The Benefits of Integrating Electricity Markets Why and How Canadian Provinces Should Reform their Electricity Sector

Transcription

1 The Benefits of Integrating Electricity Markets Why and How Canadian Provinces Should Reform their Electricity Sector Pierre-Olivier Pineau DEPARTEMENT OF DECISION SCIENCES Department of Economics: Visiting Speaker Series November 20 th, to 4:30pm Room A2065 Arts and Administration Building Memorial University St-John s

2 PRESENTATION BASED ON TWO PAPERS "Fragmented Markets: Canadian Electricity Sectors' Underperformance" (Chapter 13), in Evolution of Global Electricity Markets: New paradigms, new challenges, new approaches, ed. by F.P. Sioshansi, Elsevier, "Integrating Thermal and Hydro Electricity Markets: Economic and Environmental Costs of not Harmonizing Pricing Rules" (open access article), Billette de Villemeur E. and Pineau P-O., The Energy Journal, vol. 37 (1) ,

3 OUTLINE 1. Introduction: Energy in Canada and Regional Power Integration 2. Model 3. Calibration 4. Results 5. Discussion 3

4 1. INTRODUCTION: CANADA AND ENERGY PRODUCTION Oil 1. Saudi Arabia 2. Russia 3. US 4. China 5. Canada Natural Gas 1. US 2. Russia 3. Qatar 4. Iran 5. Canada Coal 1. China 2. US 3. India 4. Indonesia 5. Australia 11. Canada Hydropower 1. China 2. Brazil 3. Canada 4. US 5. Russia (2013) (2011) (2013) (2012) 4 IEA (2014)

5 INSTALLED CAPACITY, 2013 (MW) Internal combustion turbine (Diesel) Combustion turbine (Natural Gas) Nuclear Conv. steam turbine (Coal) Solar Tidal Wind Hydro NL PE NS NB QC ON MB SK AB BC Statistics Canada (2015)

6 TOTAL ELECTRICITY SALES PER CAPITA BY AVERAGE ELECTRICITY VALUE (2013) kwh / capita QC MB BC AB NL SK NB NS Max = Min = 6.42 Ratio: 2.47 ON PE ,06 0,08 0,10 0,12 0,14 0,16 6 $ / kwh Statistics Canada (2015)

7 REGULAR GASOLINE RETAIL FUEL PRICES ON 29-SEP-2014 ( /LITRE) Max = Min = 98.7 Ratio: 1.18 Calgary Winnipeg St. John s NRCan (2015) Vancouver Regina Toronto Montreal Halifax 99.4 St. John 98.7

8 NATIONAL ENERGY PROGRAM ( ) Main elements of the program: a blended made-in-canada price of oil consumed in Canada: $18.50 versus $35 (Sept world price) a petroleum and gas revenue tax of 8% on all production of oil and gas in Canada a federal share of petroleum production income rising from 10 to 24% 8 Scarfe (1981) and Bregha (2013)

9 GHG EMISSIONS IN CANADA BY SECTOR (2013) Waste 4% Agriculture 8% Industrial Processes 7% Provincial Electricity GHG Energy 81% AB 53% SK 18% BC 1% NL 1% PE 0% NS 8% NB 5% ON 13% MB 0% QC 1% Electricity and Heat Generation 12% Other uses (7 categories) 33% Transport 28% Fugitive Sources 8% 9 Environment Canada (2015)

10 13% natural gas in % natural gas in % natural gas in 2014 (<15% in 2000) 10

11 WHEN ABSURDITY DEFEATS ECONOMICS 11

12 GENERIC BENEFITS OF ELECTRICITY MARKET INTEGRATION 1. Improving reliability and pooling reserves 2. Reduced investment in generating capacity 3. Improving load factors and increasing demand diversity 4. Economies of scale in new construction 5. Diversity of generation mix and supply security 6. Economic exchange 7. Environmental dispatch and new plant siting 8. Better coordination of maintenance schedules 12 CEC (2002), UN (2006) and ESMAP (2010)

13 REGIONAL POWER INTEGRATION 13 World Bank / ESMAP (2010)

14 REGULATORY BARRIERS Few unified markets or deep integration Mostly bilateral trade agreements Many regulatory challenges: Possibility to trade interconnection capacity day-ahead and intraday Technical features (e.g. technical losses) properly modelled in the allocation process Gate closure time as close to real time as possible Integration of electricity balancing markets (Teusch et al., 2012) 14

