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Asian Electric Competition Custom Tailored For Success

Taking the anti-FERC approach to the grid.

Fortnightly Magazine - August 2007

A common response to energy-market risk is a complex market infrastructure, with significant administrative effort and cost dedicated to managing the risks and ensuring that the market functions in a transparent and effective manner. But is market complexity a necessary byproduct of competitive markets? Must all electricity markets be burdened with what we in the United States have come to accept—bid-based regimes, multi-part bidding, locational-marginal pricing, financial transmission rights, ancillary services co-optimization, day-ahead and real-time markets, complex price caps, virtual bidding products, or capacity markets? Are all of these market instruments really necessary to ensure fair and open access to electric transmission lines?

Some nations in Asia have politely said no, but their “no” is not to electric competition in general, but to complexity in market design. In the past few years, a number of countries in Asia have explored setting up competitive wholesale energy markets and turning their local version of what has been called “the last great monopoly” into a truly competitive enterprise. Their governments have watched the deregulation efforts in the United States. In the PJM Interconnection and New York Independent System Operator, electric competition has led to approximately $400 million to $1.3 billion per year in estimated cost savings, but the negative overhang of the Californian market crisis has driven countries like Indonesia and Thailand into the wait-and-see camp, as they indefinitely postpone deregulation of their power systems.

Far from FERC Chairman Joseph T. Kelliher’s goal to create a series of seamless grids across the country, Asian nations have instead learned to custom fit, tweak, and, if necessary, dilute their goals to make competition work effectively. Singapore and Korea each believed in the effectiveness of the independent marketplace in promoting economic efficiency, and accordingly decided to reform their power sector. But each followed its own path, proceeding differently from any energy market in the United States and from each other as well. While one cautiously evolved into a nodal-pool market over a five-year period, the other put in place a cost-based pool to create transparency while mitigating risk and price volatility.

Australian Trailblazing

Australia and New Zealand have been among the first to implement competitive electricity markets. The Australian National Electricity Market (NEM) includes the Eastern states—New South Wales (NSW), South Australia, Queensland, Victoria, and more recently, Tasmania. During the early days, the market’s cleared prices were consistently low, resulting from a number of factors including competitive-supply tensions exacerbated by the bidding behavior of government-owned generation in New South Wales. The privatization of assets in Victoria was facilitated through vesting contracts that provided a smooth transition by providing revenue certainty in the early stages of the market.

Over the years, appropriate tweaks and