Wind Power Producers’ Costs And Associated Market Regulations: The Source of Wind Power

Producers’ Market Power

Yang YuStanford university

33rd USAEE/IAEE North Conference, Pittsburgh, PA

Market Power and Wind Power Research on market power includes

– Examining strategies to exercise market power (Borenstein,eta 2002)

– Measuring market power(Wolak,2003)

Wind power producers (WPPs) are considered as price takers because– Zero marginal fuel costs – Decentralized market structure

Research Questions– Do WPPs have market power?– What are WPP’s strategies?

Hourly Wind Penetration > 50%

Germany, 2015-7-25 12pm-2pm

RevealedWind For 2am

WPPs’ Bidding Rule and Uncertain NatureDay-ahead (DA) Market Real-time (RT) Market

Demand and Wind-Energy Distributions Revealed Wind-Energy Level

ConventionalGenerator

WPP

Supply (MWhs)

Pric

e ($

/MW

hs)

Supp

ly (M

Whs

)

Commitment For 2am

Win

d En

ergy

Su

pply

(MW

hs)

200MWh

If WPP over commits

Hourly Bidding Uncertain Nature

WPP buys 100

MWh

Hour

A Stochastic Two-Hour ModelDay-ahead (DA) Market Real-time (RT) Market

Demands and Wind-Energy Distributions in Two Hours

Exact Wind-Energy Level WindRT(h) in Each Hour

If WindRT(h) < WindDA(h), the WPP buys electricity

WPP’s Benefit: PDA(h) × WindDA(h)

WPP’s Opportunity Cost: PRT(h) × (WindDA(h) -WindRT(h))+

Hourly Incremental Cost Minimization

PDA(h) = MCgas(Qgas) = MCcoal(Qcoal) + λ(h)

Coal Plant: linear marginal cost MCcoal(Qcoal) max-ramp rate: r

Gas Plant: linear marginal cost MCcoal(Qcoal)

WPP: Hourly Commitment WindDA(h)

Price Sensitivity to WPP’s Commitment Residual inverse demand (RID) curve(McRae&Wolak,2009)

WindDA(2)

Qcoal(2)

Qgas(2)

WindDA(2)

Qcoal(2)

Qgas(2)PDA(2)

=MCgas(Qgas)

=MCcoal(Qcoal) + λ(h)

Demand(MWhs) Demand(MWhs)

Hour 2 Hour 2

Tipping Point

DA P

rice

Wind Commitment

The WPP’s RID in Hour 2 When the Net Load Is Ramping Up

WPP’s Marginal Cost Is Non-Zero

Day-ahead (DA) Market Real-time (RT) Market

Theorem : the WPP’s marginal cost in the DA market is

MCwind is non-zero– WPPs do not compete with zero-cost generators,

MCwind varies by wind-energy distributions – WPPs does not necessarily compete with each other.

PDA(h) × WindDA(h) – E[PRT(h) × (WindDA(h) -WindRT(h))+]

The WPP’s Ability to Manipulate Price

WPP has ability to manipulate the price when e < 0

Wind Commitment

DA P

rice

MCwind

WindDA* WindDA’

WindDA*: market-power commitment ; WindDA’: price-taker commitment

Tipping Point

e: Elasticity of RID curve between [WindDA*, WindDA’]

WPPs’ Market Power in ERCOT in 2012

Data：– Demand and wind energy in 2012: ERCOT– Technical feature of conventional generators: E-Grid

Scenario: WPPs aggregately bid in the market 904 out of 8783 hours, WPPs have market power (e < 0)– Average of e: 2%. Max of e: 9%.

Wind Energy Penetration

Prob

abili

ty th

at W

PPs H

ave

Mar

ket P

ower

• WPP’s market power is a big problem in a future grid

• Aggregated bidding need to be limited

• Low penetration ≠ No market power

Hours When WPPs Have Market Power

Histogram of WPPs’ Hourly Marginal Costs in ERCOT

ERCOT’s Aggregate Supply Curve of fossil-fuel Generators

Coal Gas Oil

DA-Bidding Rule and WPP’s Non-zero Marginal Cost

Take Advantage of Coal Plant’s Ramping Limit

Hourly-Commitment Bidding Rule

WPP Can and Will Raise Price by Increasing Commitment

Generate More to Increase Neighboring-hour Price

Lemma: Given WindDA(2), the increase of WindDA(1) raises PDA(2)

Hour 2

Wind Commitment

DA P

rice

WindDA(2)

WindDA(1)

Demand(1)

Hour 1

WindDA(2)

Hour 2

WindDA(1)

Hour 1

WindDA(2)

Δ > r

ΔΔ

Demand(2) Demand(2)Demand(1)

• Coal plant generates less in hour 2

• Price increases in hour 2Qcoal(q) Qcoal(2) Qcoal(2)

Hour 2

r

Qcoal(q)

WPP’s Strategy to Utilize Ramp Constraints

Theorem: Because θ > 0, WPP increases WindDA(1) to raise PDA(2)

Hour 2

Wind Commitment

DA P

rice

WindDA(2)

The WPP’s optimal strategy in hour 1 satisfy：

θ > 0

Insights and Suggestions WPP’s abilities to exercise market power are unique because

they come from– Current regulations– Wind power generator’s fast-ramping feature

Reexamine current mechanisms to mitigate market power– The use of long-term contract– Restriction on WPPs’ aggregate bidding (Bitar et.al 2012)

New indices are needed to hourly monitor WPPs’ abilities to exercise their market power

Summary A Stochastic-two-hour game model is developed to analyze

WPP’s market power– WPPs’ marginal cost is non-zero and change by hours• Compete with non-zero-cost generators• Not necessarily compete with each other

WPPs have ability to raise price by – reducing generation commitments• Even in low-penetration case

– increasing generation commitments in neighboring hours• Generate more and raise price higher

Thank you.

