Implementing Electricity Trading Mechanism (UK and India)

Comparison on Feasibility of Implementing Electricity Trading Mechanism of Deregulated Power System; a case of India and UK

Abstract

United Kingdom and India are among the countries that recently have recorded significant growth in population. The implication of such increase is high demand for consumables. Among the commodities that are demanded in the two countries is electricity. Currently, power is becoming basic commodities. Electricity and other sources of energy are needed in both urban and rural areas. The government of both countries is fighting hard to ensure that both urban and rural areas are receiving enough electrification

The demand of electricity in both countries exceeds the amount of power supplied. Both countries produce power using hydro, wind, coal and bioenergy. Among the challenges that the two country face is accumulation of carbon gases that cause greenhouse effect. For this reason, initiative regarding the production of clean energy has been taken by both countries. The government of both countries has collaborated with the academics and industries to find the solution to the issue of global warming (Adam, Samuel,).

Among the measures that both countries use to regulate the production of energy without affecting the environment, is setting up electricity regulation. The regulations however set should not affect the profit margins of the selling companies. Therefore, the policy makers need to come up with appropriate measures that are fair on the side of sellers and consumers of electricity.

Some policies that are set by the government may be applicable while others seem inapplicable because their implication on either consumer or the sellers may be advance. This paper focuses on the feasibility of implementing electricity trading mechanism in deregulated power system. The paper has specifically focused on effect of power deregulation in India and United Kingdom.

Analysis of effect deregulation in India represents the effect of such policy in developing countries while United Kingdom analysis will be used to generalize the feasibility of such policies in developed countries. This paper uses previous researches that have been done regarding the deregulation of electricity in both countries. Various policies and projections have been outlines this paper.

Introduction

Different economies especially the economies that operate on competitive market are trying to come up with the best way of implementing electricity trading mechanism. Embracing deregulation in selling of power ensure that there is existence of competition among the producers and suppliers of electricity in an economy. The economics laws indicate that in economies that are characterized by free market with little government intervention suffer from both advantages and disadvantages (Ragan, Davis.).  In such economies, the power selling agencies ensure that their products are reliable which an advantage to the consumers of power is. The other side of the coin is that, in such a system the incidences of monopoly may arise leading to exploitation of the consumers (Ragan, Davis.).

The issue of power is however different from other products in the market. One of the factors that make this commodity different is the fact that the product has to pass through the transmission system before it reaches the consumers. It is therefore not easy to control the supply of power to the consumers (Ragan, Davis.). Another attribute of this type of commodity is that the transmission systems are scarce. The consequence is that the power system sometimes experience congestion hence overloads of power in the transmission system (Adam, Samuel,). Various efforts have been initiated to decongest the transmission system through creation of open, free market power generating companies in the country. Despite all these efforts, there are still challenges of power transmission overloads.

Power systems with regulation

At times federal government may find it’s critical to provide foresaw of the distribution, production and distribution and sale of power within its country.  One of the significance of such an action is that the consumers cannot exploited by the power sellers.  The power producers are assigned major activities such as generation, transmission and distribution of power.  The prices are then monitored and controlled by the government (Ragan, Davis.).  For instance, the United States electricity utilities were given mandate to sell power to certain areas.  On the other hand, the utility could supply power to other consumers in the country.  In this case, either the public utility commissions or the government agencies determine the price of a unit power (Ragan, Davis.).

Power systems operating under competitive market

The 1970 deregulation of other network based industries like natural gas demonstrated that deregulation of the market system in an economy can improve the production and consumption of commodities. The 1970 deregulation made the economists convinced that a shift to efficient schemes like production of electricity is possible and taking such a move would be a great idea.

When deregulation of power is there, the government has no control over the production and the prices of electricity. Therefore, the prices are determined by the producers and sellers.  In such situations, the power generating companies and the sellers of electricity may decide to sell their power at high prices.  One of the advantages of this system is that there is free exit and entry of the investors in the business. Through this concept, the instances of exploitation are minimized. With more producers and sellers, there are more alternative suppliers. Hence the monopoly power among the sellers of electricity is controlled.

Therefore deregulation in some cases it is good. The transmission and distribution of power in a competitive market in many countries have been considered as natural monopolies which invalidates that companies involved in production and distribution of power from the competitive market of commodities. The generation of power therefore remains as the only sector that people can invest on without challenges of closure (Adam, Samuel,).

The 1st instance of deregulation in United States was that of 1978 which appeared in the public utilities policy act.  The PURPA (1978) supported that consumers can buy energy from various producers of power. After a decade, the federal regulatory commission in 1992 issued another energy power act which facilitated the establishment of right of open access to network transmission to any firm that does not have transmission system.  The basic objective of the act statement was to facilitate the multiplication of the potential producers which the power consumers can source power. This is a requirement for a competitive market.

Deregulation of electricity in Europe

In the years prior to 1996 the power markets in the European Union were controlled by the state owned companies and the government in regime controlled the organization of these companies. As a result the companies enjoyed monopoly power in the distribution and supply of electricity. The prices of electricity were fixed and they were dictated by the government policy. The price per kilowatts was not dictated by the forces of demand and supply. To ensure that there was a fluent and movement of the products, people and capital, the European commissions considered that supplying security to the suppliers would be the best way to protect them. The member states later can to realize that provision of quality services to the product users attracts more customers. To improve the quality of the services that the electricity suppliers, there was invasion of internal electricity market disregarding the prejudice to compliance with the obligations of the public service. Later the EU commission pushed the energy market to liberalization and restructuration with a common strategy.

The 1996 decision bared fruits which triggered the establishment of the directive 96/92/EC. This was the first directive in EU. A legal framework that regulated generation of electricity, distribution and transmission of power was established. The primary objective of introducing the directive was to increase the economic efficiency and improvement of the level of the services that the public receive from the power supply and distribution companies. In addition, the directive created freedom of electricity customers in selecting the suppliers of their choice within the EU states. The EU directive featured the following concern

  1. The directive required all the EU states members to separate the electricity sectors into production, distribution, transmission and retail of power. Every company was required to separate every sector activity to different account to reduce the cases of crimination of power market.
  2. The directive also required the transmission and distribution of electricity to remain monopoly and independent with rules of nondiscrimination to users who need the access to the transmission network. For this reason the member states had to designate independent operators systems of transmission to the person who will be responsible for management and operation of all the grid lines.
  3. To improve the performance and the efficiency of the production process, the EU commission required that priority dispatching for the investors who run the renewable energy, power generation and combined heat and power plants.
  4. In regard to the supply sides of the market, the EU commission required that its members to curry operation for generation of new production plants and to carry tendering process to increase the economic competitiveness. The objective of coming up with this directive was to come up with a more transparent power production, distribution and sale transparency.
  5. The commission also directed the liberalization of the electricity market in order to provide the customers with a variety of energy suppliers. The supplies of power may come from and outside the country.
  6. The initial boosting of the power demand to begin with the industrial consumers who require consumption that exceed 40GW. The commission demanded that this directive must be improved in a sequence of 3 years to ensure that there’s complete liberation of demand side.
  7. Lastly, the EU commission required that the member states to build better mechanisms that protect competition to ensure that there is free collusion. In addition, the mechanism will facilitate avoidance of predatory market attributes.

In addition to the above directives, the EU commission directives addressed other issues that deemed important in regard to the progress of the EU member states. One of the additional a move made by the EU is the directive that required the member states to offer protection to the consumers of electricity in the market and protect the consumers against power breakout risks. This directive made the member states to embrace the implementation of the third party access system for the customers that are eligible for such protection. The additional directive provided by the EU is that every member state was to ensure that there is possibility of addition capacity and energy efficiency through a process of tendering that is trustworthy. The tendering process among the member states were to follow the tendering process that is provided by the EU commission. The EU commission also required its member states to emphasize on the unbundling of the consumer accounts to reduce competition problems, cross subdivision and consumer discrimination. The directive of EU also focused on implementation and submission of the reports related to implementation of the directives provided by EU commission.

After these directives were given by EU, the commission found it better to set up a legal framework and goals that ensured commitment of the directive. As a result a new energy policy emerged. This energy policy is called 20-20-20 policy published in 2009. The policy was referred as above because the policy primary objective was to reduce the consumption of energy by 20 percent, reduce the emission of greenhouse gases by 20 percent and incorporate the renewable energy mix in the power generation by 20 percent by year 2020. Basically, the policy as constructed in a way that it was ecosystem friendly as per the requirement of the Paris agreement of 2015. The Paris agreement of 2015 required all the member states to find solution to the climatic change and come up with production activities that discourage the methods that increase the production and excessive discharge of greenhouse gases.

