This report proposes an ancillary services payment mechanism for the Chilean electricity supply industry. This is accomplished in three steps. The first section presents a set of economic principles for assessing the likely performance of candidate ancillary services payment mechanisms in the context of Chilean electricity supply industry. The second section uses this framework to assess the likely performance of the ancillary services payment mechanism recently proposed by the National Energy Commission (NEC) in its letter Number 715 dated September 21, 2010. The third section formulates an alternative payment mechanism that respects the existing electricity market structures and rules in Chile, but is likely to provide lower cost and more reliable solution than the one proposed by the NEC. An appendix outlines several examples of how the proposed procurement mechanism could be implemented and how potential exercise of market power by a dominant supplier of any ancillary service could be mitigated.

In this report we identify the key drivers of observed market outcomes in the Colombian electricity supply industry during the fourth quarter of 2015 and first quarter of 2016, the time period covered by the most recent El Niño Event. We analyze how effective the market rules and market structure of Colombian electricity supply industry are in managing El Niño Events. The performance of the Reliability Payment Mechanism (RPM) is a major focus of this report because of its designation as the primary mechanism for ensuring an adequate supply of energy at a reasonable price during El Niño Events. We find that the RPM creates a number of perverse economic incentives for supplier behavior, particularly if suppliers have a significant ability to exercise unilateral market power, that works against the RPM mechanism ensuring an adequate supply of electricity at a reasonable price during El Niño Events. We identify several features of the RPM that make it extremely challenging even for a modified version of this mechanism to achieve its goal. We propose an alternative mechanism for ensuring an adequate supply of energy at a reasonable price during El Niño Events that should be straightforward to implement under the current market design in Colombia.

We analyze how market design influences bidding in multiunit procurement auctions where suppliers have asymmetric information about production costs. Our analysis is particularly relevant to wholesale electricity markets, because it accounts for the risk that a supplier is pivotal; market demand is larger than the total production capacity of its competitors. With constant marginal costs, expected welfare improves if the auctioneer restricts offers to be flat. We identify circumstances where the competitiveness of market outcomes improves with increased market transparency. We also find that, for buyers, uniform pricing is preferable to discriminatory pricing when producers' private signals are affiliated.

A spatial equilibrium model of the world coal market is developed that accounts for coal to natural gas switching in the electricity sector in the United States and Europe, the potential for China to exercise monoposony power in its coal purchasing behavior, and the impact of increasing the western US coal export port capacity. The global coal market equilibrium is computed as the solution to a nonlinear complementarity problem. Where possible parameters of the model are estimated econometrically. Where this is not possible the parameters are calibrated to global coal market outcomes in 2011. The model is used to assess how the shale gas boom in the United States impacts global coal market outcomes for dierent models of Chinese coal buyers' purchasing behavior and dierent scenarios for the capacity of coal export terminals on the US west coast.  Although reductions in US and European natural gas prices reduce coal consumption in the US and Europe, the percentage reduction in coal consumption in Europe is much less than that in the US. Increasing US west coast port capacity increases coal exports from the western US and reduces Chinese coal production. US coal prices increase which causes more coal to natural gas switching in the US, further reducing global greenhouse gas emissions. Modeling China as a monopsony buyer of coal reduces the absolute magnitude of these impacts.

The variability of solar and wind generation increases transmission network operating costs associated with maintaining system stability. These ancillary services costs are likely to increase as a share of total energy costs in regions with ambitious renewable energy targets. We examine how ecient deployment of intermittent renewable generation capacity across locations depends on the costs of balancing real-time system demand and supply. We then show how locational marginal network taris can be designed to implement the ecient outcome for intermittent renewable generation unit location decisions. We demonstrate the practical applicability of this approach by applying our theory to obtain quantitative results for the California electricity market.

In April 2015, Singapore introduced an anonymous futures market for wholesale electricity. Using data on prices and other observable characteristics of all competitive retail contracts signed from October 2014 to March 2016, a larger average quantity of open futures contracts that clear during the term of the retail contract a month before the retail contract starts delivery predicts a lower price for the retail contract. This outcome is consistent with increased futures market purchases by independent retailers causing lower retail prices. Consistent with the logic in Wolak (2000) that a larger volume of fixed-price forward contract obligations leads to offer prices closer to the supplier’s marginal cost of production, a larger volume of futures contracts clearing against short-term wholesale prices predicts lower half-hourly wholesale prices. Both empirical results support introducing purely financial players to improve both retail and wholesale market performance. The paper then outlines how a regulator-mandated standardized futures market can be used as a long-term resource adequacy mechanism for the wholesale market regime.

