Energy Prices and Markets

Energy Management

Carlos A. Santos Silva

Intended Learning Outcomes

• Describe the Energy supply chain

– Oil, electricity

• Understand Pricing Mechanisms

– Production, Transportation, Profit margins, Taxes

• Know Energy tariffs

– Electricity

Energy supply chain

Reference Energy System

http://www.soi.wide.ad.jp/class/20070042/slides/08/img/28.png

https://www.iea.org/publications/freepublications/publication/KeyWorld2016.pdf

World Energy Consumption

Coal

http://upload.wikimedia.org/wikipedia/commons/b/b3/Strip_coal_mining.jpg

Coal extraction

Where is coal produced?

http://markets.businessinsider.com/commodities/coal-price

Coal market

Oil products

Oil refinery production

http://www.mb.com.ph/wp-content/uploads/2014/11/398.jpg

Oil type of sources

Drilling

Offshore

Deep-Offshore

Sand

Oil Shale

Oil extraction is getting more complex, thus more expensive

Costs of production

http://2.bp.blogspot.com/-xuJRGsqPNQE/UNHinILedCI/AAAAAAAANjA/jZNdU2XAsZk/s640/cost_of_production_vs_quantity_production_2010.png

Oil refining process

Sines Refinery

Raw crude (Brent)

+ Refiningprocess

+ Margins+ End Price

=Distribution

Portuguese Market

Structure of oil prices in Portugal (2012)

https://youtu.be/k-PffWDC9xE

International oil markets

http://oilprice.com/oil-price-charts

Natural gas

http://www.cyberounds.com/elements/resources/513/Slide10.jpg

https://3bonlp1aiidtbao4s10xacvn-wpengine.netdna-ssl.com/wp-content/uploads/2017/03/LNG.jpg

Natural Gas extraction & Transport

http://cdn.oilprice.com/images/tinymce/Evan1/ada1055.png

Market prices

Electricity

Electric system components

Electricity Generation• Base load power plant

– Baseload minimum amount of power that a utility or distribution

company must make available to its customers• Nuclear, geothermal, coal

– produce energy at a constant rate

– Take hours/days to achieve steady state production

– High fixed costs, Low marginal costs

• Load following power plants (intermediate)

– Adjusts its power output as demand for electricity fluctuates

throughout the day• Hydropower, gas turbines

• Peaking power plants

– generally run only when there is a peak demand• Storage, gas turbines, hydropower, diesel, imports

– Low fixed cost, high marginal costs

Source: The oil drum

Portuguese Load Diagram

http://www.centrodeinformacao.ren.pt/PT/InformacaoExploracao/Paginas/EstatisticaDiariaDiagrama.aspx

11-10-201711-4-2016

Portuguese Load Diagram

http://www.centrodeinformacao.ren.pt/PT/InformacaoExploracao/Paginas/EstatisticaDiariaDiagrama.aspx

15-10-201423-9-2015

Prices of electricity MIBEL market

Introduction to micro-economy

Economic Agents

• BUYER / CONSUMER

– the economic agents demanding something to buy;

• Demand

– desire to own anything, the ability to pay for it, and the willingness to pay at a certain instant in time

• SELLER / SUPPLIER / FIRM

– the economic agents supplying something to sell.

• Supply

– amount of some product producers are willing and able to sell at a given price, given all other factors being held constant (ceteris paribus)

Demand Curve

Supply Curve

MarketMARKET

– place where the SELLERS wanting to sell a good and the BUYERS wanting to buy a good agree on a transaction of that good.

EQUILIBRIUM

– amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers (market clearing)

– Changes in supply and/or demand affect the equilibrium

Market Equilibrium

Market solutions

Consumer surplus

– is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay.

Producer surplus

– is the amount that producers benefit by selling at a market price that is higher than the least that they would be willing to sell for

Total surplus (welfare, economic)

– Sum of consumer and producer surplus. The market equilibrium maximizes total surplus.

Type of Costs• Capital Expenditure/ Capital Cost /Specific Capital Investment (SCI)

– Costs to introduce additional capacity (€/MW)

• Fixed Operation Costs (FOM)

– business expenses that are not dependent on the level of goods or

services produced by the business (€/MW)• Staff, maintenance

• Variable Costs (VOM)

– expenses that change in proportion to the activity of a business

– variable cost is the sum of marginal costs over all units produced.

