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DEPARTEMENT OF DECISION SCIENCESPierre-Olivier Pineau
Department of Economics: Visiting Speaker SeriesNovember 20th, 2015 – 3 to 4:30pmRoom A2065 Arts and Administration BuildingMemorial UniversitySt-John’s
The Benefits of Integrating Electricity Markets – Why and How Canadian Provinces Should Reform their Electricity Sector
PRESENTATION BASEDON TWO PAPERS
• "Fragmented Markets: Canadian Electricity Sectors' Underperformance" (Chapter 13), in Evolution of Global Electricity Markets: New paradigms, new challenges, new approaches, ed. by F.P. Sioshansi, Elsevier, 2013.
• "Integrating Thermal and Hydro Electricity Markets: Economic and Environmental Costs of not Harmonizing Pricing Rules" (open access article), Billette de Villemeur E. and Pineau P-O., The Energy Journal, vol. 37 (1) 77-100, 2016.
2
OUTLINE
1. Introduction: Energy in Canada and RegionalPower Integration
2. Model3. Calibration4. Results5. Discussion
3
1. INTRODUCTION: CANADA AND ENERGY PRODUCTIONOil Natural
GasCoal Hydropower
1. Saudi Arabia2. Russia3. US4. China5. Canada
(2013)
1. US2. Russia3. Qatar4. Iran5. Canada
(2011)
1. China2. US3. India4. Indonesia5. Australia…11. Canada
(2013)
1. China2. Brazil3. Canada4. US5. Russia
(2012)
IEA (2014)
4
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
40 000
45 000
NL PE NS NB QC ON MB SK AB BC
Internal combustion turbine (Diesel)Combustion turbine (Natural Gas)NuclearConv. steam turbine (Coal)SolarTidalWindHydro
INSTALLED CAPACITY, 2013 (MW)
Statistics Canada (2015)
5
NL
PE
NS
NB
QC
ON
MBSK
AB
BC
0
5 000
10 000
15 000
20 000
25 000
0,06 0,08 0,10 0,12 0,14 0,16
kWh
/ ca
pita
$ / kWhStatistics Canada (2015)
TOTAL ELECTRICITY SALES PER CAPITA BY AVERAGE ELECTRICITY VALUE (2013)
Max = 15.91 ¢Min = 6.42 ¢
Ratio: 2.47
6
NRCan (2015)
REGULAR GASOLINERETAIL FUEL PRICES ON 29-SEP-2014 (¢/LITRE)
Calgary109.2
Vancouver116.5
Winnipeg101.4
St. John98.7
St. John’s103.5
Halifax99.4
Toronto101.9
Montreal112.2Regina
104.7
Max = 116.5Min = 98.7
Ratio: 1.18
7
NATIONAL ENERGY PROGRAM (1980-1984)Main elements of the program:
• a blended “made-in-Canada” price of oil consumed in Canada:
$18.50 versus $35 (Sept. 1980 world price)• a petroleum and gas revenue tax of 8% on all production of oil
and gas in Canada• a federal share of petroleum production income rising from 10 to
24%
Scarfe (1981) and Bregha (2013)
8
Industrial Processes7%
Agriculture8%
Waste4%
Electricity and Heat Generation 12%
Other uses (7 categories)
33%
Transport28%
Fugitive Sources 8%
Energy81%
Environment Canada (2015)
GHG EMISSIONS IN CANADA BY SECTOR (2013)NL1%PE0%NS
8% NB5%
QC1%
ON13%
MB0%
SK18%
AB53%
BC1%Provincial Electricity GHG
9
44% natural gas in 2014(<15% in 2000)
56% natural gas in 2014
13% natural gas in 2013
10
WHEN ABSURDITY DEFEATSECONOMICS
11
GENERIC BENEFITS OF ELECTRICITY MARKET INTEGRATION
1. Improving reliability and pooling reserves2. Reduced investment in generating capacity3. Improving load factors and increasing demand
diversity4. Economies of scale in new construction5. Diversity of generation mix and supply security6. Economic exchange7. Environmental dispatch and new plant siting8. Better coordination of maintenance schedules
CEC (2002), UN (2006) and ESMAP (2010)12
REGIONAL POWER INTEGRATION
World Bank / ESMAP (2010)13
REGULATORY BARRIERS
•Few unified markets or “deep integration”•Mostly bilateral trade agreements•Many regulatory challenges:
• Possibility to trade interconnection capacity day-ahead and intraday
• Technical features (e.g. technical losses) properly modelled in the allocation process
• Gate closure time as close to real time as possible• Integration of electricity balancing markets
(Teusch et al., 2012)
14
LITERATURE REVIEW FINDINGS
“It was notable in carrying out the literature review that many of the papers on regional power are descriptive rather than analytic. There are
comparatively few academic studies which have real theoretical depth.”