The EU directives since then have changed the market of electricity because the policy promoted significantly the production of renewable electricity and reduction of gases emission. the introduction of various methods of electricity generation has contributed to intermittent  generation of electricity. The production, distribution and sale of electricity in Europe has however been experiencing various challenges. Among the challenge is that most of the renewable energy depends on whether which have made the production of it to become very unreliable due to high demand of electricity (Adam, Samuel,). Also countries that do not have reliable transportation infrastructure experience problem of power distribution congestion and also experience isolated market of electricity due to inadequate access to physical exchange. The market of electricity in Italy for instance since 1960 was controlled, organized and managed by Enel Company that was solitary vertically integrated (Sheoli, Pargal, and Banerjee Sudeshna Ghosh). The production, transmission and distribution of power was managed and under control of this company. The directives of EU however changed the characteristic of electricity market in Italy. For instance, the decree 79/99 of 1999 sparked the beginning of free electricity market. In accordance to the directives of EU commission (Bersani decree), market liberalization, the dispatch of renewable energy and green certification has become common in Italy.

The process of liberalization begins with termination of national monopolies and creation of an open market economy to facilitate the entrance of new investors into the power generation sectors thus promoting competition among the power generation and suppliers of electricity. The legislative decree 79/99 required the ENEL Company to do the following

  1. Begin privatization and unbundling of all the company activity into power generation, electricity distribution and sale and the company was to dismantle the nuclear plants that were unfriendly to the ecosystem.
  2. The commission required ENEL Company to ensure that transmission activity in power sector is given to an independent company which embraces nondiscriminatory rules.
  3. The ENEL Company was required to sell at least 15 GigaWatts of power to minimize their dominance in market. This decision was made to facilitate other companies entering power sale and generation market to enter in the market.

Terna Company was given the mandate to carry out the transmission activities which was previously designated for ENEL group.

Electricity deregulation in United Kingdom

The deregulation of price of electricity in the United Kingdom generally removed the control of prices which and encouraged the introduction of new investors in production, distribution, and supply of power in UK.  The deregulation later resulted to price variation. Also, the introduction of deregulation brought electricity and weather derivative power market to be established in United Kingdom.

The deregulation of generation of power in the United Kingdom began in 1989 with the first electricity act of 1989  (DUKES). The act laid a base for privatization of supply of electricity in the United Kingdom. Before the deregulation of electricity in the United Kingdom, there were only three state owned electricity transportation grids which covered England and wales, Scotland and the Northern Ireland. The England and wales grids were the one responsible for the 90 percent of electricity demand in the region (DUKES). By then England had only one main power generation and transmission company and nine electricity distribution companies which ensured that majority of the region is supplied with electricity  (DUKES).  The general electricity generation board at that time owned all the rights of transmission and controlled the distribution and production of power in England and wales. The other region market was divided among the south of Scotland electricity board and the north of Scotland hydro electricity board (Ragan Davis)

The decision to deregulate the energy market later led to the division of CECB into four distinct companies (Ragan Davis). Three of the companies were to generate electricity and the other company was left to carry out all other transmission activities (DUKES). The three companies that were given the mandate of production include Powergen, National power and the nuclear power generation companies. These companies were under public ownership.

The distribution companies were also privatized with the legislation which dissolved the CEGB and other companies that covered 12 regions of power distribution. During the privatization, the distribution companies in the regions were required to make accounting separations within their distribution and activities of retail (Ragan Davis). The decision was made this way because the mandate to distribute the electricity in the regions gives the companies some kind of monopoly power. Therefore the profits made by these companies needed to be monitored to ensure that the consumers of electricity were not exploited by the distributing companies. Before the deregulation, earlier 1989, the 12 regional distribution companies had a joint ownership of the national generation company. However in 1995, the legislation demanded that the companies to sell the ownership of NGC (Ragan Davis) .

The Scottish electricity market on the other hand was divided into three companies following the legislation of 1990. The non-nuclear assets were then privatized as Scottish power while the nuclear assets got a new name Scottish nuclear and remained under public ownership. Also the NSHEB was put under private management and renamed as Scottish Hydro(Ragan Davis).

The 1989 electricity act established a regulatory agency which was names as office of gas and electricity market (PFGEM). This agency is still a government department which is governed by the gas and electricity market (GEMA) (Ragan Davis). GEMA is a board that it appointed to monitor the efficiency OFGEM; the key duty of OFGEM is basically to carry protection duty to the interest of future and existing consumers of power and gas through promotion of competition among various investors in the energy companies (Ragan Davis).

The deregulation of energy in United Kingdom led to establishment of price controls by the OFGEM in order to assist the new competitors in the market to have a breakthrough in the electricity market.  18 years ago, the competition act was implemented. This facilitated the removal of price controls and swept away the competition that existed among the energy suppliers (Ragan Davis). The suppliers were allowed by the act to carry their business without interference. The OFGEM later released a review of the market which concluded that the supply competition could deliver electricity price advantages to the consumers of power (Ragan Davis).

Current state of deregulation in UK

After the deregulation of electricity in the United Kingdom, there are four primary areas of competition for energy companies that were left. They include

  1. the generation of electricity
  2. transmission of electricity and
  3. The distribution and retail of electricity.

Before the formulation of deregulation act, the major producers of power in England accounted for 75 percent of the total electricity generation. The diversity of electricity market increased significantly through the deregulation process. Today there are over 38 major producers of power in United Kingdom and more power generating companies are emerging. The United Kingdom electricity market diversification has enabled UK to transit from a region of coal power to a country with different ways of producing power.

The production of electricity through generators is directed to the national transmission network. The National generation network has the mandate of controlling this type of transmission system and remains the sole system operator in the country. In addition, it is the role of NGC to regulate the supply which exists on the national transmission network.  Basically, there are three transmission operators that fall under the system operator in order to operate, develop and ensure that there is always a high voltage grid. The three operator systems include the Scottish power transmission limited for the southern Scotland, the Scottish hydro electric PLC for the northern Scotland and the Scottish island groups. The other one is the national generation company. OFGEM regulates the NGC because it is the only company which enjoys natural monopoly. In order to regulate NGC, the OFGEM has set maximum revenue which NGC can recover from the consumers of the grid.

The United Kingdom transmission network is a high voltage transmission line. The electricity is passed through these lines to the distribution network which is at a low voltage to the industrial and domestic consumers.  14 licensed distribution network operators are based in Britain. The distribution network operators are the ones responsible for provision of electricity to the regional areas and every company is assigned a region where it should provide the service to the consumers. Also, the distribution network operators are independent DNO. the independent distributors operators are basically small network which operate in the area which is covered by the distribution  network operators . Both the IDNO and the DNOs are required to have a license in order to distribute electricity in the region. The licenses that are issued to each company have provided the companies with the limits of the amount of revenue that the respective company should recover from their consumers to avoid consumer exploitation. The licenses limitation ensures that imposition of unfair monopoly does not exist in power distribution process.

Generally the primary place where companies compete is during the retail of electricity. at this point the consumers only experience the changes of electricity price when the deregulation  is active. Otherwise, the retailing company enjoys monopoly powers and they determine the market price of electricity. Due to deregulation of electricity, the consumers are able to shoo around while comparing the price of power per unit and then decide the best company to hire their service. In the United Kingdom the retailers basically buy electricity from the wholesale market or from the companies generating electricity (Hugh, Rudnick, and Velasquez Constantin). The retailers then put up the price of their service per unit. The opportunity that the electricity consumers have in United Kingdom deregulated market put pressure to the sellers of energy. The company that offers poor services to the company cannot cope in the market competition leading to closure. Therefore the only companies that have best services win the United Kingdom market share. OFGEM monitors the moves taken by the retailer to prevent formation of cartels that may affect the electricity market. Through its overlook, the consumers are never overcharged.

Despite the deregulation of electricity market in the United Kingdom, OFGEM is still making more effort in looking for the better and alternative ways of ensuring that power market is improving. Also OFGEM over the last two decades has been making more effort in ensuring that the consumers of electricity are fairly charged. Regardless of the increased growth in the number of players in generation, distribution and retail of electricity in United Kingdom, the big companies are still controlling the majority electricity market. It imply that more has to be done by OFGEM in the coming years to ensure that the policies set are effective and functional in regard to distribution of market share and domination of market by big companies.

