Avoiding Pitfalls in China’s Electricity Reforms June 2017 Michael Davidson Institute for Data, Systems, and Society, MIT Ignacio J. Pérez-Arriaga Sloan School of Management, MIT IIT Institute for Research in Technology, Comillas University Reforming an Electricity Sector • Most countries have some market restructuring: – Traditional vertically-integrated utilities (govt-owned or exclusive franchise) → Competition in some segments • “Standard liberalization prescription” – Reduce conflicts of interest in new institutions – Create proper incentive regulation for monopolies – High degree of integration between operations and markets (Hunt 2002; Joskow 2008) Diverging Systems and Benefits • In practice, systems frequently diverge from “textbook” (Williams and Ghanadan 2006) – – – – Range of degrees of operation-market integration Persistence of legacy central planning institutions Competition structure, conflicts of interest, ownership reforms... Industrializing countries face particular challenges (Jamasb 2006) • Benefits can vary (Zhang et al 2008) – Various necessary institutions and conditions interacting 3 Evolution of China’s Electricity Sector • 1949-1985: Vertically-integrated state-run utility – Provincial development-focused State finances limited • 1985-1997 (Reform 1): Local gov’t, private & foreign investors – “Competed” with ministry Inefficient plan allocation • 1997-2002 (Reform 2): Corporatization, unbundling generation – Separate grid & generation • Incomplete restructuring (Andrews-Speed 2013; Zhang & Heller 2007): – Legacy quota allocation and price-setting institutions retained/modified – Heavily dominated by state-owned enterprises (SOEs) w/weak profit motives – Strong local government protectionism – Insufficient regulatory oversight – Renewable energy integration challenges 4 Latest Reforms (State Council 2015; NDRC 2015; etc.) Slowly reduce planned quotas T&D regulated cost recovery Retail competition New market exchanges Introduce generation price competition Open up some distribution competition 5 Pitfalls from International Contexts 1. Reliance on physical not financial contracts 2. Long-term contracts before sufficient short-term markets in place 3. Retail pricing not on reference energy prices 4. System operation conflicts of interest Pitfall #1 RELIANCE ON PHYSICAL NOT FINANCIAL CONTRACTS 7 Theory Settlement Dispatch 8 Theory Financial Contracts Settlement Dispatch 9 Theory Physical Contracts Settlement Dispatch 10 Theory (2) • Difficult for market actors to assess impact of single scheduled flow on network conditions • Financial contracts leaves system operator unconstrained: determine dispatch with full knowledge of network conditions • In practice, hinges on transmission rights: – With no congestion, or highly predictable congestion: bilateral “wheeling” contracts can resolve – As networks become more meshed / unpredictable: physical contracts lead to increased efficiency losses (Hunt 2002; Hogan 2003) 11 Examples Southern Africa Power Pool (SAPP) • 90-95% electricity thru long-term physical contracts • Wheeling arrangements, non-economic flows (Rose 2017) PJM • In 2004, AEP joined PJM ISO, previously connected via bilateral contracts • Trade increased and estimated US$160 mn saved (Mansur & White 2012) 12 France-Spain uneconomic trades Source: OMIE 2015 13 After EU short-term market Source: OMIE 2015 14 Indications of China’s Reforms • Physical contracts predominate: – Quotas = MT energy contracts – same for bilateral contracts (month to year) • Networks under-considered: – Intra-provincial: no transmission rights – Inter-provincial (crossing price zones): limited market pilots (NDRC 2015) 15 Pitfall #2 LONG-TERM GENERATION CONTRACTS BEFORE SUFFICIENT SHORT-TERM MARKET 16 Theory • Markets function by matching marginal supply and demand Source: Ventosa et al 2013 • In electricity, the market is naturally differentiated by both time (minutes ~ hour) and location (e.g., substation) • To price financial contracts correctly, need accurate reference prices (Schweppe et al 1988) 17 /Users/ipa/Library/C ontainers/com.apple. Preview/Data/Deskto p/Screen Shot 201210-11 at 12.58.01 AM.png Sample of nodal prices in PJM PJM节点价格的例子 https://edata.pjm.com/eContour/# Out-of-merit-order • Long-term contracted plant (A) with higher cost than marginal unit (B) must be dispatched A B Dispatch less Dispatch more 19 Examples UK BETTA • Imbalance market grew out of 1990s spot market • Benefits of self-commitment • Though, benefits decreasing, and challenges with renewables (Green 1999; Sioshansi et al 2008; DECC 2015) California • Long-term financial contracts may be desirable (Bushnell et al 2008) 20 Indications of China’s Reforms • Long-term contracts (month or longer) are “primary” electricity product • Short-term balancing markets deemed “supplementary” – No incorporation into existing markets with bilateral contracts • System operation increasingly constrained – Quotas