Reforming the Mexican Electricity Market: Design and Regulatory Issues. Juan Rosellón DIW Berlin and CIDE

Transcription

1 Reforming the Mexican Electricity Market: Design and Regulatory Issues Juan Rosellón DIW Berlin and CIDE Berlin Conference on Energy and Electricity Economics (BELEC 2015) May,

2 Outline 1. New industry and institutional structure 2. Challenges: Market design under the assumptions of the energy reform Introduction a nodal-price system and FTR auctions Transmission network expansion and large-scale renewable integration 3. Implications for policy making in Mexico 2

3 Outline 1. New industry and institutional structure 2. Challenges: Market design under the assumptions of the energy reform Introduction a nodal-price system and FTR auctions Transmission network expansion and large-scale integration renewables 3. Implications for policy making in Mexico 3

4 New industry structure ANEXO MEM.PPTX Generation Subsidiary A Short Term Transactions System Control and Electric Market Retailing Unregulated Supply Consumption Qualified Users Subsidiary B Spot Market Basic Service Users Subsidiary C Private Parties Long Term Contracts Auctions Regulated Supply and Contracts and Contracts Transmission Distribution 4

5 Reform Pre-Reform New institutional framework Generation Control/Dispatch Transmission Distribution Marketing Expansion Plan Expansion Plan Final Rates Generation Modality Approve Expansion Plan Dispatch Rules Reliability Standards Generator Interconnection Participate in Final Rates Permits Approve Expansion Plan Participate in Final Rates Operation of Short and Long Term Markets System Operation Planning and Interconnection Studies Requirements for Clean Energy Initial Market Rules Approve expansion plan Minimum consumption to be Qualified User Contracting Requirements Reliability Standards Regulated Tariffs Svc. Quality Requirements Administer CEC s Market Monitor Supervision of Interconnection Final Rates (Basic Service) 5

6 Clean energy potential in Mexico Solar Resources Wind Resources Geothermal Resources Mexico has sufficient resources to exceed its goals of 35% nonfossil generation in 2024, 40% in 2035 and 50% in Portfolio standard will assure that they can be developed. Installed Capacity 2 semester 2014 (MW) Actual Generation Year 2013 (% of total GWh) Renewable Energy Potential Actual Generation + Proven Resources Actual Generation + Proven Resources +Probable Resources Actual Generation + Proven Resources +Probable Resources +Possible Resources Wind % 5.30% 5.30% 34.80% Geothermal % 2.22% 22.52% 40.03% Solar % 0.65% 0.65% 2,189.40% Mini Hydro % 1.72% 9.48% 24.35% Total % 9.89% 37.95% 2,288.59% 6

7 Demand (GW) Transmission (c-km) Opportunities for transmission investment Existing Program: In the 15 year plan, CFE has included 19.3 billion USD of transmission projects including 19,555 circuit-km of lines. Planning: Expansion plan will be proposed by an independent entity with a mandate to promote open access (CENACE). Transmission in US and Canada expands faster than demand growth. Expansion in Mexico should become more aggressive Demand Growth vs. Transmission Expansion 85% growth 200 Demand 180 Transmission % growth

8 Implementation plan Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Electricity Market CENACE. Creation Decree Model Contracts First Market Rules Resolution Rules Electric Market Operation Certification Transmission and Distribution Universal Service Fund Creation Regulated Rates National Electric System Development Program Program Resolution Electric Industry Bylaws Bylaws Terms of Separation CFE Resolution Restructuring of CFE Legal Separation Clean Energy Clean Energy Guidelines Resolution Clean Energy Requirements Resolution Basic Service Auctions Operation Responsibility: SENER CRE 8

9 Outline 1. New industry and institutional structure 2. Challenges: Market design under the assumptions of the energy reform Introduction a nodal-price system and FTR auctions Transmission network expansion and large-scale renewable integration 3. Implications for policy making in Mexico 9