Indian electricity market

The Indian government is emphasizing on the efficiency, resilient, and power sector that is financially robust to facilitate the growth of power sector and reduction of poverty levels. Most of the surveys conducted by power sector has pointed out that poor availability of quality power is the major constraint to the commercial and manufacturing activities and reducing the competitiveness of the nation on other economy. Recent research has indicated that about 300 million Indians leaves without power. According to the research done by ministry of power (2005), the people with power are forced to cope with the unreliable electricity. The research indicated that the Indians who have electricity connection do not fully enjoy the services due to unsatisfied power demand and the restricted consumer welfare.

The government of India implemented the sweeping economic reform after the deliberating balance of payment in 1991.  The reform was done due to inefficient hamstrung of state dominated power sector which faced under-maintenance and laying poor investment in the power market. The power sector was previously required to supply power below the production cost which resulted to huge financial loss of the sector. The 1991 power amendment in India opened the power sector to private participation in power generation. The Indian power sector continues to face challenges of power shortage. However the government is trying to restructure its vertically integrated state electricity board (SEBs). Also, the government established electricity regulatory commissions (SERCs) which operate under reform legislative initiative of improving the performance of power sector (Sheoli, Pargal, and Banerjee Sudeshna Ghosh). Later in 1998, the electricity regulatory commission act came up with central electricity regulatory commission which brought regulatory consistency in India power sector.

The economic performance of state utilities in India is unstable. The survey carried in 1992 for instance pointed out that the performance of power sector kept deteriorating since 1998. Losses amounting to Rs 250 billion were recorded in financial year 2001 and 2002 (Sheoli, Pargal, and Banerjee Sudeshna Ghosh). As a result the   EA in 2003 responded as a result of the losses and decided to come up with a precompetitive policy and institutional framework that will help in improving the performance of power sector. The 2003 EA superseding the by then registration took some major actions. The first action was de-licensing thermal generation and set the timelines that ensured open access to distribution and transmission of power. They also introduced power trading as a licensed activity with aim of fostering competition and facilitate the entry of private sector into production and generation of power. The EA facilitated the unbundling and corporatizing the SEBs while establishing independent central and the state regulators. What followed are subsidiary policies that put on the ground the competitive bulk procurement of electricity, and establishment of multiyear tariff frames (Sheoli, Pargal, and Banerjee Sudeshna Ghosh). Also the objectives of subsidiary policies were to facilitate the expansion of renewable energy and rural electrification.

Today, the power sector in India has significantly improved. Strengthened by presence of sound policy framework and the improved economic environment, the sector has recently recorded a significant improvement. For instance, the generation and distribution of power triples between 1991 and 2012.  The generated power increased to 214GW. the production capacity was facilitated by the surge in the invested shared from the private sector which had increased from 3 percent to 29 percent. In addition, introduction of renewable power energy production in the grid and off grid had increased due to the incentives from the government. For instance, the government incentives like feed in tariffs in regard to generation end. In addition, the government encouraged the renewable purchase obligation on the distribution of power. The government also offered licenses of production and distribution of renewable energy which promoted the trade of renewable power in India.in 1990 the power generation company in India produced 18MW, the grid renewable energy capacity increased to 25856 MW in 2013 which is 12 percent of the total electricity capacity. The off grid renewable energy capacity did not increase but it remained at 825MW.

The government recognition of licensed activities, the initiative of opening private entry to generation of power, giving permission to multiple distribution licenses and government introduction of smart transmission tariff let to improved active power market and exchange of power that facilitated the entry of captive power capacity in the market. In addition the government initiative of separating the power transmission from dispatch, trading, the promotion of power generation and embracing open access facilitated the growth of electricity market in India.

Power generating companies in India have come up with more reliable models that are efficient. The models are as a result of private participating in distribution of power throughout the country. Considering the power distribution in other country, private participation is considered by several countries to be one of the best ways of resolving the problem of power distribution. India has a legacy of privatization of power distribution in Kolkata, Mumbai, Surat and Ahmedabad. Over the years, the towns have recorded reliable efficiency in power distribution which is a confirmation that privatization of electricity distribution is a reliable solution to power efficiency.

The literatures on electricity reform include the plethora of methods of analysis that fulfill various objectives which mainly have focused on cross country assessment of the impact of these reforms at macro level. The previous literatures available so far have focused on the developed countries. One of the characteristic of the developing countries is that these countries operate under the influence of certain factors which cause counterintuitive outcomes (Victor, 2004 and jamasb et al 2004). In the analyses of the characteristic of Indian market, focus on the extent and the magnitude of the reform would be best (bacon, 1999).

The India electricity reform, the reevaluation of electricity supply act of 1948 and the Indian electricity act of 1910 contributed significantly to the growth of electricity supply in India. In addition, the 2003 electricity act facilitated the participation of private sector in participation of power generation (Mercados Energy Market India Pvt Ltd). Therefore it was possible to complement cash constrained SEB to meet the demand of the electricity in Indian market (Sheoli, Pargal, and Banerjee Sudeshna Ghosh). SEB envisages the transmission of power on the competitive electricity market in India (Mercados Energy Market India Pvt Ltd). The power exchanges in India have today evolved. Power exchange in India was encouraged by the government in order to complement and supplement the current demand for wholesale power and ensure that there is transparency and efficiency in power generation and distribution (Hugh, Rudnick, and Velasquez Constantin). In addition, the trade in regard to power exchange in India has matured despite the challenge of low power volumes and high prices of electricity. The electricity market, all the operations in the market are today relatively efficient and investment of power generation has been promoted. The IEX (Indian energy exchange) has the power exchange which is the maximum volume in comparison to others and is the largest participant. IEX plays a great role in ensuring that the policies and objectives of 2003 electricity act are observed. This is done through enhancement of competition among the power generation companies, implementation of open access and realization of the effect of deli censing power generation companies. The national grid creation today has been transferred throughout India with the objective of increasing the reliability and security of electricity supply in the regions that experience deficit and surplus. The initiative has ensured that there is better utilization of Indian natural resources and there is reduced unmet demand of power. Today there is minimal economic losses and improved security in regard to power in India. There are significant bottled up captive generation which have been introduced to the Indian market to improve the productivity of the nation.

The 2003 electricity act promoted the competition of electricity market, and protection of consumers against unnecessary exploitation (L.P. Singh, et al.). The recommendation of the act was that National Electricity Policy (NEP) to provide open access in regard to transmission of power. Another important initiative taken by the Indian government was to introduce availability based tariff (ATB) which brought the day ahead scheduling and the frequency sensitive charges to cater for the deviations that arise from the schedule for the effective real time balancing (L.P. Singh, et al.). Availability Based tariff considers the fixed and variable cost as two separate variables. The variable cost is regarded to be the charges which are associated with the plant and its capability of generation on daily basis. On the other hand the variable cost is regarded as the energy charge and the aggregate amount that is paid to the generators and it is based on scheduled production (L.P. Singh, et al.). Availability based tariff also has unscheduled interchange (UI) which refers to the deviation arising from the schedule and its rate is determined with regard to the frequency of the system (L.P. Singh, et al.). The Indian idea frequency system is about 50 Hz. any deviation from the set standard needs synchronization which comes with a cost. This is one of the explanations for the differences in price for the supplies that come with a different frequency (L.P. Singh, et al.).

Source: http://www.cercind.gov.in/

The parties that benefit from get paid under withdrawal or charged over the withdrawal in accordance to the frequency system.  The mechanism of UI is the balancing market tool where the real time price is calculated with respect to the system frequency (V. S. K. Murthy Balijepalli, et al) . To facilitate the electricity trade, CERC made approval of IEX. The primary design of IEX is based on international power exchange nord tool (Flatabo, D.et al). This tool was developed as an institution which is market based where the participants of the market are volunteers. Today, IEX gives day a head signings with line set as per the demands of regional dispatch centers (RLDC). IEX also coordinates the national Load Dispatch Centers (NLDC) and the State load dispatch centers (SLDC) when scheduling the trade contracts (V. S. K. Murthy Balijepalli, et al).

Day-ahead-market of the IEX is basically a double sided auction which discovers the commodity prices incorporating the demand and supply side. In 2008 and the 1st half of 2009 high prices were discovered due to elasticity of demand. It is typical for economies where the demand is more than the supply. Therefore the supply curve has to be extended upwards in order to know the market clearing price. Is such a case the price is basically high due to the inelasticity of demand. In addition, a positive price gap emerges between the supply and demand of the commodity. From the economic perspective, it is an indication that the market is at par with the regulations and objectives of IEX. However this is not desirable in regard to social and political consideration.

