A Comparison of Price Patterns in Deregulated Power Markets Discussion: Christopher Knittel UC Davis

General Thoughts on Paper An interesting summary of price patterns in 14 markets across the world  Visually oriented paper (easy to read) 307 Figures and 11 Tables Main question addressed: Do the price processes differ across countries? If so, in what ways?  Answers: Yes! Many. Other interesting questions not posed:  Why?  Can we learn anything about “optimal” market design from looking at cross-country data?

Comment #1: More detail on the markets The focus of the paper seems to be on ways demand can respond to price signals by shifting load across hours  But, do the consumers get these signals? What proportion of customers face the wholesale price (or some function of the price)? Do those customers have any ability to shift demand across hours?  Obviously, if everyone could easily shift their load, average prices would be constant across hours

Details may explain differences Differences across markets in prices reflect differences in supply and demand  Demand may depend, in part, on institutional details  Supply depends on costs and market power Other details that would be helpful to know:  Which markets are summer peaking, winter peaking, etc.?  Is supply seasonally dependent? (e.g., hydro) Is demand peaking when supply is also peaking?  What is the generation mix? Is it all nuclear and hydro?  Is the capacity constraint ever binding?

Possible Explanations for Results S S D1D1 D summer D winter S winter S summer D2D2 D3D3 D2D2 D3D3 D1D1 Strong positive correlation between load and price Lots of price variation Prices may be more variable than load Zero correlation between load and price Little price variation Negative correlation between load and price Little price variation across seasons, but may be within seasons P Q P Q P Q

Comment # 2: Measures of Volatility Volatility is important for hedging, investment decisions, derivative pricing, etc.  We have a number of results that imply the variance is important e.g., Black Scholes, Optimal Hedging This paper focuses on a different measure (velocity)  The paper should discuss how market participants (either consumers or generators) would actually use this measure

Other measures: Other features of volatility that may differ across markets:  Are there more “jumps” in some markets? Different kind of risk  Do some markets exhibit more volatility clustering? That is, is volatility today dependent on volatility yesterday? GARCH-type models of California suggest there is clustering  What do the tails look like (e.g., fourth moment)? Are there any “normal” electricity prices?

Comment #4: Policy Recommendation/ Paper Disconnect? The paper ends with several policy recommendations  1. Reduce the time between announcing restructuring and actually restructuring  2. Focus on the surplus of generation capacity when contemplating restructuring  3. Contemplate wholesale price caps  4. Avoid Retail price caps These all seem reasonable, but do they really relate to the paper?

Possible extensions… Is there are correlation between “bad features” of prices and: delay, excess capacity, wholesale caps and retail caps  Can we answer this with only 14 observations?  Perhaps, we could focus on within-country variation? Or, are these recommendations more a question about price levels/price-cost margins?

Conclusions Nice description of the price processes of 14 markets Should think about the reasons (economics and engineering) behind the differences  Differences in installed generation-type and demand fluctuations  Differences in market designs Can demand really respond to the signals? More formal analysis of how data related to policy recommendations

Summary of results Hourly Average Prices  Not surprisingly prices are lowest in the morning  Some markets exhibit two peaks  Some markets are very flat (e.g., Scandinavia) This will depend on the variability of demand and the elasticity of supply Load and Prices  For many markets, hourly average load is much smoother than hourly average prices  Not too surprising given that supply is convex