Equilibrium Analysis of Forward Markets for Electricity and Reserves

April 1, 2003 - 12:00pm

Once thought of as a ""natural monopoly"" industry, the electric power sector has undergone changes intended to promote competition. While the deregulation of a traditionally government-regulated enterprise has created efficient mechanisms for electricity generation, it has also introduced problems associated with competitive forces. One such problem is the pricing of reserves, which were historically procured administratively, but under the deregulated paradigm, they are to be obtained through the markets. They, therefore, require pricing that reflects their cost relative to electricity. Towards this end, we employ a market-equilibrium approach to model a perfectly competitive electricity industry with generators, retailers, and an independent system operator (ISO) that procures enough reserves to maintain system reliability. Our analysis suggests that reserves are essentially call options that can be used as derivatives to manage risk. A demand-side issue that is currently being debated is the introduction of real-time pricing for consumers. In order to assess its impact, we allow end-users in our model to perceive real-time variations in the electricity spot price. This price responsiveness both decreases the electricity spot price and increases the risk exposure of retailers. Since the latter effect causes retailers to increase their forward purchases of electricity, while the former results in the opposite outcome, the overall impact of price elasticity on the electricity forward price is ambiguous. Hence, although real-time pricing decreases overall consumption, its effect on the forward market depends on the dominant characteristics of the end-users. --Afzal Siddiqui is a visiting post-doctoral fellow in the Electricity Markets and Policy Group at Berkeley Lab. His doctoral research was in risk management techniques and price-elastic demand in competitive electricity markets, specifically with regard to the pricing of derivatives in the ancillary services markets. This work is being continued at Berkeley Lab within the context of price-responsive load in restructured electricity industries. He also directs research on distributed energy resources (DER) by analytically examining the impact of economic and regulatory rules on customer adoption of on-site generation. He has a B.S. in industrial engineering and operations research (IEOR) from Columbia University, and an M.S. and Ph.D. in IEOR from the University of California, Berkeley. For more information about this seminar, please contact: JoAnne Lambert 510.486.4835, or send e-mail to JMLambert@lbl.gov

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