Table of Contents

PREFACE …………………………………………………………………………………………………………………………. VII

CONTENTS ……………………………………………………………………………………………………………………… IX

CHAPTER 1 INTRODUCTION ……………………………………………………………………………………….. 1
1-1 Background ……………………………………………………………………………………………………………. 2
1-2 Research objective and questions …………………………………………………………………………… 11
1-3 Research approach …………………………………………………………………………………………………. 15
1-4 Thesis structure ………………………………………………………………………………………………………. 17
1-5 Thesis overview ……………………………………………………………………………………………………….. 27

CHAPTER 2 THE LIBERALIZATION PROCESS AND THE DEVELOPMENT OF POWER EXCHANGES ……………………………………………………………………………………………… 29
2-1 The European legal framework …………………………………………………………………………….. 30
2-2 The role of electricity trading ………………………………………………………………………………….. 39
2-3 The emergence of power exchanges ……………………………………………………………………… 41
2-4 The “European” model: a hybrid model ………………………………………………………………….. 48
2-5 Conclusion …………………………………………………………………………………………………………….. 57

CHAPTER 3 THEORY OF MARKET DESIGN FOR ELECTRICITY ………………………………………… 59
3-1 The issue of market design …………………………………………………………………………………….. 60
3-2 Industry structure …………………………………………………………………………………………………… 64
3-3 Wholesale market ………………………………………………………………………………………………….. 68
3-4 Marketplace design ……………………………………………………………………………………………….. 81
3-5 Conclusion …………………………………………………………………………………………………………….. 87

CHAPTER 4 ECONOMIC THEORY OF MARKET FUNCTIONING …………………………………………. 89
4-1 References models: perfect competition/monopoly ……………………………………………………… 90
4-2 Oligopoly competition ……………………………………………………………………………………………. 92
4-3 Characteristics of electricity markets ……………………………………………………………………… 97
4-4 Economic theory applied to wholesale electricity: recent developments ……………………….. 103
4-5 Conclusion …………………………………………………………………………………………………………….. 118

CHAPTER 5 THE FUNCTIONING OF POWER EXCHANGES ………………………………………………… 119
5-1 Trading on a power exchange ………………………………………………………………………………….. 120
5-2 Price formation mechanisms ………………………………………………………………………………….. 122
5-3 An auction theory approach of power exchanges’ functioning ……………………………………… 127
5-4 Physical aspects ………………………………………………………………………………………………………. 130
5-5 Power exchange and others markets …………………………………………………………………………. 132
5-6 Conclusion …………………………………………………………………………………………………………….. 139

CHAPTER 6 PARTICIPANTS’ BEHAVIORS ON POWER EXCHANGES ……………………………….. 141
6-1 Introduction to firm’s behaviors ……………………………………………………………………………….. 142
6-2 Trading strategies involving a power exchange ………………………………………………………… 146
6-3 Bidding behaviors ……………………………………………………………………………………………………. 151
6-4 Example of specific bidding on power exchange related to market/marketplace design ……. 158
6-5 Conclusion …………………………………………………………………………………………………………….. 171

CHAPTER 7 COMPETITION AND POWER EXCHANGES …………………………………………………….. 173
7-1 Defining competition ……………………………………………………………………………………………….. 174
7-2 Competitors in generation and interconnections ……………………………………………………….. 178
7-3 Competitors on power exchanges …………………………………………………………………………….. 188
7-4 Prices and volumes analysis ……………………………………………………………………………………. 194
7-5 Conclusion …………………………………………………………………………………………………………….. 208

CHAPTER 8 POWER EXCHANGES AND MARKET INTEGRATION ………………………………………. 209
8-1 The creation of a common market …………………………………………………………………………… 210
8-2 Test for market integration ……………………………………………………………………………………. 218
8-3 Results of linear correlation analysis ………………………………………………………………………. 228
8-4 Results of regression analysis ………………………………………………………………………………… 232
8-5 Conclusion …………………………………………………………………………………………………………….. 237