Research gap: “theoretical analysis of the way in which benefits are distributed”
ECA (2010) The Potential of Regional Power Sector Integration: Literature Review
Billette de Villemeur and Pineau (2012) “Regulation and electricity market integration: When trade introduces inefficiencies”, Energy Economics
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2. MODEL
Th thermal jurisdiction, marginal costH hydro jurisdiction, average costet
Th hourly production, in MWh at tCTh(et
Th) cost of producing etTh in Th at t
ptTh price in Th at t (= C’Th(et
Th))xt
Th export from Th into H at ttransmission capacity at t
DtTh(pt
Th) demand in Th DtTh = et
Th+ xtH-xt
Th�̅�𝑥𝑡𝑡𝑇𝑇𝑇, �̅�𝑥𝑡𝑡𝐻𝐻
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THREE REGIMES
Regime 1: No transmission, competitive market in Th and regulated in H
Regime 2: Transmission and trade, competitive market in Th and regulated in H
Regime 3: Transmission, competitive market in both Th and H
17
PROBLEM FORMULATION FOR R1&R2
Transmission cost
Shadow value of waterλ
Shadow value of transmission capacity
µt
18
REGIME 2 PRICES
• When Th exports, 𝑝𝑝𝑡𝑡𝑇𝑇𝑇 = 𝜆𝜆 − 𝑐𝑐𝜏𝜏 − 𝜇𝜇𝑡𝑡and is at most 𝒑𝒑𝑻𝑻𝑻𝑻 = 𝝀𝝀 − 𝒄𝒄𝝉𝝉
With 𝑝𝑝𝑅𝑅𝐻𝐻 at average cost• When Th imports, 𝑝𝑝𝑡𝑡𝑇𝑇𝑇 = 𝜆𝜆 + 𝑐𝑐𝜏𝜏 + 𝜇𝜇𝑡𝑡
and is no less than 𝒑𝒑𝑻𝑻𝑻𝑻 = 𝝀𝝀 + 𝒄𝒄𝝉𝝉
• When xtTh = xt
H = 0, 𝑝𝑝𝑇𝑇𝑇 < 𝑝𝑝𝑡𝑡𝑇𝑇𝑇 = 𝐶𝐶′𝑡𝑡 (𝑒𝑒𝑡𝑡𝑇𝑇𝑇) < 𝑝𝑝𝑇𝑇𝑇
19
PROBLEM FORMULATION FOR R3
Shadow value of waterλ
Shadow value of transmission capacity
µt
20
REGIME 3 PRICES
• When Th exports, 𝑝𝑝𝑡𝑡𝑇𝑇𝑇 = 𝑝𝑝𝑒𝑒𝐻𝐻 − 𝑐𝑐𝜏𝜏 − 𝜇𝜇𝑡𝑡and is at most 𝒑𝒑𝑻𝑻𝑻𝑻 = 𝒑𝒑𝒆𝒆𝑯𝑯 − 𝒄𝒄𝝉𝝉
With 𝑝𝑝𝑒𝑒𝐻𝐻 = 𝜆𝜆• When Th imports, 𝑝𝑝𝑡𝑡𝑇𝑇𝑇 = 𝑝𝑝𝑒𝑒𝐻𝐻 + 𝑐𝑐𝜏𝜏 + 𝜇𝜇𝑡𝑡
and is no less than 𝒑𝒑𝑻𝑻𝑻𝑻 = 𝒑𝒑𝒆𝒆𝑯𝑯 + 𝒄𝒄𝝉𝝉
• When xtTh = xt
H = 0, 𝑝𝑝𝑇𝑇𝑇 < 𝑝𝑝𝑡𝑡𝑇𝑇𝑇 = 𝐶𝐶′𝑡𝑡 (𝑒𝑒𝑡𝑡𝑇𝑇𝑇) < 𝑝𝑝𝑇𝑇𝑇
21
3. CALIBRATION
• We calibrated the Th and H jurisdictions unsing 2007 hourly data from Ontario and Quebec
• Linear demand curve with a -0.15 elasticity (at the observed price-quantity pair)
• Marginal cost is linear, from observed price-quantity pairs
22
3. CALIBRATION
• H has 184.705 TWh of hydropower (but also imported from Th to meet its demand)
• Th exports were limited to 720 MW and H exports to 1,295 MW. These capacities have been adjusted to reflect actual trade
• Transaction cost of $2/MWh
23
4. PRICE RESULTS
24
4. QUANTITY RESULTS
25
4. WELFARE IMPACTS
26
4. WELFARE IMPACTS (2)
27
4. DOUBLING TRANSMISSION / PRICE
28
4. DOUBLING TRANSMISSION / QUANTITY
29
4. DOUBLING TRANSMISSION / WELFAREIMPACTS
30
4. DOUBLING TRANSMISSION / WELFAREIMPACTS
31
CONCLUSION
• Model to study regime change and trade between two jurisdictions –our main contribution.
• Welfare gains + environmental gains• Shortcomings:
• Only 2 jurisdictions are included• Perfect knowledge is assumed (e.g. hourly demand)
32
5. DISCUSSION:RECOGNIZING OBSTACLES
1. Structure of political and electoral incentives in the provinces and the federal government
2. Redistribution of the gains from a partial or complete integration
3. Lack of recognition of the environmental benefits resulting from integration
33
5. DISCUSSIONWORKING TOWARDS INTEGRATION
• Awareness and information• Redistribution and compensation • Inspiration from the Canada Health Act• Expand the concept of the “Atlantic Energy Gateway”• Bi-lateral agreements (as QC and ON are currently
exploring)• Agreement on Internal Trade• A credible Federal approach on GHG
34