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Asian Electric Competition Custom Tailored For Success

Taking the anti-FERC approach to the grid.

Fortnightly Magazine - August 2007

changes have been made to market rules to address regulatory and market issues. More recently, other market-structure issues such as government ownership of generation assets and “retail contestability” gradually are being addressed to enhance the competitive and effective operation of the market. Overall, the National Electricity Market has performed satisfactorily with positive results for consumers in terms of decreasing retail tariffs and a broader choice of supply with superior offerings for both gas and electricity.

Singapore

After extensive planning and consideration of relevant local topological issues to help ensure a smooth functioning market, the Singapore government implemented a wholesale-pool market in 2003. Starting with a rudimentary form of market structure with a day-ahead trading pool, the Singapore system operated for more than five years before transitioning into a full blown bid-based market in 2003. The regulators introduced a vesting-contract regime in the following year to ensure a peaceful transition to retail competition. The vesting-contract regime required that about 65 percent of the system demand be hedged at fixed prices based on the long-run marginal costs of a combined-cycle gas turbine plant dispatched at the margin. This regime was necessary to curb market power of the three large generation companies under a common ownership, and to ensure price certainty for franchise load. In the long term, the vesting-contract regime also provided revenue certainty, which attracted private investors for additional generation capacity.

South Korea

The Korean Power Exchange (KPX) operates an electricity market under the Cost-Based Power Pool (CBP) regime. The CBP market provides for competition among generators in a manner that is consistent with the economic dispatch of a plant. Price volatility is minimal, as separate clearing prices are set for both base-load (coal, nuclear) as well as non-base-load (gas, oil) plants. This ensures that plants compete with others in the same technology category—one coal plant versus other coal plants, one gas-fired plant versus other gas-fired plants, and so on. The plants also receive an appropriate capacity payment for declared capacity as the energy payments in the pool are limited to the recovery of variable (primarily fuel) costs.

This interim CBP market was to transition eventually to a bid-based pool market (the two-way bidding pool). However, this has been deferred indefinitely because of uncertainty in the completion of perceived prerequisites for a successful free market, such as privatization of generation assets, reform of the distribution sector, and appropriate education of consumer advocacy groups and unions regarding the benefits of price transparency for wringing inefficiencies out of the existing system.

Japan

Deregulation in Japan also has been very gradual. The first step toward deregulation, via amendments to the Electricity Utility Law in 1995, was to allow the electric utilities to buy electricity from outside sources including independent power producers (IPPs). This opened about 30 percent of the electric sector to competition.

Since November 2003, the Japanese Electric Power Exchange has operated a fairly simple spot market and a forward market aimed at sharing excess power among the different vertically integrated utilities, reducing retail costs by optimizing the overall wholesale generation production costs for the