Figure above: The supply and demand curve at IEX

Presence of few price peaks and the decreasing volatility indicates that there is short term markets which are characterized by high liquidity. The above scenario indicates that the price is close to the marginal generational cost if there are low prices on the exchange and it is an implication that there is lack of market abuse. The exchange at the present day gives the day-ahead contracts of hourly time block. it is paramount noting that the exchange envisage plans provides adjustment contracts and contracts that are long term in order to reduce the possible risk in the electricity market. The electricity market mechanism of India can be summarized by the table below.

Above: electricity market mechanism

Some of the features of the IEX as described above are summarized in the table below.

Fig. features of IEX

The potential of India electricity market

The Indian market needs more to be stable. So far more has been done in the previous years but still there is much to be done for the market to achieve it full potential. In 2013, the potential for buying was about 15.35 percent while the selling potential was at 4.57 percent nationally. Supposing that 10 percent load shedding is put into consideration, and then its potential will increase to 23.5 percent. This proportion will only account on the account of the coskewness of demand that is met in every time. In reality, the potential is basically higher. there would be a loading shedding equal to 23.5 percent in regard to the energy terms and 10 percent need to be addressed. Also, the potential will also increase if all the Indian states will accept that the large industrial consumers to produce more than 1 MW. In such a case the supply side potential will be high. It is because the private sector firms such as Jindal and JSWL sells at fixed percentage in the short term market. In addition, there is presence of requisitioning capacity of central sector firms which are available also in short term markets.

India has bid untapped potential which gives the country more opportunity to further development of power generation. The effects of NEW and SR grids together with the CERC regulations of 2014, there is a potential increase in the amount of day ahead market.

The existing gap between the demand and supply so far is an indication that signing long term utility contracts are enough to meet the existing demand of electricity across different states. India will however continue to depend on the market to meet the demand for power on the real time basis. The achievement of full potential in India faces impediments too. The national level of demand do not account for the latent demand or unserved demand which is not in the records of CEA or LDCs systems. Currently the demand that the country is targeting to meet does not include the demand of the large firms that require large amount of power supply and the open access consumers. The level of supply in the state has ignores the 3.42 percent of power which is consumed on merchant basis.

Generally, in short term market, trading is determined by the variation in the load curves of different trading utilities in India. The local distribution utilities face peaking conditions which require tie up with the peaking generator. It is paramount to carry out short term planning which will incorporate local peaking resources and the transmission of electricity from other regions just for the benefit of the economy.

The energy infrastructure in India

The Indian economy is currently unpredictable. The Indian electrical power system needs to come up with goals that are objective towards fulfillment of power sustainability. In order to handle the expanding demand for power in the country, power inventory needs to be well managed. The power inventory network consists of generating units and the T and D which over the years has been experiencing innovation period. India per capita consumption is growing consistently in the last years. For instance, FY2008-09 recorded per capita consumption of 734 kWh. This value in 2016 increased to 1075 kWh. This implies that there is significant growth of 46 within a span of 8 years. This is an average of 6 percent per annum.

Analysis of problem

India is among the countries that are very ambitious in installation of renewable energy. The country policy makers and the public utilities are striving much to ensure that the country goals are achieved. When there is disruption of established industries by the emerging markets, the legacy systems becomes unhindered. They have to adapt to the upcoming change as soon as possible. This is the type of economic transformation that is happening in India. The government announced its ambitious plan of generating about 227 GW of renewable energy by 2022. Among the technological changes that will ensure that the target is achieved is through application of digital technology, proliferation of renewable and application of new strategies in distribution of power throughout the country.

The government of India is also pushing for a cleaner energy supply against the background of the massive economic and demographic change. The population of India is growing very fast. Research indicates that by 2025 there is probability that the population will be higher than the china population. The population growth grows together with the economic growth as the research indicates that the economy of India is also growing at a high rate.

The India population growth is an alarm that more power is needed to meet the demand of the growing population.  With the high demand of electricity in India, more has to be done to ensure that the consumers of power in India get the best services. As the demand for electricity in India increases, the Indian government has set a target of 100 percent electrification by 2022. Indian government is making effort of modernizing and extending the electricity grid to other parts of India.

The recent policies and objectives set by the Indian government are considered as the drivers to transformation of India energy sector. The EY teams and the global analysts indicated that there are three critical milestones that can change the Indian electricity market for good. Understanding of the country timing needs to understand some of the challenges that people and companies face in order to achieve its future objective. The Indians existing demand for power imply that the coal and natural gas continue to sit alongside the ecosystem friendly sources of energy. The demand for coal in India will probably double from the current levels in 2050. The introduction of renewable energy may however reduce this figure significantly.

Theoretical principles

Methodology of analyzing the data in Indian electricity market

In order to analyses the effect of deregulation of Indian electricity market; the investigation will be based on a set of relevant hypothesis. Therefore the following hypothesis developed in order to study the major economic variables.

Hypothesis

Null hypothesis 1

Apart from the infrastructure, the electricity stock in India does not make any positive and significant influence on the Indian economic and industrial output

The objective of this hypothesis is to find the contribution of electricity within other infrastructure and the extent to which the deregulation has contributed to the growth of Indian economy. The literatures of Grossman and Helpman (1994) have covered some of the contribution.

Null hypothesis 2

The electricity infrastructure stock in India does not make any positive and significant contribution to the growth of the country GDP.

This hypothesis aims at determining how the distribution and improvement of electricity infrastructure in India have facilitated the growth of India GDP. The research to find the effect finds some of the policies that facilitated the distribution and sale of electricity in Indian states.

Null hypothesis 3

The electricity infrastructure in India does not make positive and significant contribution to the Indian industrial HDP per capita

in order to find the information regarding to the answers to this hypothesis, regression of two  dependent variables; the total GDP of the industrial sector and the  GDP per capita in the Indian industrial sector (Petrella, A., and Sapio, S.). The length of the transmission cables, the distribution line, the growth of the direct exchange lines and the grand length of the Indian highways and track railways represent the electricity and communication, the roads and other infrastructural developments. The population is used as proxy in order to come up with the measure of the size which does not depend on time. The population involved in the survey includes the workers, and the larger population in Indian electricity market.

Null hypothesis 4

The Indian states that use are served with electricity resulting from the deregulation policies do not experience significant improvement in terms of technical and operation efficiency in provision of power supply.

Among the reforms that were made in the Indian power generation policy is the efficiency reforms. These reforms involved the restructuring of the power generation industry and unbundling of the sector components into different companies that deal with transmission, generation and retail supply of electricity supply. The improvement that have happened so far in regard to technical efficiency in utilization of existing capacity and capital need to be investigated. The research done by Harris (2003) and Ennis and pinto (2004) studied how efficiency improve the services given to consumers. The survey uses the multivariate regression. The regression incorporates three interrelated dependent variable which are selected as representation of technical efficiency. The other variables are selected on the aspects which cannot be measured by use of only one variable.

Null hypothesis 5

The power sector reforms done by both countries so far have hot contributed to significant changes in regard to consumption of electricity in the industrial consumer segment.

In regard to the magnitude and composition of consumption of electricity in the two countries, there is indication that both countries reveal a net downstream effect in regard to the existing reform programs. It is because the response of the industries in regard to the reform measures is quiet slow. There are two indicators of consumption in industries that are applied in different regression specification. First is total industrial consumption and the per capita industrial consumption (Anupama Sen and Tooraj Jamasb). The first regression specification generally shows if the responses are even throughout the consumer in the industries or if the utilization of power from certain parts of an industry is disproportionately relative to other parts of the industry. The following data is from the Indian public resources. The information is Indian total industrial economic output (Anupama Sen and Tooraj Jamasb). The model estimations were estimated relative to the fixed variables on the table.

