)
9.1 Introduction (pg. 325)
9.2 Rationale for Capacity Mechanisms (pg. 326)
9.3 Experience from Capacity Mechanisms (pg. 334)
9.4 A Model of Capacity Mechanisms and Market Power (pg. 343)
9.5 Capacity Mechanisms and Generation Adequacy (pg. 351)
10. Concluding Observations (pg. 359)
10.1 Economic Research Questions (pg. 359)
10.2 Policy Choices (pg. 362)
Afterword by Jean-Bernard Lévy (pg. 367)
Bibliography (pg. 369)
Index (pg. 377)

Thomas-Olivier Léautier

Thomas-Olivier Léautier has more than twenty years experience in the electric power industry, both as an academic researcher and as a practitioner. He is currently Director of EDF Group University for Management and on the Research Faculty at the Toulouse School of Economics.

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