1423class16

1423class16 - 14.23 Government Regulation of Industry Class...

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14.23 Government Regulation ± of Industry± The Case of Class 16: Problems of De-regulation - Californian Electricity 1
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Outline • Markets: by accident or design? • What is the nature of the electricity market? • General principles of market design • The design of the Californian electricity market • The Californian Power Crisis of 2000 • Lessons for market design 2
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A Competitive Electricity Market Source: Hogan (1998), http://ksghome.harvard.edu/%7E.whogan.cbg.Ksg/empr1298.pdf 3
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Elements of an Electricity Market • Generators • Transmission Owners • Independent System Operator (ISO) • Power Exchange (energy market) • Balancing Market • Ancilliary Services • Distribution Companies • Power Retailers • Regulators e.g. CPUC and FERC 4
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Economics of a Competitive Electricity Market (Hogan, 1998) • Short-Run market • Transmission congestion • Long-run market contracts • Scheduling and balancing • Long term investment • Access fees to recover embedded costs • Security concerns and capacity reserves 5
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Supply and Demand for Electricity Source: Hogan (1998), http://ksghome.harvard.edu/%7E.whogan.cbg.Ksg/empr1298.pdf 6
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Transmission Constraint Costs Blue and Red are bilaterally contracted generation at A Source: Hogan (1998), http://ksghome.harvard.edu/%7E.whogan.cbg.Ksg/empr1298.pdf 7
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Issues in the design of markets (Chao and Huntington, 1998) • Markets are not an accident! Primary motivation is to promote long-run efficiency gains through competition that stimulates technical innovation and efficient investment. Requires unbundling and new institutions, this will add transaction costs. Efficient short run price signals are essential for long run efficiency. Market design should exhibit compatibility across regions and consistency across market segments. 8
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Issues in the design of markets Policy markers tend to undervalue the importance of customer choice and product diversity in achieving long run welfare maximisation. Some long-run decisions will require public
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This note was uploaded on 11/18/2011 for the course ECON 14.23 taught by Professor Daronacemoglu during the Fall '09 term at MIT.

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1423class16 - 14.23 Government Regulation of Industry Class...

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