 

The estimation of the equation has been done disregarding the interaction variables to discern the infrastructural effect on the contribution of industries on GDP. The interaction terms indicate that there are insignificant and negligible coefficients. For instance the coefficient ELEC has almost equal size with the estimations (Anupama Sen and Tooraj Jamasb). From the table above it is therefore clear that the infrastructure has an effect on the amount of electricity sold in India. The figures above also indicate that infrastructure has contributed to the industrial development positive. However, it is hard to establish a separate the contribution of infrastructure from other interaction variables (Anupama Sen and Tooraj Jamasb). Also, the coefficient of roads in dictates that roads have a significant contribution. Following analytical approach by McCloskey & Ziliak (1996; 2004) the model is statistically significant and has economic significance implication. The economic significance may be determined through examination of the magnitudes of the coefficient and the amount of variation in the study variables. Considering the ELEC statistics, it has 0.14 and a high std. dev. of 215633.9. On the other hand, the coefficient of RDSI is equal to 10.98 but with a lesser std. dev. of 1426.451 (Anupama Sen and Tooraj Jamasb). This implies that the magnitude brought by the total impact brought by the two repressors on the dependent variables is the same.  There is negative coefficient on the TEL. this is an indication of adverse impact. TEL gives the proportion of growth in different physical lines of exchange and shows the underlying growth rate in the country.  Provided that there is connectivity in India in the past years there will be a decrease of fixed lines in the growth rate (Anupama Sen and Tooraj Jamasb). The variable TEL captures this effect. Therefore, the table above indicate that the industrial economic output has an association with the decrease in fixed line connection growth rate; the effects which are contributed by the existing substitution of latter with mobile connectivity (Anupama Sen and Tooraj Jamasb).

The RAIL coefficients appear positive and significant. POPN also has positive coefficient. ELEC also has a positive and significant coefficient. This is an indication that total industrial GDP in India is significantly contributed by the electricity infrastructure. The positive coefficient of RDSI shows that roads contribute to the industrial GDP significantly (Anupama Sen and Tooraj Jamasb).

Method of investigation of UK electricity market

This paper has used research papers analysis that applied ARMA-GARCH model with the exogenous variables for forecasting the electricity in hourly price in the UK day head market in attempt of explaining the feasibility of electricity deregulation in United Kingdom (Knittel, C. R., and Roberts). UK gives very interesting test for this research due to its price levels and the volatility, of prices in the European market. The data that is constructed consist of electricity price levels, the demand and the price of gas from 2014 to 2018. The data collected is analyzed and ARMA GARCH model is used to provide the best forecasting. One of the advantages of using the model is that it is the best model when the error variance in a time series follows an autoregressive model (Petrella, A. and Sapio, S.). In autoregressive moving average is assumed for the error variance, and then the model used is heteroskedasticity modal which is also referred to as GARCH model. The arch model gives a description of the variance of the error term as a function of the actual or real sizes of the measured time series. It is related to the square of the previous error term. The models used in analysis of the data makes the information reliable.

Introduction

The deregulation of electricity has risen due to the volatility of the wholesale prices of the electricity increment in the market on the basis of price determination mechanism. The deviation in terms of the actual commodity demand, the prices of fuel and the supply curve has created a market equilibrium shock. As a result, the prices sometimes may go below the price threshold or above the anticipated threshold depending on the supply of power in the market (Hugh, Rudnick, and Velasquez Constantin). For instance, the case of Germany electricity market; where the price fell to negative due to surplus effect. When there is high price volatility in the market, the consumers or the market participants are affected significantly which is a risk to the people buying or selling electricity. It is therefore the role of the policy makers to carry analysis of availability of electricity. The analysis enables them to spot the electricity price in order to examine the fairness in the market. In order to ensure that there is no bias in decision making, it is important to come up with a more reliable forecast of the price of electricity to get a clear picture of what is expected in future. This forecast will enable the policy makers to control the prices in the market and avoid the future risks that may cause exaggerated fall of electricity prices.

There are different models and approaches that can generate a reliable forecast of prices of electricity in the day-ahead-electricity market. One of the approaches is the one proposed by Weron (2014). Weron (2014) indicated that there are five classes of forecasting techniques. These classes are multi agent, reduced form, and fundamental class, statistical and computational intelligence. Basically there are different flexible tools that may be used to carry correct analysis of strategic characteristics of the electricity market. For instance the model discussed by Gao et al. (2008) known as electricity price modeling. The limitation of electricity price modeling is that they cannot give the policy makers the actual price values. The model only provides the estimates. The model built by Vahvilainen and pyykkonen (2005) are parameter rich models that make use of weather data to explain the formation of prices.

Sometimes it is difficult to have the market price data for electricity. Thus, it becomes a problem when constructing higher frequency price models. Also, the stochastic processes of critical price drivers are associated with several assumptions which make the simulated prices to have very sensitive disadvantages. There are different attributes of a model that are used in determination of the best model to use during forecasting. Some of the characteristics that are considered include the price dynamics, the price correlation and the marginal distribution. Among different models, pricing and risk analysis model seem to cater for the significant factors. The technique used in this analysis is that there is jump diffusion and Markov regime switching which is used to simulate the price rise at different price regime. Weron (2008) use the jump diffusion.

This paper uses Weron (2014) models to compare the Feasibility of Implementing Electricity Trading Mechanism of Deregulated Power System in India and UK. Specifically, the analysis of the data will be based on ARMA-GARCH with the exogenous variables for forecasting electricity price on daily basis. Different researches have been done that are related to the electricity price forecast. In ARMA literature, Cuaresma et al (2004) made a comparison of various linear forecasting methods in prediction of Leipzig prices of electricity. In their study, they compared autoregressive models, the autoregressive moving averages and unobserved models in order to come up with the best model approach. also, the scholar Contreras et al. (2003) proposed large parameter seasonal ARMA model which would do forecasting of electricity price in three countries; California, Spain and Australia. The advantage of these models is that they produce reasonable errors during estimation of market prices. Small error implies that the models are good for producing regressions that can be used in predicting the future prices of electricity. Scholars have tried to find the best model that is reliable in computation of forecast. The analysis done the five models so far indicates that ARMA-SGARCH-M model is the most robust model to use in electricity price forecasting.

Theoretical/Algorithmic/Experimental results

The papers explore and examine univariate models in comparison of the relationship between the electricity market in United Kingdom. Following the Lucia NA Schwartz (2000), the price of electricity P within a given time t is calculated as follows

Ph(t)=Gh(t)+ Fh(t)

Where h =1, 2, … the formula consist of deterministic components Gh at time t and the stochastic component F.

The deterministic component consists of the following.

  1. The seasonal dummies; Sh (t). Seasonal dummies are incorporated in the model because seasonality is part of estimation as it is a factor that affects the generation and the amount of power that is distributed to the people. Incorporating seasonal dummy in the model is important because it facilitate avoidance of spurious regression of exogenous variables in our model.
  2. The second component is the price driver Xh (t). These are exogenous variables which determine the price of electricity. In our case the major determinants of price of electricity are the demand of electricity power and the cost of fuel. their price driver estimation will therefore can be estimated by the following formula

Xh(t) = α 1 h(t) ∗ gash(t) + α 2 h(t) ∗ demand h(t)

The estimation of various univariate models on stochastic component under the seasonal process of ARMA and GARCH residuals will be done. From the general model below

ΦP (B sp(B)Fh(t) = ΘQ(B sq(B)ωh(t)

given that Fh(t) = Ph(t) − Gh(t) as above then we have B as the backshift operator ωh(t) as the residue value at time t and hour h. the other values p, q, P,Q and S are integers (values which may take both positive and negative values. S is the length of the season and term P and p represent the autoregressive process orders in the model for both seasonal and non-seasonal models. These models are represented as follows

θq(B p ) = 1 − θ1B − θ2B 2 − … − θqB q

ΘQ(B s ) = 1 − Θ1B s − Θ2B 2s − … − ΘQB Qs

The analysis of United Kingdom and India electricity market will also be based on the secondary data. Precisely, the information about United Kingdom electricity market comes from the United Kingdom national statistics and the time series data collected by the national statistics.

 The method of data evaluation

The data will be separated into different section. Basically two sections; the in sample and the out sample. The in section sample will span over the period of 5 years. The sample will then be used to produce a goodness of fit line of each model. The Bayesian information criterion will be used to calculate the best fir equation line. The BIC equation is as follows

BIC = log (σ2 ) + k( log n)/n

Where n represent the sample size and k is the number of parameters used. The value of k is used because in evaluation of forecasting performance, various parameters are used. These parameters include the Mean Absolute Error, the Expected shortfall and the maximum value residual.

Evaluation of univariate model

Seasonal process basically provides the study with better model that is accurate and reliable through combining the performance of seasonal ARMA-GARCH models. it is important noting that BIC depends on a number of parameters( indicated above). The dependency nature of BIC model sometimes reduces its reliability. The investigation however considered survey that used both BIC and ARMA-GARCH models in when analyzing the data of electricity price in the two countries.

