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Energy Policy 38 (2010) 55825599

Contents lists available at ScienceDirect

Energy Policyjournal homepage: www.elsevier.com/locate/enpol

Market power analysis for the Iranian electricity marketMohammad Hossein Asgari n, Hassan MonsefSchool of ECE, University of Tehran, North Kargar Avenue, P.O. Box: 14395-515, Tehran, Iran

a r t i c l e in f oArticle history: Received 2 September 2009 Accepted 29 April 2010 Keywords: Iranian electricity market Market power Market power mitigation

a b s t r a c tThe market power problem in Iranian electricity market is addressed in this study. This paper by using various structural indices of market power and reviewing market results analyzes the intensity of competition in Irans electricity market and examines whether this market is functioning at an appropriate level of efciency. In this article the most well-known indices of market power are calculated in two approaches for two different scenarios (current situation and future outlook of generation sectors ownership in Irans power industry). Comparing the results of these scenarios promises more competitive market for the second scenario. Calculating Residual Supply Index for Irans power market shows despite admissible values of concentration ratios, due to supply scarcity during periods when the demand is close to the total available capacity, some suppliers can exercise market power even with a relatively small market share. The most important price and load indices like weighted average prices and load/price duration curves of Iranian electricity market during March 2007March 2008 are also analyzed in this paper. These results imply the existence of economic withholding. The main limiting factors of competition and signicant implemented countermeasures for market power mitigation in Irans electricity market are also mentioned. & 2010 Elsevier Ltd. All rights reserved.

1. Introduction Like most developing countries, Iran is moving towards a competitive power market with the assumption that the competition will result in technological progresses, better services, higher efciency, enhanced reliability, as well as less costly delivery of electricity to consumers. Experiences with restructured electricity markets have demonstrated that the presumption that markets will intrinsically produce competitive results is not justied and power markets behave more like an oligopoly than a perfect competitive market. One of the main concerns related to industry liberalization and market efciency is market power. Due to some characteristics of Irans electricity market, it seems that competition is just conceivable in certain hours and in remaining hours some pivotal suppliers abuse market situation and exercise market power. Market power may be dened as owning the ability by a seller, or a group of sellers, to drive the spot price over a competitive level, control the total output, or exclude competitors from a relevant market for a signicant period of time. A market power could hamper the competition in power production, service quality and technological innovation. The net result of the existence of market power is the transfer of wealth from buyers

Corresponding author. Tel.: + 98 21 88705484; fax: +98 21 88700562. E-mail addresses: mh.asgari@ieee.org, asgari20012002@yahoo.com (M.H. Asgari), hmonsef@ut.ac.ir (H. Monsef). 0301-4215/$ - see front matter & 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2010.04.056

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to sellers through a misallocation of resources (Shahidehpour et al., 2002). Assessment of competitiveness and market efciency, detection of dominant suppliers, identication of actual exertions of market power, investigation of gaming opportunities, implementation of mitigation measures and modication of market rules are the main responsibilities of market monitoring units (MMUs). Many tools for detection and identication of market power have been developed and many reports and articles have been published about the evaluation of market power in various electricity markets throughout the world. Competitiveness of Korean, Singaporean, Colombian, UK, Nordic, USA, European, German and Texas electricity markets are analyzed in Ahn and Niemeyer (2007; Chang (2007; Garcia and Arbelaez (2002; Green (2006; Hellmer and Warell (2009; Helman (2006; Lise et al. (2008; Weigt and Hirschhausen (2008 and Zarnikau and Lam (1998), respectively. Analyzing market power in different electricity markets not only uncovers market design aws, restricts market power exertions, identies strength and weak points of markets and provides recommendations for policy makers but also sends economic signals to new entrants and may help them in decision making process. This paper examines whether Irans electricity market is functioning at a workable level of competition. To fulll this aim and for analyzing the potential of market power exertions, structural indices of market power (such as the largest market share, 4- and 8-rm concentration ratios, Herndahl Hirschman Index (HHI), entropy coefcient and Residual Supply Index (RSI))

M.H. Asgari, H. Monsef / Energy Policy 38 (2010) 55825599

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for Irans electricity market are calculated in two approaches (in both capacity based and energy based methods) for two different scenarios and the results are compared with each other. The rst scenario represents the current situation of Irans electricity market that each Regional Electric Companies (RECs), Regional Water Companies (RWCs) and private generators are considered as autonomous players. The second scenario corresponds to the future outlook of generation sectors ownership in the countrys power industry (nal step of horizontal unbundling process). In this scenario, it is assumed that RECs and RWCs are segregated to smaller generation companies and all these companies participate in the market individually. The topmost important price and load indices of Iranian electricity market such as weighted average prices (WAPs), requested load (RL), load duration curve and price duration curve are also analyzed in this paper. On the whole, this study by using structural indices and analyzing market results concludes that market power is an inuential feature of Iranian electricity market and should be addressed by more competitionoriented activities. The remainder of this paper is organized as follows: in Section 2, the restructuring process and its objectives in Irans electricity industry are briey explained. Section 3 introduces Irans electricity market and points out the main characteristics of this market. In Section 4, concepts and the most important topics related to market power are reviewed. In Section 5, different structural indices of market power are calculated in two approaches for two scenarios for Irans power market and the results are compared with each other. Market results and most important price and load indices of the countrys power market are analyzed in Section 6. The market power sources and most signicant fullled activities for mitigating market power in Iranian electricity market are discussed in brief in Section 7. Section 8 concludes this study.

publicly owned and are administrated by the State. By the traditional dominant interpretation of this article, all parts of the electricity generation industry must be governmental. But the words of law are electricity supply and these words opened the way for a new interpretation by which the supply is meant as be sure from supplying the generation (Ghazizadeh et al., 2007). This new interpretation facilitates the next legal actions. The next signicant legal actions for reforming Irans power industry are summarized in Table 1. The main objectives of creation of competitive environment and privatization in electricity industry in Iran are as follows:

Reduction the duty of the government in the areas of activitiesin which natural monopoly does not exist.

Clarication and separation of costs of generation, transmission and distribution of electricity.

Provision of just and fair competitive environment for generators and distributors of electrical energy and enhancement of the quality of their services. Improvement of productivity, reduction of losses and consequently reduction of generation costs of power units, which has a great competitive impact on industrial production of the country at the world market level. Providing the end user with the option to select the best supplier, among various energy suppliers. Provision of essential facilities for direct trade between buyers and sellers of electricity and operation of transmission and sub-transmission networks as transit networks. Provision of necessary incentives for attraction of the private sector to invest on generation of electricity in collaboration with foreign investors. Development of managerial potential. Development of the capacities for domestic contractual and consulting activities. Development of domestic manufacturing of power plant, transmission and distribution equipment (Iran Power Industry Information and Data Center, 2008).

2. Electricity restructuring in Iran The Ministry of Energy (MOE) is responsible for the energy policy in Iran. To organize the supervisory activities of the government in the elds of operation and development of the electric power industry within the framework of the policies of the MOE, the Expert Holding Company of TAVANIR (Iran Power Generation and Transmission Company) has been established. The operational responsibilities of MOE have been vested to the fully state-owned TAVANIR Company since 2001. At present, TAVANIR Company is responsible for the management of 16 Regional Electric Companies (RECs), 32 Generation Management Companies (GMCs), 42 Distribution Companies, Iran Power Development Co. (IPDC), Iran Renewable Energy Organization (SANA), Iran Ene