(€/MWh)• resources

• Total Cost (TC)

– Sum of fixed cost and variable costs

• (Short Run) Marginal Cost (MC)

– is the change in total cost that arises when the quantity produced

changes by one unit

Typical firms’ cost evolution

• AFC – average fix cost

• AVC – average variable cost

• ATC – average total cost

• MC – marginal cost

When marginal cost equals average total cost, average total cost is at its minimum.

Coal Market: Perfect Market

A perfect market

• a. large number of agents

• b. standardized product

• c. no non-price competition

• d. freedom of entry & exit

• e. price taker

• Price is the same for all units of the good!

Coal market can be modeled as perfect market

• a. large number of agents

– yes

• b. standardized product

– Not really, but the differences are not very significant

• c. no non-price competition

– No firm can distinguish its product from competing products on the basis of

attributes like design and workmanship

• d. freedom of entry & exit

– yes

• e. price taker

– No agent as enough power to change market prices• Largest world exporter (seller): Australia (35%)

• Largest world importer (buyer): Japan (20%)

Competitive market profitMarginal cost is the solution that maximizes the profit of SELLERS:

• Maximizing profit=max(Total revenue- Total Costs)• max (𝑷 × 𝑸 − 𝑻𝑪)

• ֞𝒅(𝑷×𝑸−𝑻𝑪)

𝒅𝑸=0

•

𝑷𝒄𝒐𝒏𝒔𝒕𝒂𝒏𝒕 𝑷𝒅𝑸

𝒅𝑸=

𝒅𝑻𝑪

𝒅𝑸

• ֞𝑷 = 𝑴𝑪

Firms decide the quantity to be produced based on marginal costs and sale price.

If the sale price is higher than the marginal cost, then they supply the unit and sell it.

If the marginal cost is higher than the price, it would not be profitable to produce it.

So the production will be carried out until the marginal cost is equal to the sale price. In other words, firms refuse to sell if the marginal cost is higher than the market price

Electricity generation: Natural Monopoly

A natural monopoly• a. single seller

• b. no close substitutes

• c. price giver

• d. blocked entry

• e. non-price competition

• There is no supply curve in an industry which is a monopoly.

• For a monopoly, price doesn´t need not equal marginal cost.

• Difference between monopoly and competition:

– A monopolist can influence price by increasing or decreasing output. A competitive firm can't.

Club goods (artificially-scarce), which are goods that are not-rival in consumption but excludable, are provided most efficiently by a natural monopoly , e.g. water and electricity distribution

Electricity market is /was a natural monopoly

• a. single seller

– Verticalized companies (still in US)

• b. no close substitutes

– Except for heat, most of electricity services cannot be replaced by other resource

• c. price maker /giver

– ability to individually affect either the total quantity or the prevailing price in the market

• d. blocked entry

– Regulation

• e. non-price competition

– quality of service, extensive distribution

Monopoly profitThe maximum profit is where marginal costs are equal to marginal return:

• max𝑷 𝑸 × 𝑸− 𝑻𝑪 𝑸

• ֞𝑷(𝑸) +𝒅 𝑷 ×𝑸

𝒅𝑸−

𝒅(𝑻𝑪)

𝒅𝑸= 𝟎

• ֞𝑷+𝒅𝑷×𝑸

𝒅𝑸=

𝒅𝑻𝑪(𝑸)

𝒅𝑸

• ֞𝑴𝑹 = 𝑴𝑪

For the profit maximizing monopolist, Pm is the price in the monopoly and Qmis the quantity exchanged in this market.

However, where MC = D is where a perfectly competitive industry produces and this is associated with Pc and Qc.

The monopolist therefore produces less and charges more than a purely competitive industry.

Regulated monopoly• Social optimum

– P=MC

– what the industry would produce if it were a purely competitive industry

– However, • if ATC is above price -> economic losses

• if AVC is above price-> shut down

• Fair return

– P=ATC

– enforces a normal profit because the firm must price its output

– This eliminates economic profits and the risk of loss or of even putting the monopolist out of business

Electricity Market in IBERIA

Types of market

• Bilateral contracts

• Future Markets

• Day-ahead market

• Intra-day market

• Anciliary services

Day-ahead market

Intra-day markets

Electricity markets with renewables

Iberian market

Typical thermal generation (Portugal)

Cost of electricity

49

Active and Reactive Power

50

Electricity Bill (Medium Voltage)

51

Electricity Bill (Low Voltage)

52

Time of use (Medium Voltage)

Monday to Friday Saturday Sunday

Winter

Summer

Time of use (Low Voltage – Daily Cycle)

54

Winter

Summer

Time of use (Low Voltage – Weekly Cycle)

Monday to Friday Saturday Sunday

Winter

Summer