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Loyola de Palacio Working Papers Series
Working Papers edited by the Robert Schuman Centre for Advanced Strudies in the name of the Loyola de Palacio Chair
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LdP 1: Which Electricity Market Design to Encourage the Development of Demand Response?
Rious, Vincent; Roques, Fabien and Perez, Yannick
Abstract
Demand response is a cornerstone problem in electricity markets under climate change constraint.
Most liberalized electricity markets have a poor track record at encouraging the deployment of smart
meters and the development of demand response. In Europe, different models are considered for
demand response, from a development under a regulated regime to a development under competitive
perspectives. In this paper, focusing on demand response and smart metering for mid-size and small
consumers, we investigate which types of market signals should be sent to demand manager to see
demand response emerge as a competitive activity. Using data from the French power system over the
last 8 years, we compare the possible market design options to allow demand response to develop. Our
simulations demonstrate that with the current market rules, demand response is not a profitable
activity in the French electricity industry. Introducing a reserve and/or capacity remuneration could
bring additional revenues to demand response providers and improve incentives to put in place
demand response programs in a market environment. |
LdP 2: Analysis of the strategic use of forward contracting in electricity markets
Miguel Vazquez
Abstract
Absence of arbitrage is one of the fundamental tools to describe financial markets. The no-arbitrage
price of any financial contract represents players’ valuation of the uncertain future income stream that
will result from the contract. This reasoning is based on considering future income streams as
exogenously defined variables. When spot markets do not behave under the assumption of perfect
competition, future income streams might depend on players’ strategies. If this is the case, price
differences between the forward and the spot markets do not imply the existence of arbitrage
opportunities, as market players cannot take advantage of such differences. The paper will study the
forward-spot interaction in the presence of spot market power. It will be shown that, when producers
anticipate that forward sales reduce spot price, they can react in the forward market to compensate for
the spot price decrease. Hence, players profits are, considering both forward and spot markets,
equivalent to the ones obtained in the case where no forward trading is allowed. The paper also
develops a multi-period model that considers the role of private information, aimed to represent that
past spot prices are signals of the probability of future spot prices. In this context, there is an additional
incentive when playing in the spot market, which is associated with the sensitivity of forward prices to
past spot decisions. This often results in spot prices equal to the ones obtained in the no-trade case.
The policy implications of the previous results will be discussed. Actually, it will be shown that the
number of regulatory measures based on forward contracting that can be used to mitigate market
power is considerably small. |
LdP 3:Tight Volume Coupling: Analytical Model, Adverse Flow Causality and Potential Improvements
Tanguy Janssen, Yann Rebours and Philippe Dessante
Abstract
The European Market Coupling Company (EMCC) operates an
interim tight volume coupling (ITVC) that implicitly allocates the interconnection
capacities between Central West European (CWE) and Nordic (Nordpool)
day-ahead electricity spot markets. Though it is to be replaced by a
single price coupling in the near future, the volume coupling principle can still
inspire pragmatic solutions for future challenges in other situations.
In order to learn from the current experience, this paper o ers elements of
understanding on the interim volume coupling run by the EMCC that are not
highlighted in the documents already available. In particular, a new analytical
model of the tight volume coupling is developed to show that the ITVC
principle would not generate any ineciencies under three assumptions. This
analysis thus o ers a new perspective on the causality of adverse
ow events.
Furthermore, this model could be used to study other tight volume coupling
mechanisms because it can be applied with minor modi cations to any number
of areas, other kinds of traded products or areas using a
ow-based method.
Learning from the ITVC experience, this paper proposes an example of
improvement of the tight volume coupling method based on a stronger coordination
between the numerical solvers. This improved mechanism could serve
as an interim solution if a price coupling numerical solver does not provide
satisfactory results because of the optimisation problem size or complexity.
In this case, the proposed solution is expected to be a satisfactory implicit
allocation method from both technical and governance points of view. |
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