IEEE PES Summer Meeting, Chicago, July 2002
Pontificia Universidad Católica de Chile
Escuela de Ingeniería
Departamento de Ingeniería Eléctrica
Application of the Power
Exchange-Independent System
Operator Model in Chile
David Watts
Paulo Atienza
Hugh Rudnick
h.rudnick@ieee.org
www.ing.puc.cl/power
Contents
z Introduction
(Latin American reforms)
z Chilean market
z Power Exchange – Independent System
Operator Model (PX-ISO)
z Application to the Chilean market: Benefits
and risks
– Market power and adequacy analysis
z Conclusions
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IEEE PES Summer Meeting, Chicago, July 2002
Objectives
z
z
Describe Chilean reform process in the Latin
American environment.
Analyze the actual regulatory framework and its
performance
– Energy crisis and its results
z
Describe PX – ISO Model
– Identify the risks associated with the implementation of
the proposed model in the Chilean market
Latin American Reforms 1
z High load growth
z Mainly hydro systems
z Lower PGB and KWh per capita than developed
nations
z ¿Why reform?
– State unable to continue high investments
– Other reasons:
z Political intervention (very low tariffs)
z Management problems
z High losses
z Economic and financial crisis
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IEEE PES Summer Meeting, Chicago, July 2002
Latino American Reforms 2
1997-9
CENTRAL AMERICA & PANAMA
1994
COLOMBIA
1993
PERU
1998
BRAZIL
1994
BOLIVIA
1982
CHILE
1992
ARGENTINA
Latin American Reforms 3
z Objective:
To establish conditions for
economic efficiency and attract private
investment
z Centralized planning and operation replaced
by market-oriented approaches
z Only subsidiary role by State:
z
z
Intervenes only when private sector does not
Monopoly regulation and control
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IEEE PES Summer Meeting, Chicago, July 2002
Wholesale Market
z
Wholesale market deregulation
– Large consumers (FREE): unregulated prices, use bilateral
financial contracts
– Small consumers (REGULATED): pass through
z
Competition at generation level with centralized
generation dispatch (Poolco model)
– Audited costs: Chile, Perú, Brazil, Central America
– Bids: Colombia, Argentina
Chilean Wholesale Market (2000)
Central SIC
SING
Northern SING
Composition
Hydro: 61%
Thermal: 39%
Hydro: 0%
Thermal: 100%
I
Consumers
(% Load)
Regulated: 60%
Free: 40%
Regulated: 10%
Free: 90%
C
Installed capacity:
6642 MW
3352 MW
Max Demand
4576 MW
1175 MW
Energy Consumption
29577 GWh
9327 GWh
Others
Mainly residential, 90%
of Chilean population.
Mainly industrial and
mining
S
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IEEE PES Summer Meeting, Chicago, July 2002
Chilean Wholesale Market
z
z
z
z
z
Central cost based dispatch, by the pool CDEC (Centro de
Despacho Económico de Carga)
Thermal Gen variable costs are audited
Hydro Gen dispatched according to the alternative cost of
water calculated by CDEC models
Marginal cost transactions only among generators
Capacity payment: to generators contributing with capacity in the
yearly peak demand period (may-sep). Depends on availability, time
to start and time to full load. Independent of dispatch
z
z
Capacity price defined by regulator every six month, fixed
cost of gas turbine.
Contracts are financial hedges
Chilean Wholesale Market
Small
Generator
CDEC (pool)
Generator
CMg
Physical,
economic and
commercial
system operation
by CDEC (pool)
Generator
Transmitter
Regulated
Price
Distributor
Regulated Price +
VAD (value added
distribution cost)
Regulated
consumer
Bilateral financial
contracts
Unregulated
consumer
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IEEE PES Summer Meeting, Chicago, July 2002
Actual Chilean Model: Results
Price Reductions
Second Chilean System: Northern
SING (Thermal
Main Chilean System: Central SIC
(Hydrothermal)
Actual Chilean Model: Results
z Price
reductions (Mainly at SING)
z Investments following high growth (but it
was reduced at SIC after crisis)
z Tight
poolco has limited market power
z Prices reflecting marginal costs
z Increasing coverage, security of supply and
efficiency
z State focused on other social needs
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IEEE PES Summer Meeting, Chicago, July 2002
Electricity Chilean Crisis
z Centennial
drought 1998-99
z Important natural gas combined cycle
failure
z Crisis in Central System (SIC), mainly
hydro system
z Rotating blackouts
Electricity Chilean Crisis
z Reservoir
Stored Energy
7.000
5.000
4.000
3.000
2.000
1.000
RAPEL
INVERNADA
COLBUN
CHAPO
07-2001
04-2001
01-2001
10-2000
07-2000
04-2000
01-2000
10-1999
07-1999
04-1999
01-1999
10-1998
07-1998
04-1998
01-1998
10-1997
07-1997
04-1997
01-1997
10-1996
07-1996
04-1996
01-1996
10-1995
07-1995
04-1995
01-1995
10-1994
07-1994
04-1994
0
01-1994
GIGAWATTS HORA (GWh)
6.000
LAJA
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IEEE PES Summer Meeting, Chicago, July 2002
Electricity Chilean Crisis
z Poor
handling of supply crisis
z Conflicts in wholesale market (deficiencies
in market design)
– Absence of prices to cope with crisis
– Contracts do not oblige generators to serve or
compensate (law changed during emergency)
z Investment
trend slows down
z No new agents coming into the market
Chilean Reform Draft
z
Creation of Power Exchange PX and Independent
System Operator ISO replacing the actual pool.
