Partie 2 ou 3 Nouvelle conomie lectrique - Centre International de ...

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Partie 2 ou 3 Nouvelle conomie lectrique - Centre International de ...

- 5 -The competition-based market would guarantee the collective efficiency of the competitors’investments on the basis of the net discounted value of the equipment to be installed. In thisdesign, the entry of producers not vertically integrated and not involved in long-termarrangements with suppliers would be a natural way to develop capacities, as confidence hasbeen established in the quality of competition on the wholesale market and the liquidity of thebilateral contracts market (Newbery, 2000, p. 417). The liquidity of the markets would easethe allocation of factors without running a risk of excess entries. This market path would beallowed by the technological progress. The entries would be facilitated by the presence ofmarket-divisible techniques, an example being the gas turbine technique: the existence of suchtechniques would allow the market risk to be limited.Still from this point of view, the electricity market would correspond to a classic assetcommoditymarket with a classic price cycle with a high price step accompanying theconstruction of new capacity. If the market prices are subject to daily, weekly and seasonalvolatility, which reflects the tension between instant supply and instant demand, they alsofollow a structural cyclical movement caused by rigidity of supply and demand over a longperiod (construction period, life span of equipment, time taken to adapt to demand). Thiscycle shows itself in a significant increase in seasonal volatility during the step of scarcity oncapacity reserves. In order not to distort the adaptation of supply to meet demand, pricemovements must be allowed complete freedom of play regardless of their magnitude and levelof volatility (Ford, 2001).Still from this point of view, the “capacity adequacy” has to be managed also from theconsumer part. Reliability (or security) and capacity adequacy should be considered as twoseparate goods. Instant reliability can not be treated as a private good because of inherentexternalities between physical flows; it is managed by the System Operator to which technicalauthority has to be given on the commercial transactions for offering the “reliability” of thesystem with resources procured competitively by complementary markets such as thebalancing mechanisms. On its side “capacity adequacy” in peak should be treated asinsurance against temporary price spikes or shortages (Stoft, 2002 ; Oren, 2003). Such servicecan be treated as a private good with each consumer able to choose their level of protectionand choosing among a range of contracts of hedging. This insurance system with its variety ofcontracts would contribute to the profitability of new peak and base-load equipment.1.2. The economic and social limitations of the pure market incentive systemThe justifying reference of a commodity price cycle that should be left to develop unhinderedis untenable, because of the shortage risk and the significant price volatility. The long cycleshows itself by the extreme amplification of the seasonal and daily volatility during the stageof capacity tension. The main reason of this exceptional volatility is the inelasticity of instantdemand, which authorises very steep price rises without even the explicit collusion of theproducers: “on a market on which consumers cannot react to prices in a situation of severecapacity tension, there are no limits to the prices that the producers can fix when a shortfallappears” (R. Green, 1998).By comparison, aluminium prices oscillate between USc 50 and 10 per pound and oil pricesbetween $10 and $30 per barrel, while gas prices can vary by 50% around the average price.Electricity prices, meanwhile, can show seasonal fluctuations of 200-300%, with still higherpeak price episodes with a factor of 50-500 lasting for a few hours or a few weeks with anypossibilities to anticipate their duration. Price volatility reaches an astonishing level ofincentives inv elec north south energy policy.doc created by Dominique Finon on 14/05/2004printed by JQ on 12/22/2004 at 11:43 5/31

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