A global model is basically non stalked time series model that is used in forecasting the hourly electricity price of the two countries. Therefore, any information presented in this paper, comes from research that used this type of model. Much of the information from this paper comes from analytical papers that treated electricity price in hourly frequency. This type of model is advantageous in terms of simplicity and the efficiency of the estimation because there are little parameters involved in the calculation. However the method sometimes violates the fact that day a head market is discrete and the price is usually updated at every unit time.

Statistical output of United Kingdom energy

The data analyzed come from the BEIS (Energy and industrial strategy). The contribution of energy on the GDP of United Kingdom is summarized in the table below

Attribute Percentage contribution
GDP 2.9
Industrial investment 33.6
Total investment 9.8
Annual business expenditure on 2016 research and  development 1.9
Direct employment 6.3

Source: UK ENERGY IN BRIEF 2018

The trend of the contribution to the GDP by the energy industries in United Kingdom from 1980 to 2017 is as below

Source: UK national statistics

The contribution of energy to the united kingdom GDP in 1982 was at 10.4 percent. There was a significant fall in oil and extraction of gas in 198 but oil and gas bovver the years has been among the major contributors of UK GDP. In 2015 and 2016 the production of oil increased. The prices of oil dropped below the prices of electricity (UK National statistics ). Later in 2017 the production of oil drop but the prices of oil increased. The contribution of GDP by the energy industries in UK economy became 2.9 percent. Electricity accounted for the 42 percent in the energy sector and oil accounted for 17 percent.

In the past years, the United Kingdom is making effort of diversification. The graph below represents the investment that have been done in energy industries from 2004 to 2017

Source:  UK ENERGY IN BRIEF 2018

The investment on the energy sector over the years has been increasing. Specifically in the electricity sector regardless of the drops in the recent years.  The national statistics indicate that in 2017 the at the current price of 18.7 billion pounds the investment was about 0.6% more than the previous business year (UK National statistics). Out of this figure, 30 percent represent the extraction of oil and gas, 60 percent is electricity, 7.5 percent in gas and the remainder is in extraction of coal, coke and refined products of petroleum.

The data below is in regard to primary fuel production from 1990 to 2017

  1990 2000 2010 2015 2016 2017
Primary oil 100.1 138.3 69.0 49.5 52.0 50.9
Natural gas 45.5 108.4 55.3 38.8 39.9 40.0
Coal 56.4 19. 6 11.4 5.4 2. 6 1.9
Primary electricity 16.7 20.2 15.1 20.1 20.0 20.9
Bioenergy and waste 0.7 2.3 6.1 10.3 11.8 12.9
Total 156.9 124.5 126.3 126.7

Source: UK ENERGY IN BRIEF 2018

There was a 0.4 percent increase in production of primary fuels when expression is done with respect to the energy content in 2017. This increase was basically contributed by the increase in the primary electricity from wind, solar and hydro power production. In addition, there records indicate that the increase was also contributed by the growth of gas, bioenergy and waste. There was a decline in oil and nuclear production. According to national statistics, the production of coal decreased, in 2017 significantly. The primary oil accounts for about 40 percent of the total production while the natural gas accounts for 32 percent. Also, the United Kingdom national statistics indicate that bioenergy accounts for 17 percent, waste 10 percent and the reminder (20 percent) represent the coal (UK National statistics).

There was an increase in total production between 1980 and 2000 because of the development of production of oil and gas. According to the national statistics, the production of natural gas was high than others, while the petroleum and the overall levels were put into records in 1999. Ever since there has been a decrease in the amount of oil and gas because the extraction sites are becoming exhausted and increase in maintenance activities. The United Kingdom national statistics indicate that the production is currently 57 percent lower than it used to be in 1999 (UK National statistics). Oil and gas has been recording an average decline of 5.7 percent per year since 2000. The graph below is a summary of the United Kingdom inland energy consumption from 1990 to 2017

 

                                                                                           Million tons of oil equipment
Total inland primary energy consumption 213.6 234.8 219.5 194.5 192.1
Conversion losses

Distribution losses

And energy industry use

66.4 53.8

 

20.7

50.3

 

18.0

37.4

 

15.0

35.8

 

15.0

Total final energy consumption 147.3 159.4 150.5 142.2 141.2
Final consumption of

Industry

Domestic sector

Transport

Services

 

38.7

40.8

48.6

19.2

 

35.5

46.9

55.5

21.5

 

23.7

41.7

56.0

20.8

 

24.1

40.1

56.5

20.5

Temperature corrected total inland consumption 221. 6 240.2 213.7 195.7 195.2

Source: UK ENERGY IN BRIEF 2018

In 2017 the primary energy consumption was 1.2 percent lower than the previous year 2016. in 2017 the average temperature was 0.3 degrees cooler than 2016. The national statistics indicates that in the last 30 years the natural gas consumption and consumption of electricity has increased while the consumption of oil and gas has dropped. Since 2009, the consumption of bioenergy and waste has been increasing significantly.

Energy consumption in United Kingdom from 1990 to 2017

2017                                                                                                     million tons of oil equivalent
  Industry Domestic Transport Services Total
Manufactured oil and coal 1.3 0. 6 0.00 0.00 1.9
Gas 8.7 25.5 8.0 42.2
Oil 4.3 2.5 55.1 2.0 63.9
Electricity 8.0 9.1 0.4 8.4 25.9
Bioenergy 1.9 2.5 1.0 2.1 7.4
Total 24.1 40.1 5.56 20.5 141.2

Source: UK ENERGY IN BRIEF 2018

The national statistics indicates that excluding the non-energy use, the final total energy consumption was 0.7 percent lower in 2017 compared to the amount of energy consumed in 2016. The fall was about 3.7 percent in the domestic sector, and 1.4 percent in the service sector. On the other hand, there was a 0.9 percent increase in energy consumption in the transport sector and 1. 6 percent rise in the industry sector. The decline of consumption of energy in the domestic and service sectors was contributed by the decrease in demand for heat in the winter 2017. the aggregate final energy consumption by 2017 had raised up by 0.9 percent (UK National statistics).

In regard to the type of fuel, gas consumption and the fuel used in heating, there was a fall of 3 percent. The consumption of oil increased by 1 percent with 1 percent increase in fuel consumed for the purposes of transportation (UK National statistics). The consumption of electricity reduced by 1 percent in 2017. There was an increase in the consumption of bioenergy in all the sectors except in transport

The import energy dependency in United Kingdom from 1970 to 2017

                                                                                                                                     Percentage
  2000 2010 2014 2015 2016 2017
Coal 39 52 87 60 47 57
Gas -11 40 47 43 47 46
Oil -55 14 43 37 34 35
Total -17 29 47 38 36 36

Source: UK ENERGY IN BRIEF 2018

The United Kingdom in 1970 was the net importer of energy. Oil and gas production was developed in the North Sea and this changed the importation history. United Kingdom becomes a net exporter of energy. There was a Piper Alpher disaster in 1980 which led to reduction of net exporter. In 2004 the country regained its net exporter. The country in 2013 increased the amount of petroleum imported into the country due to the closure of Coryton refinery. Today, United Kingdom has become a net importer of petroleum products. 3 percent of energy was imported in 2017 a significant fall of imported quantity due to increase in consumption of indigenous oil and gas output, reliance of electricity and renewable energy (UK National statistics).  The Eurostat latest data indicate that United Kingdom in 2016 had the 7th lowest importation level dependency in Europe. All the countries in Europe are today net importers of energy.

The graph below represents the primary sources of energy imports in United Kingdom from 1998 to 2017 as presented by UK national statistics

From 1999 the production of energy in the United Kingdom has been increasing. Precisely the importation of energy has increasing. In 2010, the imports exceeded the production level of the economy. United Kingdom still exports large volumes of other commodities therefore the net import still remained below the total economy production level. The national statistics records indicate that in 2017, the imports increased by 1 percent. However the importation of petroleum products and gas reduced.

The table below represents the percentage of United Kingdom energy which is supplied from low carbon sources from 2000 to 2017.