10 Challenges Key issues related to the implementation of the of the Mexican electricity reform. Optimal design of an electricity market driven by the assumptions of the energy reform, e.g., network expansion, horizontal and vertical integration, ISO s corporate governance. Implementation of a nodal pricing system and introduction of financial transmission rights (FTRs). Optimal regulation of the transmission network to promote large-scale integration of renewables. 10

11 First issue: Electricity market design under the assumptions of the energy reform First problem: horizontal competition in the generation subsector under a dominant incumbent (CFE): And under the existence of IPPs with long-term contracts of energy sales to CFE How to accomplish a level-playing-field to allow fair competition? Second problem: regulation of the transmission network: Application of an incentive mechanism to promote the efficient regulation of the operation and expansion of the Mexican networks. Third problem: corporate governance and regulation of the independent system operator (CENACE): What would be the structure of incentives for the ISO? Would be a profit-maximizing dispatch entity? Or welfare-maximizing? 11

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13 A combined merchant-regulatory mechanism Rosellón, J. and H. Weigt (2011), A dynamic incentive mechanism for transmission expansion in electricity networks Theory, modeling and application, The Energy Journal, 32(1), Upper level problem: Profit maximizing Transco: T t t t t max ( pi di pi gi ) F k, F t i s.t. i i ( p d p g ) F N t w t w t t i i i i ( p d p g ) F N t 1 w t 1 w t 1 t i i i i 1 RPI t N X t i, j c t k ij Regulatory constraint Lower level problem: ISO welfare maximization: s.t. Line capacity restriction Energy balance Plant capacity restriction t d i max W p( d )dd mc g dg, t t t i i i i i, t 0 i, t pf g t t ij t i k t g t ij ij gi qi di i, t t t, max i i,t 13

14 MAPA 2. Zonas congestionadas en México Fuente: Elaboración propia con base en mapa de la SENER (2008). 14

15 GRÁFICA 1. Desarrollo de los precios en México Fuente: Elaboración propia. 15

16 Second issue: Introduction to the Mexican electricity market of a nodal-price system and FTR auctions Transition to nodal prices starting from subsidized prices Model to study initial free allocations of FTRs to smooth out revenue or cost shocks (distributive efficiency) Grandfathered FTRs 16

17 Kunz, F., K. Neuhoff and J. Rosellón (2014). "FTR Allocations to Ease Transition to Nodal Pricing: An Application to the German Power System," Discussion Papers of DIW Berlin 1418, German Institute for Economic Research. Market clearing n d n,t min G p p,t G p,t mc p G p,t n 0 G p,t g p max RES g n,t = 0 Congestion management min G UP,G DOWN,Δ p,t mc p (G UP p,t G DOWN p,t ) d n,t g p,t + G UP DOWN RES p,t G p,t g n,t p A n 0 G UP p,t g max p g p,t 0 G DOWN p,t g p,t nn b n,nn Δ n,t = 0 l h l,n Δ n,t Δ n,t = 0 p l max 17

18 FTR allocation min G d n,t G p,t p A n p,t mc p G p,t g RES n,t nn 0 G p,t g p max b n,nn Δ n,t = 0 l h l,n Δ n,t p l max min Δ ε D FTR n FTR n RES FTR p G = 0 n n p FTR D n FTR RES G n FTR p b n,nn Δ n,t = 0 p A n nn cr t TSO p G RES price slack,t price A n,t FTR p price slack,t price n,t FTR n D price n,t price slack,t FTR n = 0 n n l h l,n Δ n,t p l max Δ n,t = 0 18

19 No FTR allocation Full FTR allocation Average change in surplus of demand in the high wind winter week under production-based allocation approach 19

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21 Third issue: Optimal incentive regulation of the transmission network and large-scale renewable integration Schill, W.-P., J. Egerer, and J. Rosellón (2014), Testing Regulatory Regimes for Power Transmission Expansion with Fluctuating Demand and Wind Generation. Journal of Regulatory Economics. Online First. Issue 3.1: Transmission expansion under renewable integration of with time resolution and supply and demand fluctuations Understanding how to regulate and expand transmission networks under large-scale renewable integration in Mexico. Include fluctuating renewable energy with hourly time resolution so as to substantially increase the applicability of regulatory mechanisms. 21

