Regulatory tools to enhance security of supply at the generation level in electricity markets

Resumen

The energy industry, and particularly the electricity sector, has been subject to major reforms over the recent decades. Until these processes started, the activity that we now call generation supply was a part of the complete chain of activities of vertically integrated utilities and was therefore performed as a public service or as a regulated monopoly. Since there are no fully comparable energy systems, these reforms have taken very different forms, but all of them have shared a common approach, consisting in taking steps towards introducing competition at any of the activities in which it was considered feasible. Ideally competition is useful since, if properly implemented, it sends sound economic signals market prices both to electricity consumers and suppliers that are supposed to drive their decisions in the direction of efficiency. These reforms have been traditionally denoted as liberalization or deregulation processes, terms which might appear to be slightly misleading, since they could easily be understood as just a relaxation of government limitations, leading to a weaker or lighter-handed regulation. From the regulatory perspective, the fact is that in the case of the energy industry, the reform has entailed exactly the opposite: rather than a deregulatory process, it has been (and it is still being and still expected to be) an intensely re-regulatory one. In this sense, the term restructuring has sometimes been preferred in some electric power systems (particularly in the United States). The discussion developed in this thesis, the need for the regulator's intervention to complement electricity markets in order to guarantee security of generation supply, is a good illustration of this paradox: the deregulation in electricity systems has accentuated the crucial need for reinforcing regulation. This regulatory intervention, which is carried out in order to drive the market towards the most efficient outcome, is in practice implemented by introducing additional mechanisms, roughly speaking additional sets of rules. These mechanisms are regulatory tools aimed to provide additional (and optimal) signals to market agents. To perform this role properly, the regulator needs another sort of tools: assessment tools (models of different nature) either to evaluate the market performance and thus detect the need of introducing additional mechanisms, or to assist in the design of these mechanisms (if needed), by evaluating ex-ante the impact of the regulatory solutions that could be considered. The analyses carried out in this thesis are focused on these regulatory tools (the mechanisms and the models). In the context of the four dimensions of the security of generation supply problem (security, firmness, adequacy and strategy expansion policy), we have found that there is a certain consensus around the idea that the security dimension can be tackled by means of operation reserves markets, where the reserves requirements are prescribed by the System Operator. On the other extreme, it is also commonly agreed that the Strategic Expansion Policy has to be solved through the implementation of additional out-of-the-electricity-market mechanisms (e.g. feed-in tariffs or cap and trade mechanisms). Nowadays, in the liberalized context, the discussion on the necessity of regulatory intervention is more acute in the other two dimensions. The debate in these two dimensions (particularly on the adequacy dimension) has been, and still is, quite intense. For many different reasons, ensuring a secure generation supply at these dimensions is still far from being an evident matter as it seems that a system driven by purely market-based mechanisms ensures neither an efficient resource management nor the required long to very long-term expansion. In the thesis, we have mainly focused on these adequacy and firmness dimensions. Although some general analyses including all the four dimensions are also carried out (see Chapter III), unless explicitly mentioned, it is considered that the problems being tackled are those stemming from these two intermediate dimensions. The contributions of the thesis have been gathered around three differentiated but interrelated areas of the security of supply regulatory problem: first, the diagnostic of the problem, second, the analysis and design of mechanisms (rules and incentives) to tackle the problem, and third, the development of simulation modeling tools to support both the performance of the system and also to assess the impact of the implementation of these regulatory mechanisms.