CHAPTER 9 POWER EXCHANGES AND TRANSMISSION PRICING ………………………………………. 239
9-1 Transmission pricing ……………………………………………………………………………………………….. 240
9-2 Case studies: the Nordic countries and PJM ……………………………………………………………. 250
9-3 Transmission pricing in the EU ………………………………………………………………………………… 261
9-4 Empirical evidences of inefficient transmission pricing ………………………………………………….. 275
9-5 Conclusion …………………………………………………………………………………………………………….. 286

CHAPTER 10 POWER EXCHANGES: CORNERSTONE FOR “MARKET” REGULATION ………………. 289
10-1 Redefining regulation …………………………………………………………………………………………….. 290
10-2 Difficulties for designing and monitoring markets in Europe ………………………………………… 295
10-3 Toward European “market” regulation: the role of power exchanges ……………………………. 315
10-4 Conclusion ……………………………………………………………………………………………………………. 337

CHAPTER 11 CONCLUSION ………………………………………………………………………………………… 339
11-1 Research results ………………………………………………………………………………………………………. 340
11-2 Follow up research ……………………………………………………………………………………………….. 343
11-3 Final remarks …………………………………………………………………………………………………………. 345

APPENDIX 1 THE IMPORTANCE OF “MARKET” REGULATION: LESSONS FROM CALIFORNIA ……………………………………………………………………………………………………………. 349
A1-1 Introduction …………………………………………………………………………………………………………….. 350
A1-2 Overview of the Californian market design ………………………………………………………………. 353
A1-3 Poor market design? ……………………………………………………………………………………………… 356
A1-4 Lessons for European markets ………………………………………………………………………………… 359

APPENDIX 2 DETAILS OF ADF UNIT ROOT TESTS, ESTIMATES OF REGRESSION MODELS AND ECONOMETRIC DEFINITIONS …………………………………………………………………… 363
A2-1 Details of ADF unit root tests ………………………………………………………………………………….. 364
A2-2 Estimates of regression models …………………………………………………………………………….. 368
A2-3 Econometric definitions …………………………………………………………………………………………. 371

REFERENCES ………………………………………………………………………………………………………………. 373

SUMMARY ……………………………………………………………………………………………………………………… 391

SAMENVATTING …………………………………………………………………………………………………………… 395

RÉSUMÉ …………………………………………………………………………………………………………………………. 399

PUBLICATIONS ……………………………………………………………………………………………………………. 403

CURRICULUM VITAE ……………………………………………………………………………………………………… 405

NGINFRA PHD THESIS SERIES ON INFRASTRUCTURES …………………………………………………… 105

Abstract

The electricity sector worldwide is undergoing a fundamental transformation of its institutional structure as a consequence of the complex interactions of political, economic and technological forces. The way the industry is organized is changing from vertically integrated monopolies to unbundled structures that favor market mechanisms. This process in Europe, known as the liberalization process, has had a wide impact on the European electricity industry. The focus of this dissertation is an analysis of the role of electricity power exchanges in the recently liberalized electricity markets of Europe. In the context of creating ‘a’ competitive electricity market at a European level, the key questions considered are the functioning of these power exchanges with respect to electricity characteristics, market design and regulatory framework. In Europe, very little attention has been paid to the role of these new marketplaces and to the issue of market design in general. Hence the main purpose of this work was to analyze how these marketplaces facilitate the trading of electricity and the role they can play in the construction of a pan-European competitive electricity market. An analysis of power exchange requires taking into account the ‘double-duality’ of such institutions. One, power exchanges are both a market and an institution. As a market they facilitate the trading of electricity and determine an equilibrium price. As an institution power exchanges have their own objectives and constraints, and play a role in the market design of the overall electricity market. Two, the relationship between electricity power exchanges and liberalization is neither linear nor one way: liberalization encourages the birth of such marketplaces yet marketplaces are more than the results of such process, they are also a driving force of the liberalization process.

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