Questions? yangyu1@stanford.edu

Conditions Under Which WPP Has Market Power

A steep slope of each piece• Competitors have fast-increasing supply curve

A high value of the tipping point• Net-demand is fast increasing• Competitors’ ramp rates are limited

Wind Commitment

DA P

rice

WindDA* WindDA’Tipping Point

Reference [1] Ito, Koichiro, and Mar Reguant. Sequential Markets, Market Power

and Arbitrage. No. w20782. National Bureau of Economic Research, 2014.

[2] Borenstein, S., Bushnell, J. B., Wolak, F. A., 2002. Measuring market inefficiencies in california’s restructured wholesale electricity market. AER 92 (5).

[3] McRae, Shaun D., and Frank A. Wolak. "How do firms exercise unilateral market power? Evidence from a bid-based wholesale electricity market." (2009).

[4] F. A. Wolak, “Measuring unilateral market power in wholesale electricity markets: the california market, 1998-2000,” The American economic review, vol. 93, no. 2, pp. 425–430, 2003.

[5] E. Y. Bitar, R. Rajagopal, P. P. Khargonekar, K. Poolla, and P. Varaiya, “Bringing wind energy to market,” Power Systems, IEEE Transactions on, 2012.

Back Up Slides

DA-Bidding Rule and WPP’s Non-zero Marginal Cost

Wind-Energy Uncertinaty

Possible Payment for Wind Shortfall

Marginal Cost ≠ 0

WPP Can Raise Price by Reducing Commitment

WPPs Have Market Power Even When the Penetration Is Small

In over 900 hours of 2012, the WPPs in the ERCOT market have ability to manipulate the price if they aggregately bid– Average penetration: 17.8%– In 78 hours, the market share of WPPs is less than 5%– In 6 hours when the market share < 1%, WPPs have market power– In more than 200 hours when the market share > 30%, WPPs do not have market power

Histogram of WPPs’ Hourly Marginal Costs in ERCOT

ERCOT’s Aggregate Supply Curve of Conventional Generators

Background

Do WPPs have market powers?– Single Company separate bid– Aggregate bidding

What is a WPP’s optimal strategy when it exercises its market power

Increasing Wind-Energy Penetration

Geographic Imbalance of Wind Energy Generation

Single Company’s High Market Share in a Particular Hour

Needs of Aggregate Bidding of Wind Power Producers (WPPs)

Forecast Error Decrease by

Aggregate Bidding

Research Questions

DA Price Changes With the WPP’s Commitment

Reduce Commitment in a Hour

WPP

System Operator

Coal and Gas Generation

Binding Coal’s Ramping Limit

Change DA Prices in this and other hours

PDA(Wind Commitment):Residual Inverse Demand (RID) Curve to the WPP• How DA price responds to the change of WPP’s

Lemma: The DA price satisfy the following condition

DA Price =MCgas(Ggas) =MCcoal(Gcoal) + λ(t) λ is the dual variable of the Ramping

Constraint in hour t

The RID curve is a Piece-wise Function Theorem(DA price): The DA market price is a function of the

WPP’s Commitment: DA Price = MCcoal(Demand – Ggas – Wind Commitment) + λ

The WPP’s RID in Hour 2 When the Net Load Is Ramping Up

Tipping Point Wind Commitment

DA P

rice

Price Increases Slow When the Ramping Constraint is lessened

Price Increases Fast When the Ramping Constraint is Binding

Price Sensitivity to the WPP’s commitment

Factors Determining Price Sensitivity

Tipping Point Wind Commitment

DA P

rice

Marginal Costs of Competitors Fast Increase

Coal Plant’s Ramp Rate Is Limited

WPP’s Commitment in Hour 1 Is Hihg

Load Difference is Large

The WPP’s RID in Hour 2 When the Net Load Is Ramping Up

The Price is sensitive when

Value of Tipping Point Is Large

Future Grid: More Risks of Wind Power’s Market Power

Wind Energy’s PenetrationPerc

enta

ge o

f Hou

rs W

hen

WPP

Has

Ab

ility

to M

anip

ulat

e th

e Pr

ice

When the hourly wind penetration increases, the probability that WPPs have ability to manipulate price increases

In many hours, WPPs do not have market power when they aggregate

Background Increasing concern about the market power of a single wind

power producer (WPP)– Fast growing of wind energy’s penetration– Geographic unbalance of hourly wind energy’s generation

Debate about whether WPPs could be allowed to aggregated make bid in a electricity market– Pros: reducing forecast errors [1]– Cons: concerns of the market power of aggregated WPPs