Evaluation and Analysis of Economic Welfare in the Wholesale Electric Power Market Using an Optimal Model of the Composition of Electric Power Sources

Author Name KAINOU Kazunari  (Fellow, RIETI)
Creation Date/NO. November 2007 07-J-044
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Retail sales of industrial electric power were partially liberalized as a result of regulatory reforms affecting the electric power system implemented from the 2000 fiscal year, and trading on the Japan Electric Power Exchange (JEPX) began in April 2005. The JEPX was established as a voluntary market for the purpose of forming index prices for long-term investment and of improving the means for its sale and procurement. However, it is necessary to evaluate and analyze quantitatively and objectively whether competition has been stimulated and economic welfare has been maintained and enhanced in the wholesale electric power market, including trading conducted on the JPEX, and, if necessary, to review the system for electric power wholesaling market. In addition, among the power transmission systems that link the Japanese regions the capacity of the frequency conversion equipment between East Japan (50Hz) and West Japan (60Hz) is markedly smaller than in other transmission systems, and in terms of economic welfare the impact of electric power wholesaling caused by this separation of the east and west markets is a matter for concern.

As a method of evaluating and analyzing issues of this kind, in this paper I have constructed a model for the optimal composition of power sources that estimates electricity generation costs according to power source and time zone, based on data such as the financial statements of general electric utilities and official Japanese trade statistics. I create an estimated electricity load curve by time zone based on the quantity and price of contracts on the JPEX, and estimate costs and price indexes such as marginal cost by region and by time zone. And by comparing these with historical performance on the JPEX I attempt to evaluate and analyze the economic welfare of electric power wholesaling and the effects of the separation of the east and west markets.

As a result of a two-year evaluation and analysis in the 2005 and 2006 fiscal years the wholesale electric power market was - with the exclusion of the winter of fiscal 2005, when there was severe winter weather and heavy snowfalls - evaluated as being highly competitive and favorable to consumers. Throughout this period the sellers recovered only approximately 65% of their fixed costs, and one can infer that low-price bilateral contract systems such as continuous backup systems within the wholesale electric power market exert a major impact on trading prices. With regard to the separation of the east and west markets for electric power wholesaling, the effects of the market separation are clearly observed, though at present the amount of the impact is judged to be very limited. Looking ahead, it is expected that in the wholesale electric power market the capacity of electricity-generation facilities will be reduced to enable sellers to recover fixed costs, and it is considered necessary to continue to improve the bilateral contract system and to enhance the supervision of economic welfare.