Electrical Energy Pricing

1
Electrical Energy Pricing

• Market Structures
• Sheraz Mustafa
• Mohamad El khatib

2
Outline

• Energy as a commodity
• Monopoly controlled markets
• Benefits and costs of reform
• Models of reform
• Trading mechanisms in an open
  market

3
Energy as a commodity

• Energy differs from most commodities in the
  following ways
• Electrical energy is linked with the grid (hence
  rapid transfer of energy)
• Only one grid for every one
• Cyclical demand of electricity

4
Monopoly controlled markets

• A monopoly generally owns all the market for a
  given product
• The electrical energy sector was
  considered a natural monopoly since the1920s
• In the 1970s a movement challenging this
  idea arose and called for reform

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Benefits of reform

• Lower prices due to competition
• Lower prices due to increased trade
• Savings on investments
• Increased labour productivity
• Development of new energy services

6
Cost of reform

• Large investments required for restructuring
  and regulation
• High transaction costs after vertical
  supply chain is unbundled
• Horizontal restructuring may have
  efficiency costs

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Models of reform

• Model 1 Monopoly

Hunt
S and Shuttleworth G.competition and choice in
electricity, Chichester, Wiley,1996
8
Models of reform

• Model 2 Purchasing agency

Hunt S and Shuttleworth G.competition and choice
in electricity, Chichester, Wiley,1996
9
Models of reform

• Model 3 Wholesale competition

Hunt S and Shuttleworth G.competition and choice
in electricity, Chichester, Wiley,1996
10
Models of reform

• Model 4 Retail Competition

Hunt S and Shuttleworth G.competition and choice
in electricity, Chichester, Wiley,1996
11
Open market mechanism

• The principal forward markets are the bilateral
  and electricity pool markets
• Comparison
• Pools offer centralized management
• Bilateral markets involve direct negotiations
• Smaller standard bids in Pools hence lower
  scheduling risks

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Open market mechanism

• Electrical energy markets require a managed spot
  market to perform the balancing functions

D. Kirschen, G. Strbac. Introduction in Power
System Economics, England, Wiley,2004,1-9
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Questions