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The Impact of Wind Power on Electricity Market Competition in the Baltic Countries

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The Impact of Wind Power on Electricity Market Competition in the Baltic Countries POLITECNICO DI TORINO Corso di Laurea Magistrale in Ingegneria Energetica e Nucleare Tesi di Laurea Magistrale The impact of wind power on electricity market competition in the Baltic countries Supervisors Candidate Prof. Ettore F. Bompard Alessio Coccia Prof. Sanna Syri Advisor M.Sc. Anahita Farsaei Academic Year 2019/2020 Summary In the 1990s, Nordic electricity market inaugurated as a pioneer regional market. Baltic countries (Estonia, Latvia, Lithuania) deregulated their power markets and joined the Nord-Pool market during 2010-2013. Today, major share of electricity in Baltic countries is produced from fossil fuels. Main energy source for electricity generation is natural gas, in Latvia and Lithuania respectively followed by oil shale in Estonia. Over the past few years, the increasing penetration of renewable energy systems intensified in order to meet EU-wide targets and policy objectives (40-27-27 target by 2030 within the EU). Regional cooperation is an opportunity to meet 2030 RES targets of Baltic countries. In particular, installing wind power dramatically rises as a result of a great potential especially in Northern Europe. In Baltic countries, Lithuania is forerunner in wind power by over 500 MW capacity followed by Estonia and Latvia with 309.96 MW and 78 MW respectively. A change in capacity mix could affect competition in the electricity market. This thesis attempts to provide an overview of the market power scenario over the years in Baltic countries. Herfindahl-Hirschman Index (HHI), a market concentra- tion index, is chosen to conduct this exploratory study. The Herfindahl-Hirschman Index (HHI) is a common measure of market concentration and is used to determine market competitiveness. HHI index trend in Baltic countries from 1991 (dissolution of Soviet Union and independence of Baltic countries) to recent years is evaluated and then compared with the change in wind power to investigate the impacts. The results show how Baltic area is a highly concentrated marketplace, as put in evidence by the high HHI index values. I Sommario Negli anni '90, il mercato elettrico del Nord Europa `estato inaugurato come un mercato regionale pionieristico. I Paesi Baltici (Estonia, Lettonia, Lituania) hanno liberalizzato i propri mercati elettrici aderendo ad un unico mercato gestito da Nord Pool negli anni 2010-2013. Oggigiorno, i combustibili fossili rappresentano la maggiore fonte per la produzione di energia elettrica. La principale fonte di energia per la produzione di elettricit`a`eil gas naturale, rispettivamente in Lettonia e Lituania, seguito dallo scisto bituminoso in Estonia. Negli ultimi anni, la crescente entrata delle fonti energetiche rinnovabili si `eintensifi- cata al fine di raggiungere i nuovi target Europei (40-27-27 entro il 2030 nell'Unione Europea). La cooperazione regionale `eun'opportunit`aper raggiungere i nuovi obiet- tivi nei Paesi Baltici. In particolare, l'installazione di energia eolica negli ultimi anni `eaumenta notevolmente grazie al potenziale presente nel Nord Europa. Nei Paesi Baltici, la Lituania `eil precursore dell'energia eolica con oltre 500 MW di capacit`a installati, seguita da Estonia e Lettonia con rispettivamente 309,96 MW e 78 MW. Un cambiamento nel mix di generazione di elettricit`apotrebbe influire sulla concor- renza nel mercato elettrico. Questa tesi fornisce una panoramica dello scenario di potere di mercato nel cor- so degli anni nei Paesi Baltici. Inizialmente, l’Herfindahl-Hirschman Index (HHI), un indice di concentrazione del mercato, `estato scelto per condurre questo studio esplorativo. L'indice Herfindahl-Hirschman (HHI) `euna misura comune della con- centrazione di mercato e viene utilizzata per determinare la competitivit`adi una societ`anel mercato. L'andamento dell'indice HHI nei Paesi Baltici dal 1991 (scio- glimento dell'Unione Sovietica e indipendenza dei Paesi Baltici) agli ultimi anni `e stato valutato e confrontato con l'aumento dell'energia eolica per indagarne l'impat- to. I risultati mostrano come i Baltici sono un mercato fortemente concentrato, come evidenziato dagli alti valori dell'indice HHI. II Acknowledgments Before starting to write the dissertation, it is my duty to thank people that during my educational and professional path supported me. I would first like to thank my supervisors, Professors Ettore Bompard and Sanna Syri and my advisor Anahita Farsaei for the opportunity they gave me to perform this thesis, for the huge support in the research process and for the indispensable advice. Your help has been really appreciated. Thanks to Politecnico di Torino and Aalto University that trained and radically changed me. Thanks to all the Professors I had during my educational path. I would like to acknowledge all my family, especially my parents and brother who assisted me during the difficult moments I lived over the years. Thank