Source: UK national statistics

 

                                                                                                                       Percentage
  2000 2010 2014 2015 2016 2017
Nuclear 8.4 6.3 7.1 7.9 7.9 7.9
Wind 0.0 0.4 1.4 1.8 1. 6 2.2
Solar 0.0 0.0 0.2 0.4 0.5 0.5
Hydro 0.2 0.1 0.3 0.3 0.2 0.3
Bioenergy 0.9 0. 6 0. 6 0.5 0.5
Transport fuels 0.0 0. 6 0. 6 0.5 0.5 0.5
Other 0.00 0.00 0.1 0.5 0.5 0.5
Total 9.4 10.2 14.3 19.8 17.4 18.4

Source: UK ENERGY IN BRIEF 2018

United Kingdom in 2017 got 18 percent of its primary energy from low carbon sources. Among the sources, about 40 percent was from nuclear power. The Largest component of low carbon energy used by UK was the bioenergy which accounted for 35 percent of the total low carbon energy sources. The sources of energy from biofuel raised by 5 percent. The bigger proportion coming from the anaerobic digestion power generation. There was a 2 percent decline of nuclear energy because of the outages. The energy from wind in 2017 had increased by 34 percent which was a 23 percent increase.

The United Kingdom national statistics also indicated that the country is facing a problem of carbon emissions. Graph below represents the data of green gas emissions from 1990 to 2017.

Source: Ricardo Energy and Environment, BEIS (2017 provisional figures)

                                                                                                Million tons of CO2 equivalent
  1990 2000 2010 2015 2016 2017
CO2 net emissions 594.1 553.7 492.7 402.5 378.9 366.9
Methane 133.2 109.1 64.5 51. 6 51. 6 51. 6
Nitrous oxide 49. 6 29.9 22.5 21.5 21.4 21.4
HFC 14.4 9.8 16.4 15.9 15.2 15.2
PFC 1.7 0. 6 0.3 0.3 0.4 0.4
SF6 1.3 1.8 0.7 0.5 0.5 0.5
NF6 0.0 0.0 0.0 0.0 0.0 0.0
Total greenhouse gas emissions 794.2 705.0 597.1 492.4 47.9 455.9

Source: UK ENERGY IN BRIEF 2018

The estimated carbon emissions in 2017 were about 455.9 million tons. This is lower than the 2016 value (467.9). This is about 2. 6 percent decline and 43 percent lower than the 1990 carbon emission record. The amount of carbon dioxide emitted in the United Kingdom accounts for the 80 percent of the national 2017 anthropogenic greenhouse gas emission. In 201, the amount of carbon emission decreased significantly due to electricity generation that use ecosystem friendly technologies and increased consumption of renewable energy (UK ENERGY IN BRIEF 2018).

The reliability of oil and gas, and electricity in United Kingdom has been changing. The consumption of electricity is increasing. The graph below shows a reliability trend in regard to electricity and gas capacity margins. The graph incorporates the maximum supply and the maximum demand of energy from 1993 to 2018.

Source: National Grid and BEIS

Although there is complexity in energy supply in United Kingdom, previous data on energy consumption indicate that consumers are shifting to electricity. In 2017 the statistics indicate that capacity generation increased by thirty six percent.

More electricity is needed in unite kingdom following the increasing demand of power.  National data indicate that the government is making more effort to ensure that proportion of electricity is hire. This is to avoid carbon emissions in the country. The pie chart below gives a summary of electricity generation and method of generation between 2016 and 2017

                                                                                                                T.W.h
  1990 2000 2010 2016 2017
Coal 229.8 120.0 107. 6 30.7 22.7
Oil and other fuels 20.7 13. 6 10.5 10.5 9.7
Gas 0.4 148.1 175.7 143.4 136.7
Nuclear 63.2 85.1 62.1 71.7 70.3
Hydro 5. 6 5.1 3. 6 5.4 5.9
Wind and solar 0.9 10.3 47.7 1.5
Other renewables 4.3 12.3 30.1 31.9
Total electricity 319.7 377.1 382.1 339.3 338. 6
Source: UK ENERGY IN BRIEF 2018

In 2017 the amount of electricity generated decreased by 1 percent from the previous year generation. The trend of consumption of coal shows a decline. The share of generated electricity in 2016 reduced from 40.4 percent to 42.3 percent. The reduction of supply of electricity from the fossil fuel was due to increment in generation of electricity from the renewables which improved the proportion of power generation from 24.5 percent to 29.3 percent. In 2017, the generation of power using the renewables increased due to increase in the average speed of wind by 13.6 percent.

Discussion/Analysis of approach/results

In the previous years, the topic of electricity market deregulation has received a great deal of attention as a result of reconstructing the initiative in UK, US and among other countries. The study uses the following approaches, the concentration analysis, and the production simulation of cost and application of oligopoly market models. The regulatory and legal precedents have made the market of electricity in UK and USA to apply the concentration indices like Hirschman-Herfindah index (HHI). The type of analysis dominates regulatory proceeding over the proceedings over the utility mergers. The research by FERC over the proposed California ISO and PX (Joskow et al. 1996) utilized HHI concentration index. The disadvantages of this approach are that there is poor representation of elasticity of demand and supply. The approach is the best option because most market shares are basically the observable data is readily available. Today various model approaches have come across due to availability vast electricity generation data. The oligopoly modeling was first developed by Klemperer and Meyer in 1989 and later adopted by the United Kingdom electricity market in 1992. The electricity market uses the oligopoly model which is explicitly strategic model that has appeared in literatures of economies. The previous work done in analyzing of electricity market seems to have used the supply function equilibrium of oligopoly modeling.

 

General comparison between UK and India

Common issues

Despite the differences in the economic status of the two countries, the two countries experience some common issues. The population of the two countries has been increasing at a significant rate. More industries have developed in the two countries. The growth in population and introduction of new investment in the two markets has led to increase in the demand of electricity. The increasing demand of power has consequently caused a problem related to inadequate energy security. The two countries have not been able to supply the country with the needed power.  Due to increased demand of electricity, the prices of power have hiked significantly. The power plants in the two countries were set up long time ago. Some of the production firm has more than 20 years since the time they were set. It implies the technology used in setting up the power plants utilized technologies that is not efficient enough.

Both countries are faced by environmental issues. India and United Kingdom are among the members who participated in signing of the 2015 berlin act, which aimed in fighting the environmental impacts that are facing the globe recently. To ensure that the production of power involves activities that are environment friendly, the two countries are regulated by the strict environmental regulation. the two countries in the past years have been recording increasing emissions which contribute to global warming. The effects of environmental damage are evident in both countries. Even though United Kingdom is considered as a developed country, it is still experiencing the problem of energy transmission infrastructure that supplies power to the rural areas. India is also facing similar problems. Today, India is making more effort to have rural electrification. The only challenge that it’s hindering the achievement of electrification is inadequate infrastructure to supply electricity in all Indian states. Both countries are experiencing energy inefficient buildings.

The two companies are making more effort to close the technology gap. India and United Kingdom formed commissions that were to regulate power generation activities. Both countries have considered generation of power using clean fossil energy technology innovations to ensure that any power generation activity that the generating company uses is environmental friendly. There is also lack of technology transfer in the two countries. Following the recent report about the environmental problems in the two countries both countries are looking for the opportunities that will improve the efficiency. Both countries need to improve the renewable power generation and avoid the methods that affect the ecosystem negatively. Another common issue affecting the two countries is public acceptance. The citizens of both countries lack general awareness in regard to proper utilization of public utilities especially the natural resources. There is lack of communication between the government, the scholars and the general public. For this reason, the citizens face issue related to resistance to change.

Specific issues facing United Kingdom electrification

UK being a developed country in Europe is currently facing some challenges which are not common in Europe. Among many issues, the United Kingdom has problem of energy inefficiency homes as compared to the homes in other countries in the rest of Europe. The reason for the problem is lack of awareness among the users of energy in this country. The country is also experiencing energy intensive per capital.  In effort to reduce the problem, there is political pressure which makes the government to set up unrealistic environmental targets. Among the pressure is implementation of green energy production. despite the effort of implementing the ecosystem friendly power generation firms, the  united kingdom is still experiencing slow implementation of renewable energy due to lack of enough capacity to facilitate the projects.

In order to ensure that United Kingdom solve its issues, there are several methods that may facilitate implementation of 100 percent electrification in the country.