Hourly plant-level wind and solar generation output and real-time price data for one year from the California ISO control area is used to estimate the vector of means and the contemporaneous covariance matrix of hourly output and revenues across all wind and solar locations in the state. Annual hourly output and annual hourly revenues mean/standard deviation efficient frontiers for wind and solar resource locations are computed from this information. For both efficient frontiers, economically meaningful differences between portfolios on the efficient frontier and the actual wind and solar generation capacity mix are found. The relative difference is significantly larger for aggregate hourly output relative to aggregate hourly revenues, consistent with expected profit-maximizing unilateral entry decisions by renewable resource owners. Most of the hourly output and hourly revenue risk-reducing benefits from the optimal choice of locational generation capacities is captured by a small number of wind resource locations, with the addition of a small number of solar resource locations only slightly increasing the set of feasible portfolio mean and standard deviation combinations. Measures of non-diversifiable wind and solar energy and revenue risk are computed using the actual market portfolio and the risk-adjusted expected hourly output or hourly revenue maximizing portfolios.

We show that a common regulatory mandate in electricity markets that employ locational marginal pricing (LMP) requiring all electricity retailers to purchase their wholesale electricity at the same quantity-weighted average of these prices can improve the performance of imperfectly competitive wholesale electricity markets. Linking loca- tional markets strengthens the incentive for vertically integrated firms to participate in the retail market, which increases competition in the short-term wholesale market. Sim- ulations based on a stylized model of an electricity supply industry find economically significant price reductions are likely for actual markets that employ this regulatory mandate. Our results imply that a policy designed to address equity considerations associated with implementing a locational marginal pricing market design can also en- hance wholesale market efficiency.

This paper proposes a model of the behavior of an expected profit-maximizing merchant storage owner with the ability to exercise unilateral market power. The resulting non-linear bilevel optimization problem is transformed into a single-level stochastic bilinear program using the Karush-Kuhn-Tucker conditions of the lower-level Independent System Operator dispatch problem. By discretizing the offers and bids of the merchant storage owner, the problem is formulated as a stochastic disjunctive program. Using the disjunctive nature of the derived program, a specialized branch-and-bound algorithm that applies a linear quasi-relaxation of the merchant storage problem is proposed. Our solution algorithm is able to solve the problem in an efficient manner; returning the charge and discharge strategies for the merchant storage owner that yield the highest expected profits. Simulations of test systems reveal the various abilities of the merchant storage owner to exercise unilateral market power. Those include demand withholding, generation withholding and under-usewhich result in an increased congestion in both space and time when compared to the welfare-maximizing use of storage. Factors such as uncertain bids by other players, final state-of-charge requirements and arbitrage by other storage players are investigated. Moreover, numerical results demonstrate the superior computational performance of the proposed solution algorithm when benchmarked against current practices in the literature.

Capacity markets provide guaranteed payments to electricity generation unit own- ers for having the “firm capacity” to produce electricity. Historically, these markets are plagued by the weak incentives they provide for plants to be available during high-demand hours. The reliability payment mechanism in the Colombian electricity market provides market-based incentives for plants to produce during periods of system scarcity. This market has served as a model for the design of capacity markets in a number of jurisdictions in North America and Europe. We demonstrate severe shortcomings of this mechanism. By adjusting their price and quantity offers, genera- tors with the ability to exercise unilateral market power can choose whether or not a scarcity condition exists. We find that this mechanism can make it privately profitable for a firms to withhold output and create a scarcity condition. We illustrate this prob- lem using hourly data from the first ten years of operation of the reliability payment mechanism in Colombia. The mechanism not only fails to minimize the cost of meeting electricity demand but also creates perverse incentives for electricity generators that could reduce the reliability of electricity supply. We quantify the cost of the perverse incentives caused by this capacity payment mechanism by computing a counterfactual dynamic oligopoly equilibrium for the 2015–16 El Niño event in Colombia.