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Increased transparency of forward markets in the electricity market will have a strong downwards effect on prices through increased competitive pressure
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Economics Experiments
The price-effect of transparency (REMIT)
Silvester van KotenCERGE-EI, Prague
Laboratoř experimentální ekonomie (LEE), Prague
Andreas OrtmannThe University of New South Wales, Sydney
1. Theoretical Economics
Engineering
1. Theoretical Physics
2. Bridge model experimentation
3. Bridge
1. Theory 2. Engineering 3. Implementation
Theoretical Physics Bridge Experimentation Bridge
Theoretical Economics Market ExperimentationExperimental & Computational
Economics
Competitive MarketEnergy Market
• What effects have different arrangements?
1. Making (forward) markets more transparent (REMIT):• Effect on prices?
2. Way of procuring ancillary services: • System Marginal Price (SMP) • Pay-as-Bid (PaB)?
Laboratoř experimentální ekonomie
Earnings are paid in cash at the end of the session
2. Making (forward) markets more transparent (REMIT)
( ) 60p Q Q
A
Spot MarketFriday
Week 1
Demand20
20Q=20+20=40P=20
B
2345Introduction Setup Results Behavioral Structural Design
Forward Market
( ) 60p Q Q
Spot Market
Monday
Friday
Trader
12
12 24
Demand12
12Q=12+12+24=48P=12
A
B
A
B
24
Week 12345Introduction Setup Results Behavioral Structural Design
( ) 60p Q Q
Spot Market
23Introduction Setup Results
( ) 60p Q Q
Spot Market +
Forward Market
Quantity =48Price =12
Behavioral Structural Design
Quantity =40Price =20
Introduction Setup Results Behavioral Structural Design Predictions
M2, M2F, M3
Introduction Setup Outcomes Results Conclusion60
070
080
090
010
00S
pot P
rice
4 8 12 16 20 24Period
M2
M2, M2F, M3
Introduction Setup Outcomes Results Conclusion60
070
080
090
010
00S
pot P
rice
4 8 12 16 20 24Period
M3
M2
Effect competition
M2, M2F, M3
Introduction Setup Outcomes Results Conclusion60
070
080
090
010
00S
pot P
rice
4 8 12 16 20 24Period
M3
M2
Effect competitionM4
M2, M2F, M3
Introduction Setup Outcomes Results Conclusion60
070
080
090
010
00S
pot P
rice
4 8 12 16 20 24Period
Effect FM transparencyM3
M2
M4
M2F
600
700
800
900
1000
Spo
t Pric
e
4 8 12 16 20 24Period
Introduction Setup Outcomes Results Conclusion
Effect FM transparency
LARGER effect adding competitor
M2
M3
M2F
M2, M2F, M3
Introduction Setup Outcomes Results Conclusion60
070
080
090
010
00S
pot P
rice
4 8 12 16 20 24Period
Effect FM transparency
M2
M2FM3F
M3
M2, M2F, M3
Introduction Setup Outcomes Results Conclusion60
070
080
090
010
00S
pot P
rice
4 8 12 16 20 24Period
Effect FM transparencyLARGER THAN
Effect competition
M2
M4
M3F
M3
• What effects have different arrangements?
1. Making (forward) markets more transparent (REMIT):• Effect on prices?
A considerable downwards pressure on prices is likely from the competitive effect of a transparent forward markets
• What effects have different arrangements?
1. Making (forward) markets more transparent (REMIT):• Effect on prices?
2. Way of procuring ancillary services: • System Marginal Price (SMP) • Pay-as-Bid (PaB)?
3 6 9 12105421 7 8 11
Price
System Marginal
Price
Needed reserves
Bids
Quantity
Uniform price auction
1.Procuring ancillary reserves
Profits
Profits
Profits
3 6 9 12105421 7 8 11
PriceNeeded reserves
Bids
Quantity
Price 1
Price 2
Price 3
Zero profit!
Pay-as-bid auction
1.Procuring ancillary reserves
3 6 9 12105421 7 8 11
PriceCosts
Quantity
Profits
Profits
Profits
Needed reserves
Pay-as-bid auction
1.Procuring ancillary reserves
“It depends on the particulars of the setting.”
Peter Cramton & Steven Soft,The electricity journal 2006.
What is the best way to procure ancillary reserves?
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