22 Lower level as in Hogan et al. (2010), but with more time resolution: q nt,, 1 max p ( q ) dq c g n, t, n, t, n, t, s s, n, t, qg,,, t1,, p, tt nn 0 ss 1 s,, I s t P l t ln,.. n, t, l, t 0 ( 1, l, t, ),, n X lt, I ln, n, t, Pl, t 2, l, t, n X lt, gn, s, t, Bn, nnnn, t, n, t, n, t, s nn 0 ( ) l, t, q 0 ( p ) n, t, g g 0 ( ) n, s, t, n, s, t, n, s 4, n, s, t, slack 0 ( ) n, t, n n, t, 5, n, t, Upper level as in Rosellón and Weigt (2011): 1 max p q p g fixpart ec ext 1 s.a. n, t, n, t, n, t, s, n, t, t l l, tt p t 1 tt nn ss ll ttt p q p g fixpart p q p g fixpart HRV n, t1, n, t, n, t1, s, n, t, t1 nn ss HRV n, t, n, t, n, t, s, n, t, t nn ss 1 RPI X fixpart ec ext (1 r) fixpart CostReg CostReg t1 l l, tt t ll ttt1 22

23 Comparison of welfare and extension results 100% Ten regulatory periods Higher extension costs More wind Endogenous line reactance 80% 60% 40% 20% 0% -20% Static DRes WindRes Static_t10 DRes_t10 WindRes_t10 DRes_250 DRes_500 DRes_1000 Static_x4 DRes_x4 WindRes_x4 Static_er DRes_er WindRes_er HRV NoReg CostReg Figure 17: Social welfare gain of extension compared to WFMax for different model runs Fluctuating demand and wind power both increase the gap between wfmax and the regulatory cases. HRV much closer to wf-optimum in all cases robust! 23

24 Third issue: Optimal incentive regulation of the transmission network and large-scale renewable integration Egerer, J., J. Rosellón and W-P. Schill (2015), Power System Transformation toward Renewables: An Evaluation of Regulatory Approaches for Network Expansion, The Energy Journal, Vol. 36 (4) Issue 3.2: Transmission expansion under the dynamic transformation of the generation park towards renewables Rationality of transmission investment under a dynamic process of renewable integration. Transmission investment under gradual substitution of conventional energy (e.g., coal or fuel oil) with renewables (wind, solar or geothermal energy). Diverse developments of the technological mix in the generation park that implies different network congestion scenarios. 24

25 Development of the congestion rent 25

26 Table 1: Welfare changes relative to the case without extension Weights Static Temporarily increased congestion Permanently increased congestion Permanently decreased congestion WFMax 0.29% 1.28% 11.62% 0.00% NoReg 0.00% 0.00% 9.25% 0.00% CostReg 0.00% 1.27% 9.22% 0.00% HRV Laspeyres 0.25% 1.01% 9.02% -0.17% Paasche -0.11% 0.38% 9.39% -0.32% Average Lasp.- Paasche 0.29% 0.89% 9.21% -0.32% Ideal 0.29% 1.28% 11.62% 0,00% 26

27 Outline 1. New industry and institutional structure 2. Challenges: Market design under the assumptions of the energy reform Introduction a nodal-price system and FTR auctions Transmission network expansion and large-scale renewable integration 3. Implications for policy making in Mexico 27

28 Implications for policy making in Mexico Analysis of allocative, productive and distributive efficiencies in the electricity sector. Increase in economic welfare. Efficient integration of renewable energies into transmission networks (with consequent reduction of greenhouse emissions). Efficient expansion of transmission networks. Nodal-price systems and financial hedging mechanisms that grant adeaquate property rights which incent efficient investments Research results with potential to be applied in actual public-policy making: CIDE-CRE academic agreement (Rosellón, 2008): Policy decisions in the natural-gas industry regulatory reform back in