W2.2 Competition in Electricity Markets

Key points

• Market opening (4 models): wheeling (integrated utilities trade) → single buyer → wholesale competition → retail competition (EU; needs retail/distribution unbundling)
• Electricity is traded ahead of real time; deviations handled by the TSO via the balancing mechanism
• Power exchange = single-price auction → bid VC → Merit Order → price = system marginal cost
• Renewables (VC ≈ 0) → merit order effect: lower prices
• Shortage → demand sets price → VoLL, price cap
• Capital is recovered from the margin $P - VC$, earned when a more expensive plant or scarcity (demand) sets the price → Investment Cost Recovery

Concepts

• Merit Order
• Plant Economics
• Investment Cost Recovery
• Supply Curve
• Shutdown Rule