Course description:

This new course focuses on market power in electricity markets.  Market power remains a difficult issue in the design and functioning of electricity markets.  We will define and analyze market power, particularly focusing on issues that are unique to electricity markets such as transmission constraints.  Although market power is a problem in all electricity markets, we will focus on offer-based markets that involve locational marginal pricing.  Topics include:

• Background:
  • Variable operating costs,
  • Marginal costs,
  • Price-taking assumption,
  • Offer-based economic dispatch,
  • Computational issues,
  • Forward contracts.
• Market power in the absence of transmission constraints:
  • Defining market power: economics versus regulatory focus, collusion versus unilateral actions, economic and physical withholding, efficiency and equity implications of withholding, quantity withheld, price mark-up, price and quantity distortion,
  • Exercising market power: forward markets, long-run reactions, marginal and non-marginal generators, effects of market power, significance,
  • Modeling market power: profit maximization, monopoly, Cournot model, Herfindal-Hirschman index (HHI), Lerner index,
  • Designing to reduce market power: market share and demand elasticity, forward contract and retail obligations, demand uncertainty, fixed offers over multiple intervals, elasticity of demand in ancillary services,
  • Predicting market power: factors that HHI ignores, problems with Lerner index
  • Monitoring market power: regulatory versus economic, fixed costs, measurement of market power, market power tests,
• Empirical analysis of mark-up and withholding:
  • England and Wales in 1992-1994,
  • California in 2000,
  • ERCOT in 2001-2003,
  • ERCOT in 2005,
  • Pivotal offers,
  • Reconciling the economic and commercial models,
  • Distinguishing design flaws from market power.
• Equilibrium analysis of market power:
  • Model formulation,
  • Market operation and price formation,
  • Equilibrium and solution,
  • Validity, uses, and limitations of equilibrium models.
• Transmission constraints:
  • Modeling market power, revisited,
  • Transmission constraints and geographical market power,
  • Shift factors and the DC power flow,
  • Offer-based transmission-constrained economic dispatch,
  • Ad hoc indices of market power with transmission constraints,
  • Consideration of incentives when transmission constraints bind,
  • Ownership of generation at multiple buses,
  • Pivotal offers,
  • Transmission and equilibrium analysis,
  • Transmission, equilibrium, and transmission rights.
• Market power mitigation,
  • Price and offer caps,
  • Texas two-step,
  • Pay-as-bid versus market clearing prices,
  • Long-term contracts,
  • Limitations on changing of parameters,
  • FTR ownership rules,
  • Demand response.

The course will integrate a number of concepts from economics, electric power, and optimization theory.  The emphasis will be rigorous and we will present various theorems and results formally.

Expectations

Please come to office hours with prepared questions.

I may have to cancel one or two classes during the semester in order to attend conferences. 

I do not take attendance and you are free to attend or not attend class as you choose.  However, if you come to class, please be prompt. 

Textbook

• Steven Stoft, Power System Economics: Designing Markets for Electricity, IEEE Press and Wiley Interscience and John Wiley and Sons, Inc., Piscataway, NJ, 2002. 

Pre-requisites:

The class will build on a background of undergraduate economics, undergraduate electric power or circuit theory, and continuous optimization theory.  I do not expect every student to have a strong background in all three areas.  However, if you do not have a background in at least two of these areas, you may struggle in the class.  I am encouraging people to take the course as credit/no credit if they are concerned about their background.

For people from industry:

I am strongly encouraging people from industry to attend.  The Wednesday evening format is to make it easier for those with full-time jobs to attend.  There are two basic options for attendance by non-students:

• Auditing: Use this option if you do not need credit for the course.  Come to the first class day and I will give you a signed form that you will submit, together with $20, to the Registrar. 
• Non-degree:  Use this option if you want credit for the course or your employer requires that you take the course for credit.  Apply through the Texas Common Application website, https://www.applytexas.org/adappc/commonapp.WBX, for graduate admission to The University of Texas at Austin.  You should create a new admission application to The University of Texas at Austin.  Select "Graduate, U.S." admission or "Graduate, International," as appropriate, and choose Fall 2006 admission.  Select admission to the "ECE-Energy Systems" major.  Enter the biographical information on "Page 1" and the other required information on the successive pages.  On "Page 2" be sure to check the "Nondegree Graduate Student" box on question 13.  The application fee is $50 and the online application must be completed and submitted by August 1, 2006.  As well as submitting the online application, you will need to submit transcripts of your degrees.  Once admitted, the tuition and fees will be between $1500 and $2000 for in-state residents and approximately $3500 to $4000 for out-of-state.

Homework policy:

There will be occasional homeworks in this class.

Quiz and exam policy:

No make-up exams will be given.  Excused absence from the final exam must be obtained in advance.  In this case, the student's final exam grade will be substituted for the missed exam.  In the case of an excused absence from the final exam, the course grade will be based on the homework.  Unexcused absence final will result in a grade of zero for the final.  Excused absences from exams will be made only in extreme circumstance (serious illness, death in the immediate family, etc).  Requests for excused absences should be made in advance in writing and must be supported by appropriate documentation.

Exam date:

• Final: Wednesday, December 12, 7:00pm to 10:00pm, location to be determined.

Grading policy:

A final score will be calculated based on:

• Homeworks 50%
• Final 50%

Other information:

Allegations of Scholastic Dishonesty will be dealt with according to the procedures outlined in Appendix C, Chapter 11, of the General Information Bulletin, http://www.utexas.edu/student/registrar/catalogs/.

The University of Texas at Austin provides, upon request, appropriate academic adjustments for qualified students with disabilities. For more information, contact the Office of the Dean of Students at 471-6259, 471-4241 TDD, or the College of Engineering Director of Students with Disabilities, 471-4321.