Market architecture

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Vicente Mataix Ferrándiz Slide 1 of 24

HSS511I Régulation et stratégies dans les industries de réseau en

Europe Mid-term defense. Article

''Market architecture'' – Robert Wilson

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Introduction+20 years privatization movementGame theory complements clasic theory

● Viewpoints privatizationI. From big monopole Light separated firmsII. Unbundling Improve efficency by priceIII.Overcome organizational inertia

Incentives

● Architecture marketa) Structure marketb) Design market

Electricity as example

Student:

Vicente Mataix Ferrándiz

''Market architecture'' – Robert WilsonHSS511I Régulation et stratégies dans les industries de réseau en


Introduction

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Electric market

Incomplete and imperfectly competitiveElectricity is a flow

● Flow No one owns electricity Market participants obtain privilegies(reciprocals) Highly complex transmission system

● Market Can be only one spot market SO(System

Operator) A lot spatial/temporal effects

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Introduction

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1. The extent of decentralization1.1 Centralized systems1.2 Decentralized systems1.3 Summary comparison1.4 Hybrid designs

2. Microstructure of forward and spot market

2.1 The spot market2.2 Forward markets for reserves2.3 Forward markets for transmission2.4 Forward markets for energy

3. Mitigation of market power4. Conclusions

Additional bibliographyStudent:




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1. The extent of

decentralizatio

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Centralized systems

Characteristics➔ Forward/real-time optimization (generation,

transmission, reserves)➔ Pricing based opportunity cost (shadow prices)

Require

“max-SO” Participants reveal information Input in algorithm

Negative points

No incentives Reflect actual costs Weak comptetive forces

Inefficiencies Ignore contingencies/Imperfect optimizationStudent:




1.The extent of

decentralization1.1 Centralized systems

Incompleteness of optimization

models

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Decentralized systems

Solve the dual of a primal optimization problem but...

Problems➔ Inter-temporal costs must be internalized by

participants

➔ No explicit coordination Expectation of rational behavior

This brings complexity Solution forward markets

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1.The extent of

decentralization1.2 Decentralized systems

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Summary comparison

Centralized designs

– Manipilation by participants Pricing/settlement complex

– Strongest with big competition/optimization

Decentralized designs

– Incomplete/unsynchronised markets Complex internalization participants

– Strongest with good scheduling decisions of participants

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1.The extent of

decentralization1.3 Summary comparison

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Hybrid designs

Central management (SO)+Participants manage own operations

Comparision with others industries

– Natural gas– Rail lines– Airlines– Telecommunications

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1.The extent of

decentralization1.4 Hybrid

designs/Comparision

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2.

Microstructure

of forward and

spot marketStudent:




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2.Microstructure of forward and

spot market2.1 Spot market

Spot market➔ Flow Interval 5/10 min (Imperfect metering and

SW)– Continous balancing demand/supply– Expensive storage

➔ Price– Economic terms Real-time+transmission cost

(SO)– Practice Real-time price merit order

➔ Systems– Centralized SO have total control– Decentralized Participation is voluntary

Greater volatility

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Growing → “inc”Declining → “dec”

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spot market2.2 Forward market for reserves

Forward market for reserves

➔ Centralized vs Descentraized

– Centralized systems SO asign reserve energy– Decentralized systems Self-provide/ buy to SO

(weakest part desc.)

➔ Remains vertically integrated utilities

– Little use reserves in demand side– Hierarchy derived from response times– Price Capacity-availabilty vs Price offered SO

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spot market2.3 Forward market for transmission

Forward market for transmission point2point (energy dissipated)

➔ Transmission is a public good Technical externalities➔ Decentralized systems vs centralized

– Decentralized• SO buy counterflows in market• Price: Rely to market “inc”/”dec” (fragile, possible

collapse)– Zonal pricing (strategies/no local effects)

• Sequence optimization• Transmission right: Financial/Schedule

– Centralized• Reduce flow/Produce counterflows• Price: System price+ Injection price• Symultaneous optimization• Transmission right: Injection/withdrawal point

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spot market2.4 Forward market for energy

Forward market for energy

➔ Time frame– Real time/Day ahead Reserves/voltage

control/etc...– Longer time frames

➔ Centralized systems vs Decentralized systems– Centralized Consolidate– Decentraliced Not consolidate Better describe of

forward markets➔ Organizational forms

– Contracts between participants (Market Manager broker)

– Exchanges (Market Manager adds demand and supply)➔ Trading arrangements

– Try to solve the deficiencies of exchange proceduresStudent:




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3. Mitigation of

power market

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3.Mitigation of power

market

➔ Mitigate market power

– Monopoles with long-term contracts audited– Long-term forward contracts with fixed prices– ….

➔ Centralized systems vs Decentralized systems

– Decentralized just monitor– Centralized have more control of market

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4. Conclusions

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5.Conclusions

➔ Centralized vs Decentralized

– Centralized designs Optimize and coordinate operations (Few incentives/ Market powers)

– Decentralized designs Incentives and competition (Deficiencies not coordinated/Separate spot and forward market/Price discovery)

➔ Price discovery Better performance

– “Invisible hand”– Recent procedure to improve price discovery

➔ Economic theory Contribute to market architecture

– Electric market example: Promote price discovery– Help in trend to decentralization (author opinion)

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5.Conclusions

Personal point of view

–Why is important this article

– Limitations

– Future

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Addditional

bibliography

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Additional bibliography

Centralization and autonomy in international-marketing decision making. Jacques Picard et al. Topic: Centralization. Note:Old (1993)

Dynamic general equilibrium models with imperfectly competitive product markets. Julio J.Rotmberg et al. Topic: Modelization of market. Note:Old (1993)

Institutional competition versus centralization: Quo vadis Europe?. Horst Siebert et al. Topic: Centralization

Centralization vs. decentralization in a multi-unit organization: A computational model of a retail chain as a multi-agent adaptive system. Chang Myong-Hun et al. Topic: Centralization and modelization of market

The economist as enginner: Game theory, experimentation and computation as tools for design economics. Alvin E. Roth. Topic: Modelization of market (econometrics)

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Additional bibliography

Market design: The policy uses of theory. John McMillan. Topic: Market design

Centralization vs decentralization. An application to price setting by a multi-market. Ricardo Alonso et al. Topic: Centralization

The european electricity market: Centralization of regulation or competition between regulatory approaches?. Lars Kumkar. Topic: Centralization and electricity market

The trouble with electricity markets: understanding California’s restructuring disaster. Severin Borenstein. Topic: Electricity market

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Thanks for your

attention

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Student:

Vicente Mataix Ferrándiz Slide 24 of 24

HSS511I Régulation et stratégies dans les industries de réseau en


''Market architecture'' – Robert Wilson

Market architecture

Technology

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