have greater flexibility than contracts in dispatch (State Council 2015; NDRC 2015; Interviews 2016) 21 Pitfall #3 RETAIL PRICING NOT BASED ON REFERENCE ENERGY PRICES 22 Theory • Benefits of retail competition mixed: – Promise: demand bidding ensures investment incentives and prevents overly high clearing prices – But inefficient pricing more likely from regulated tariff structures than lack of retail competition • In future with large DR, retail could become more important (Hunt 2002; Joskow 2008; MIT 2016) 23 Most US states Do Not Have Source: Morey and Kirsch 2016 24 Examples Spain (retail competitive) • Subsidized default tariffs too low retailers drop consumers India (not retail competitive) • Distcoms prefer not to buy when default tariff too low (can occur daily) • Huge debt in distribution segment (Kumar & Chatterjee 2012; Swain 2016) 25 Indications of China’s Reforms • Strong interest in retail competition, multiple pilots and companies created • Generation side of these markets essentially unchaged: MT energy without reference short-term prices 26 Pitfall #4 SYSTEM OPERATION CONFLICTS OF INTEREST 27 Theory • Well-functioning (wholesale) markets: – Require non-discriminatory operation = no considerations beyond efficiency and grid reliability – Should reduce direct political intervention (e.g., thru quotas) – Should avoid indirect conflicts of interest (e.g., system operator with financial interest in transactions) (Hunt 2002; Joskow 2008) 28 Examples Transmission Owner System Operator Market Operator 29 Examples Transmission System Owner Transmission Operator (TSO) (e.g. Spain) System Operator Market Operator 30 Examples Transmission Owner Transmission System Operator (TSO) Independent System Operator System Market (ISO) Operator Operator (e.g., PJM) 31 Indications of China’s Reforms • Current approach follows neither model: Transmission Owner Grid Company System Operator “Relatively Independent” “相对独立” Market Operator • Postage stamp pricing indirect conflicts 32 Conclusions • Current indications show China’s market reforms failing to address some key pitfalls based on first principles and international lessons • Implications for lost efficiency gains, distributional impacts, and renewable energy integration • Need for analysis of different “partial reform” trajectories…What are 2nd best policy options? 33 Michael Davidson [email protected] THANK YOU 34 References Bushnell, J. B., Mansur, E. T., & Saravia, C. (2008). Vertical Arrangements, Market Structure, and Competition An Analysis of Restructured US Electricity Markets. American Economic Review, 98(1), 237–266. DECC. (2015). Electricity Market Reform: Contracts for Difference. UK Department of Energy and Climate Change. Retrieved from https://www.gov.uk/government/collections/electricity-market-reform-contracts-for-difference Green, R. (1999). The electricity contract market in England and Wales. The Journal of Industrial Economics, 47(1), 107–124. Hogan, W. W. (2003). Transmission Market Design (Faculty Research Working Paper Series). Harvard University. Retrieved from http://papers.ssrn.com/abstract=453483 Hunt, S. (2002). Making Competition Work in Electricity. New York: John Wiley & Sons. Joskow, P. (2008). Lessons learned from electricity market liberalization. The Energy Journal, 29(2), 9–42. Mansur, E. T., & White, M. (2012). Market organization and efficiency in electricity markets (Working Paper). Hanover, NH: Dartmouth University. Retrieved from http://www.dartmouth.edu/∼mansur/papers/mansur_white_pjmaep. htm Morey, M., & Kirsch, L. (2016). Retail Choice in Electricity: What Have We Learned in 20 Years?. Electricity Markets Research Foundation. National Grid. (2011). National Electricity Transmission System Seven Year Statement. Retrieved from http://www2.nationalgrid.com/WorkArea/DownloadAsset.aspx?id=43266 NDRC. (2015). Notice Regarding Improving Inter-Provincial Inter-Regional Electricity Trade Price Arrangements (No. 962). Beijing: National Development and Reform Commission. OMIE. (2016, January). European Wholesale Electricity Market: Challenges and Goals. Madrid. Rose, A. (2017). Improving the performance of regional electricity markets in developing countries: The case of the Southern African Power Pool (Ph.D. Thesis). Massachusetts Institute of Technology. Schweppe, F. C., Caramanis, M. C., Tabors, R. D., & Bohn, R. E. (1988). Spot Pricing of Electricity. Boston, MA: Springer. Sioshansi, R., Oren, S. S., & O’Neill, R. P. (2008). The Cost of Anarchy in Self-Commitment-Based Electricity Markets. In F. P. Sioshansi, Competitive electricity markets : design, implementation, performance. Amsterdam: Elsevier. State Council. (2015). Opinion Regarding Deepening Electricity Sector Reform (No. 9). State Council. Ventosa, M., Linares, P., & Pérez-Arriaga, I. J. (2013). Power System Economics. In I. J. Pérez-Arriaga (Ed.), 35 Regulation of the Power Sector (pp. 47–124). London: Springer.
© Copyright 2022 Paperzz