Electricity markets. Natural monopoly model презентация

Electricity markets Natural Monopoly model

Overview Special features Stages of electricity production Production function and costs Natural monopoly Regulation Technological change

Special features Demand fluctuations within the day, across seasons Demand = load Peak vs. offpeak demand

Variations in hourly load California system, GW vs. hour

Special features Not storable (electricity today is not a substitute for electricity tomorrow)

Special features High costs of shortages Blackouts or brownouts Capacity >= load “peak load problem”

Special features Electricity is a secondary source of energy Electricity is both an output and an input with respect to other energy products E.g. output with respect to …? E.g. input with respect to …? Electricity is a substitute to some of its inputs

Special features Electricity consuming capital is long lived (… years) Electricity producing capital is long lived (40 years) Technology used often is not the most optimal

Special features Summary Demand fluctuations (within the day, across seasons) Not storable (electricity today is not a substitute for electricity tomorrow) High costs of shortages Complex relations with respect to other energy products

Production process Generation Transmission Distribution

Production process Generation Electricity is a secondary energy source Transformation of one energy into electricity Mechanical power into electric power: Hydropower and wind Thermal (coal, gas, oil) Solar Nuclear

How is electricity generated? http://www.eia.gov/energyexplained/index.cfm?page=electricity_generating

Supply chain video https://www.youtube.com/watch?v=20Vb6hlLQSg

Electricity supply chain Generation: transformation of other energy into electric energy Transmission: high voltage transport of energy Distribution: low voltage transport of energy

Minimum efficient scale MES is the level of output that minimizes average cost relative to the demand

Varian, Intermediate Microeconomics, Ch. 24

Modelling electricity markets High fixed cost Low variable cost Average cost declines as Q grows

Traditional Monopoly

Natural Monopoly

Natural Monopoly profit-max outcome

Natural Monopoly profit-max outcome

Natural Monopoly socially efficient outcome

Natural Monopoly DWL

Natural Monopoly socially efficient outcome

Natural Monopoly socially efficient outcome

Natural Monopoly Policy 1. Public Ownership 2. Private Ownership + regulation

Natural Monopoly Average cost pricing outcome

Differentiating peak & off-peak demand

Peak & offpeak load

Which prices to charge? How to distribute costs among two consumer groups? Fixed cost? ~ “Capital cost” (Ck) Variable cost? ~ “Operating cost” (Cp – during peak hours; Co – during offpeak hours)

Peak & offpeak load Should the marginal unit be supplied during peak or offpeak? What should be its price?

Peak & offpeak load Should the marginal unit be supplied during peak or offpeak? What should be its price?

Smart meters and differentiating peak & off-peak demand

Peak-load pricing Electricity prices in Astana: 23:00-7:00 => 3.21 KZT/ kWh 7:00-23:00 => 14.52 KZT/ kWh

Peak-load pricing Summary Peak-load pricing allows a utility to cover the fixed cost. Peak-load pricing became feasible due to advances in technology.

Electricity industry in Kazakhstan

Industry structure Generation: mostly privately owned Transmission: KEGOC, state-owned Distribution: 15 regional distribution companies, state/privately owned

Review Special features Stages of electricity production Production function and costs Natural monopoly Regulation

Readings Dahl, Ch. 4 Kazenergy pp. 274-275, 290-291, 303-305.