15 LITERATURE REVIEW FINDINGS It was notable in carrying out the literature review that many of the papers on regional power are descriptive rather than analytic. There are comparatively few academic studies which have real theoretical depth. Research gap: theoretical analysis of the way in which benefits are distributed ECA (2010) The Potential of Regional Power Sector Integration: Literature Review 15 Billette de Villemeur and Pineau (2012) Regulation and electricity market integration: When trade introduces inefficiencies, Energy Economics

16 2. MODEL Th thermal jurisdiction, marginal cost H hydro jurisdiction, average cost e t Th C Th (e t Th ) hourly production, in MWh at t cost of producing e Th t in Th at t p t Th price in Th at t (= C Th (e t Th )) x t Th xx tt TTT, xx tt HH D t Th (p t Th ) export from Th into H at t transmission capacity at t demand in Th D Th t = e Th t + x th -x Th t 16

17 THREE REGIMES Regime 1: No transmission, competitive market in Th and regulated in H Regime 2: Transmission and trade, competitive market in Th and regulated in H Regime 3: Transmission, competitive market in both Th and H 17

18 PROBLEM FORMULATION FOR R1&R2 Transmission cost Shadow value of water λ 18 Shadow value of transmission capacity µ t

19 REGIME 2 PRICES When Th exports, pp tt TTT = λλ cc ττ μμ tt and is at most pp TTTT = λλ cc ττ With pp RR HH at average cost When Th imports, pp tt TTT = λλ + cc ττ + μμ tt and is no less than pp TTTT = λλ + cc ττ When x t Th = x th = 0, pp TTT < pp tt TTT = CC tt (ee tt TTT ) < pp TTT 19

20 PROBLEM FORMULATION FOR R3 Shadow value of water λ 20 Shadow value of transmission capacity µ t

21 REGIME 3 PRICES When Th exports, pp tt TTT = pp ee HH cc ττ μμ tt and is at most pp TTTT = pp ee HH cc ττ With pp ee HH = λλ When Th imports, pp tt TTT = pp ee HH + cc ττ + μμ tt and is no less than pp TTTT = pp ee HH + cc ττ When x t Th = x th = 0, pp TTT < pp tt TTT = CC tt (ee tt TTT ) < pp TTT 21

22 3. CALIBRATION We calibrated the Th and H jurisdictions unsing 2007 hourly data from Ontario and Quebec Linear demand curve with a elasticity (at the observed pricequantity pair) Marginal cost is linear, from observed price-quantity pairs 22

23 3. CALIBRATION H has TWh of hydropower (but also imported from Th to meet its demand) Th exports were limited to 720 MW and H exports to 1,295 MW. These capacities have been adjusted to reflect actual trade Transaction cost of $2/MWh 23

24 4. PRICE RESULTS 24

25 4. QUANTITY RESULTS 25

26 4. WELFARE IMPACTS 26

27 4. WELFARE IMPACTS (2) 27

28 4. DOUBLING TRANSMISSION / PRICE 28

29 4. DOUBLING TRANSMISSION / QUANTITY 29

30 4. DOUBLING TRANSMISSION / WELFARE IMPACTS 30

31 4. DOUBLING TRANSMISSION / WELFARE IMPACTS 31

32 CONCLUSION Model to study regime change and trade between two jurisdictions our main contribution. Welfare gains + environmental gains Shortcomings: Only 2 jurisdictions are included Perfect knowledge is assumed (e.g. hourly demand) 32

33 5. DISCUSSION: RECOGNIZING OBSTACLES 1. Structure of political and electoral incentives in the provinces and the federal government 2. Redistribution of the gains from a partial or complete integration 3. Lack of recognition of the environmental benefits resulting from integration 33

34 5. DISCUSSION WORKING TOWARDS INTEGRATION Awareness and information Redistribution and compensation Inspiration from the Canada Health Act Expand the concept of the Atlantic Energy Gateway Bi-lateral agreements (as QC and ON are currently exploring) Agreement on Internal Trade A credible Federal approach on GHG 34