you because you trusted in me. Thanks to all my friends, especially Egidio, Dennis, Emanuele, Giacomo, Lorenzo, Stefano, Daniel when you encouraged me and shared with me joyful moments, with- out which it would have not been the same. Last but not least, I would like to thank God for the strength and for the desire to know He donated me. Thank you all for the end of this wonderful experience. III "But the wisdom from above is first pure, then peaceable, gentle, open to reason, full of mercy and good fruits, impartial and sincere." (The Bible - James 3:17) IV Table of contents Summary I Sommario II Acknowledgments III 1 Introduction 3 1.1 Structure of the thesis . .4 2 Nordic Electricity Market 5 2.1 Financial market . .7 2.2 Day-ahead market . .8 2.3 Intra-day market . 10 2.4 Balancing market . 11 2.5 Market integration . 12 3 Market Power in electricity market 14 3.1 Capacity withholding (market manipulation practice) . 15 3.1.1 Physical withholding . 16 3.1.2 Economic withholding . 17 3.2 Measuring Market Power . 18 3.2.1 Lerner index . 18 3.2.2 Market share concentration ratio . 19 3.2.3 Herfindahl-Hirschman Index (HHI) . 19 3.2.4 Entropy coefficient . 20 4 Market Power in Baltic electricity market 21 4.1 Estonia . 22 4.1.1 Electricity generation mix . 22 4.1.2 Market power . 24 4.2 Latvia . 29 4.2.1 Electricity generation mix . 29 V 4.2.2 Market power . 30 4.3 Lithuania . 36 4.3.1 Electricity generation mix . 36 4.3.2 Market power . 38 4.4 Results . 43 5 Conclusion 47 VI List of figures 2.1 Bidding areas [5] .............................5 2.2 Nord Pool international exchanges balances in 2018. Source: Pre- pared by AleaSoft using data from Nord Pool [6] ............6 2.3 Electricity Market structure in Nordic Countries. Source: Courtesy of Jussi Jyrinsalo, Fingrid [7] ......................7 2.4 Demand and supply curves [10] .....................9 2.5 Example screenshot from Day Ahead Web with exclusive groups [14] . 10 2.6 Pay-as-bid pricing [18] .......................... 11 3.1 The hourly market clearing under strategic bidding [26] ........ 15 3.2 An electricity market with five generators. Source: Seth Blumsack [29] 16 3.3 The System Marginal Price in the electricity market increases to $70/MWh if Generator D is withheld from the market. Source: Seth Blumsack [29] ............................... 17 3.4 A two-node network that creates localized market power for Generator 2. Source: Seth Blumsack [30] ...................... 17 4.1 Electricity generation by energy source and total consumption in Es- tonia in 1990-2016 [32] .......................... 22 4.2 Installed power capacity (in MW) by renewable energy source in Es- tonia in 1992-2017 [34] .......................... 23 4.3 Usable power density [W=m2] of wind speeds in the Baltic Sea based on numerical simulated data from coastDat. Usable power density implies the wind power available based on the wind speed distribution [37] .................................... 23 4.4 Electricity generation by energy source in Latvia in 1990-2016 [32] .. 29 4.5 Installed power capacity (in MW) by renewable energy source in Latvia in 1992-2017 [47] ............................. 30 4.6 The average speed of wind in Latvia at a height of 10 metres [56] .. 35 4.7 Electricity generation by energy source and electricity consumption in Lithuania in 1990-2016 [32] ....................... 36 VII 4.8 Annual average speed of wind in Lithuania at a height of 50 metres [59]. .................................... 37 4.9 Installed power capacity (in MW) by renewable energy source in Lithua- nia in 1992-2017 [57] ........................... 37 4.10 HHI in Baltic countries in 1992-2010-2017 ............... 45 4.11 Installed wind capacity in Baltics over the years (1992-2017 ) [34],[47],[57] 46 VIII List of tables 4.1 Main Estonian power plants in 1992 [34],[39] ............. 24 4.2 Market share percentage of firms in Estonia in 1992 .......... 25 4.3 Main Estonian power plants in 2010 [34],[35],[40],[41],[42] ...... 25 4.4 Market share percentage of firms in Estonia in 2010 .......... 26 4.5 Main Estonian power plants in 2017 [34],[35],[40],[44],[45] ...... 27 4.6 Market share percentage of firms in Estonia in 2017 .......... 28 4.7 Main Latvian power plants in 1992 [48] ................. 31 4.8 Market share percentage of firms in Latvia in 1992 .......... 31 4.9 Main Latvian power plants in 2010 [48],[49],[50],[51] ......... 32 4.10 Market share percentage of firms in Latvia in 2010 .......... 33 4.11 Market share percentage of firms in Latvia in 2017 .......... 33 4.12 Main Latvian power plants in 2017 [40],[48],[49],[50],[51],[54],[55] .. 34 4.13 Main Lithuanian power plants in 1992 [57],[61],[62],[63],[64],[65],[66] 38 4.14 Market share percentage of firms in Lithuania in 1992 ........ 39 4.15 Main Lithuanian power plants in 2010 [61],[62],[63],[64],[65],[68] .. 39 4.16 Market share percentage of firms in Lithuania in 2010 ........ 40 4.17 Main Lithuanian power plants in 2017 [57],[61],[62],[63],[64],[65],[68],[70] 41 4.18 Market share percentage of firms in Lithuania in 2017 .......
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