– PX: Economic and commercial operation. It performs
auctions, settlement process, and manages day ahead
and hour ahead markets.
– ISO: Physical operation. It operates transmission grid.
It validates PX operations making adjustments if
necessary, it determines additional generation and
ancillary services.
z
The law draft proposes to use annual bids in the
first years to mitigate market power.
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IEEE PES Summer Meeting, Chicago, July 2002
PX-ISO Model
Bids
Transmission
Traders
Transmission
Power
Exchange
ISO
Physical
Operation
Economic
Generators
Commercial
and
Operation
Bids
Contract
s
Informs
Standardized Forward
Markets
Demand
Real Time Markets
Demand
Distribution
Retailers
Major Consumers
Supplies
Regulated
Consumers
Benefits
z
z
Transparency and efficiency in commercialization
Independence of the market operator from the
other agents (present pool is managed by generators and
transmission companies with important governance problems)
z
z
z
Development of ancillary market
Development of future and options market
Less centralized decisions
– No more discussions about the real marginal cost for transfers
among generators
– No more centralized models estimating marginal cost of energy
and water usage
– No more discussion about the costs used for dispatch
z
Etc.
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IEEE PES Summer Meeting, Chicago, July 2002
Major Risks in Chilean Market
z
Market Power*
– Cost based scheme and centralized dispatch of water
reservoir contribute to mitigate MP
z
Adequacy** problems
– Energy price alone is a weak signal for investment of
capacity in hydro systems
z
High contract levels desirable
– When spot market is so profitable, it could be attractive
to participate in spot market instead of full contracts
coverage
* MP: The capacity of a firm to establish prices above the marginal cost.
** Adequacy: Secure Peak Load Capacity in Long Term
Market Power
z Highly
concentrated ownership (SING – SIC)
Central SIC Market Share
(according to installed capacity)
Northern SING: Market Share
Colbun S.A
16%
AES Gener
S.A
22%
Others
7%
Endesa S.A.
55%
(according to Installed Capacity)
Endesa
22%
Southern Energy
20%
28%
AES Gener
30%
Tractebel
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IEEE PES Summer Meeting, Chicago, July 2002
Market Power at SIC
z
z
z
z
z
Small reserve
Largest company almost has a technology monopoly over
the hydro resources
Very high hydro dependence
Strategic use of water
Market simulations with free bids:
z
z
z
z
z
Watts – Rudnick: Annual bids dispatch would bring price increases
around 17-27% in Chile
Villar – Rudnick: Short term dispatch using a Nash-Cournot
equilibrium also showed important M.P. in Chile
Pereira-Barroso-Kelman: Strategic use of water in Brazil
High importance of regulated consumers (60% of demand )
Transmission constrains (a strategic issue)
Simulation exercise in main Chilean system
-Nash-Cournot simulation,everything sold in spot market
Resultant prices
100
90
80
Price
70
Competitive
60
50
Unit
games
40
30
Company
games
20
10
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Periods
Game simulation (competitive market; games by generating units
and games by companies, maximizing benefits)
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IEEE PES Summer Meeting, Chicago, July 2002
Market Power at SING
z
Lower Risk of MP
– Excess installed capacity
– No hydro dependence
– High importance of free consumers (90% of demand).
Their bilateral contracts mitigate MP.
z
This system has important problems of continuity
and reliability of service, so an explicit payment
for ancillary services in the new scheme could
help
Adequacy & Capacity Payment
z
z
Adequacy is a very big issue in hydro systems
Different ways to remunerate the Capacity
– The explicit Capacity Payment has worked well.
– Chilean law draft eliminated Capacity Payment, going
to a simple energy price scheme.
z
Why is the Capacity Payment important ?
– It is a strong signal for new capacity investments
– It reduces the entrant risk, anticipating the entrance of
new agents with lower discount rates.
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IEEE PES Summer Meeting, Chicago, July 2002
Conclusions: Is it the Solution?
z
z
z
z
PX-ISO Model could bring some improvements to the
Chilean model (transparency, independency, financial market
development, etc.).
The model would work better in Northern SING but
problems need to be solved at Central SIC before its
establishment.
The new model does not present a better solution for market
power, strategic use of water, transmission constrains than
the older one.
Price signals for new capacity additions and promotion of
new agents are not clearer under this scheme.
Conclusions: Is it the Solution?
z The proposed model needs some adjustment to be applied to
the main Chilean market (SIC), and to effectively avoid a
new crisis and MP exercise.
z The proposed use of annual bids could solve transitorily
some of these troubles, but denaturalizes the PX.
– Possible interconnection of SING-SIC-SADI (Chile-Argentina)
would help, opening the market to new agents, but some of them are
the same global energy companies installed in Chile now.
– The entrance of new economic combined cycle plants would promote
competition at base level. With the sustained growth of the demand
and the installation of these plants, the strategic hydro plant will loose
relevance quickly.
z Chilean system needs to increase number of free clients by
reducing their power size.
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IEEE PES Summer Meeting, Chicago, July 2002
Pontificia Universidad Católica de Chile
Escuela de Ingeniería
Departamento de Ingeniería Eléctrica
Application of the Power
Exchange-Independent System
Operator Model in Chile
David Watts
Paulo Atienza
Hugh Rudnick
h.rudnick@ieee.org
www.ing.puc.cl/power
14