  1. the government need to facilitate the implementation of smart grid system
  2. replacement of old nuclear power plants with new power plants that apply recent technology has to be done
  3. The government needs to set a common national recycling scheme to reduce the pollution instances in the country. This will also ensure that the country natural resources are utilized properly.
  4. The government need to embrace bike hire schemed in the city. this initiative will reduce the amount of emissions in the cities
  5. The manufacturing industries and other energy consuming firms need to be encouraged to start investments in various types of low carbon power to diversity energy resources.
  6. The country also needs to diversify the gas supply into the country. This will minimize the amount of electricity power needed in the country. Other alternative sources of energy also need to be incorporated in manufacturing.
  7. The government needs to increase public awareness on the problem of energy in the country.
  8. The government also needs to give power generation companies incentives that will facilitate the companies that are involved in transmission to grow. For instance providing incentives that will facilitate improvement of power transmission connection between France and United Kingdom as well as other parts of Europe.

The United Kingdom policies

The United Kingdom is trying to set up scheme where large energy users are paid to use little amount of power. The government is also making effort in investing in anaerobic digesters as the alternative source of energy. The government has also come up with policies that encourage the integration of CHP to provide heating.

In addition to the above policies, the United Kingdom is doing immediate funding for the CSS projects. The government of United Kingdom has today started to embrace regional targets for low carbon technologies. More public awareness programs are watched on television programs which educate people on the ways of conserving nature and conservation of natural resources.

The following regional proposals have been set in effort of ensuring that there is power distribution efficiency in United Kingdom

  1. large mountainous regions and large potential for tidal power
  2. loosing 30 percent of the electricity generating capacity in the next 10 years
  3. the current government is fighting the nuclear energy production

2012 proposal

  1. Subsidization of building insulation
  2. R and D it tindal power
  3. Improving infrastructure for CHP

2015 proposal

  1. removal of tight legislation that existed in regard to the wind power
  2. investing in wind power as an alternative source of energy in the country
  3. substitution of fuel with gas especially municipal waste and the biomass

2025 proposal

  1. implementation of CHP for district heating
  2. investing on tidal power

2050 proposal

  1. Reduction of carbon dioxide emissions by 30 percent
  2. Making CSS operational

Issues that are specific to India

Currently India is among the countries that are facing a significant increase in population while retaining high economic growth. Recent research indicates that about 40 percent of household have no access to electricity. Generally there is heavy reliance of coal. Research indicates that there will be about sixty percent possible shortfall of 250 MT by 2020. The country also faces a problem of low transmission efficiency. The 2012 research indicate that India is the 5th largest carbon dioxide emitter in the world producing about 1300 MT per year. There is also inefficient use of fossil fuel in the rural areas especially in domestic use. There is poor communication gap between the academic research and the industries. The government does not does not give incentives to the industries that embrace green energy production.

Lastly there is a problem of utilization of waste. Basically, there is almost zero utilization of crop waste as biomass feed stocks. The use of motor vehicles is increasing in India. The implication is that more carbon emissions are expected in future if something will not be done.

Possible solution to the problems facing India

  • The power generating companies need to retrofit the older steam turbines.
  • Utilization of biomass waste effective way.
  • Exploring micro generation options of power generation.
  • Doing effective coal blending through selection of the correct set of coal.
  • Embracing effluent recycling methods to minimize waste discharge.
  • The government should diversify the sources of energy. Research regarding new source of energy need to be done. Diversification in power production will reduce the existing pressure on electricity.
  • Further studies regarding storage of carbon dioxide need to be done.
  • Increasing the exploration of natural gas and oil as sources of energy.
  • Start production of electricity through geothermal and wind.
  • Efficient green houses.
  • Make effort on discovering activities that reduce waste at coal handling and in the coal crushing zones.

The following policies have been set by the Indian government to ensure that power pressure is reduced and becomes enough throughout the country

  1. introduction of carbon credits has been made
  2. The government is issuing subsidies to small scale power generation. this ensures that people in the rural areas get access to reliable power supply
  3. the government has issued more strict monitoring to ensure that the industries comply to the set regulations
  4. building of decentralized biomass power generation plants
  5. The government is also creating awareness programs in regard to conservation and utilization of power in the Indian education system.
  6. The government of India today is encouraging the collaboration of industries and academia through funding of joint projects.
  7. the government has also set compulsory waste heat utilization systems in industries
  8. Ethanol blending for petro vehicles has been initiated.

Regional proposal for India

Chhattisgarh and Vidarbha regions are rich in coal. India government therefor intends to utilize the natural resource in the region in production of thermal power. In addition, the industries in India are getting turbines from dismantled ships for their captive electricity production. In addition, the government is discouraging the use of coal in n sponge iron plants to reduce the excessive utilization of natural resources.  The Indian government is also supporting the development of intra city and intercity electricity transaction network.

Some of the project proposal that Indian policy makers set are under implementation. For instance, the government of India had proposed that there will be infrastructural development for the utilization of crop waste and the renewable energy. The project proposal was set to be completed by 2015. In addition, the Indian government has set the 2020 project proposal that by this year the country will have come with the appropriate way of producing steel. In addition the development of inert city and intra city transport to be completed.

The Indian government also proposed that by 2025, the country will be producing hydrogen energy, and biodiesel which can be alternative source of energy. The government also target to reduce open cast mining significantly by 2025. The shift to ultra-mega power plant, fluidized bed combustors are expected to be set and completed by 2030.

General comparison between UK and India

Despite the difference in the economic, political and geographical location differences, India and United Kingdom are facing similar challenges. Firstly, both countries have a problem of increasing energy demand that is characterized by tight emission control. Therefore both countries have concern over energy security. The governments of both countries are currently corroborating with the academia and the industries to find the solutions for their challenges especially the issue of source of energy.

Both countries have begun to create more awareness and involving people against poor utilization of natural resource. TV shows and magazines that educate people about environmental conservation is an initiative started by the government of both countries. UK and India have international collaboration in regard to improvement of environment and facilitation of transfer of knowledge. India and United Kingdom have diversified the grid through variety investment on technologies that result to low carbon emissions.

Conclusion

As discuses above, the deregulation of electricity in United Kingdom and India emerged as a result of volatility of the wholesale prices of the electricity increment in the market on the basis of price determination mechanism. The existing differences are brought by actual commodity demand, the prices of fuel and the supply curve has created a market equilibrium shock. As a result, the prices sometimes may go below the price threshold or above the anticipated threshold depending on the supply of power in the market. For instance, the case of Germany electricity market; where the price fell to negative due to surplus effect. The policy makers need to come up with appropriate measures that are fair on the side of sellers and consumers of electricity.

Some policies that are set by the government may be applicable while others seem inapplicable because their implication on either consumer or the sellers may be advance. Therefore, the policy makers need to come up with appropriate measures that are fair on the side of sellers and consumers of electricity.

Population growth and high demand for electricity is a challenge that both countries are facing. Deregulation of electricity in both countries has ensured there is efficiency in supply, generation and retailing of electricity in both countries. The policies has assistant in diversification of power sector. Deregulation of energy has also promoted introduction of new power generating companies in the economy. Consequently, there is increase in production of power in the economies of both countries. As seen in the analysis, the consumption of electricity increased significantly after the start of deregulation policies. The trade in regard to power exchange in India has matured despite the challenge of low power volumes and high prices of electricity. The electricity market, all the operations in the market are today relatively efficient and investment of power generation has been promoted. The Indian government proposal that by 2025, there will be production of hydrogen energy and biodiesel as an alternative source of energy was facilitated by deregulation policies. It is because; the policy allows new investors in the power market. The policies set by the government allow new investors to venture into generation of electricity. The government also target to reduce open cast mining significantly by 2025. The shift to ultra-mega power plant, fluidized bed combustors are expected to be set and completed by 2030.

The opportunity that the electricity consumers have in United Kingdom deregulated market exerts pressure on the sellers of electricity. The pressure ensures that any company that ventures into the market provides people with the best services. The company that offers poor services to the company cannot cope in the market competition leading to closure. Therefore the only companies that have best services win the United Kingdom market share. The deregulation therefore improved the reliability of electricity in both countries.

The policies set by both countries demanded that the selling companies not to exceed specific profit ceiling. This regulation ensured that the participant companies do not over charge the consumers. Basically the primary role for such policy is control of natural monopolies that distributing companies may have. The electricity deregulation policies involved the restructuring of the power generation industry and unbundling of the sector components into different companies that deal with transmission, generation and retail supply of electricity supply. The improvement that have happened so far in regard to technical efficiency in utilization of existing capacity and capital need to be investigated. The unbundling done in both countries had a significant effect of electricity market. As indicated above unbundling of generation into different component increased the efficiency in production. The Indian and United Kingdom electrical power generation system needs to come up with additional polices and goals with objective of fulfillment of power sustainability all throughout the country.

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