Electricity supply concerns are increasing. Supply reserve ratio for this winter is forecast to be negative (vs. H1 = severe winter high demand) and supply shortages are expected to continue.
Why have supply shortages occurred? The main reason is the failure of the electric power system reform. Many people have explained the reasons for the failure in the press and specialized magazines. All of them are correct, but the three essential reasons are as follows.
Three Reasons for System Reform Failure
1 Market Segmentation
System reform has divided the electricity market into three major markets: the kW (capacity) market, the ΔkW (adjustment power) market, and the kWh market trades (output). The kW market trades in terms of installed capacity (output), the ΔkW market trades in terms of adjustment power (change in output), and the kWh market trades in terms of electricity volume.
From the seller’s perspective (i.e., the power plant), in order to construct a power plant, it is necessary to have transactions in all three markets (or two of the kW and kWh markets). In order to construct a power plant, trading must take place in all three markets (or kW market and kWh market) previously. This is because power cannot be generated unless transactions are concluded in all markets beforehand.
When making an investment decision to build a power plant, it is not possible to obtain a priori (in advance) market information for all three markets. The result is that a single facility, a power plant, has been divided into three functions (capacity, adjustment, and quantity of electricity), and independent markets have been created and operated for each of these functions. As a result, they have created a system that discourages investment in power supply.
2 Division of Time
To make matters worse, the time units for each market are subdivided: The kW (capacity) market is divided into 1-year units, the ΔkW (regulating power) market into 3-hour units, and the kWh (electricity) market into 30-minute units.
This means that, in the kW market, for example, a contract may be executed for one year, but there is no guarantee that it will be executed for the next year and beyond. The same is true in the ΔkW and kWh markets, where a contract is executed during certain time frames but not during other time frames.
From the seller’s (power plant’s) point of view, there is no more unstable market than this. The time span (in hours) of contracts, which is a prerequisite for investment recovery, output adjustment, and fuel procurement, has been unnecessarily fragmented. It has created a system that makes the operation of power plants unstable.
3 Neglect of facility utilization rates
There is a close correlation between the costs of the three segmented markets. In particular, there is an inverse correlation between the cost of the kW (capacity) market and the cost of the kWh (quantity of electricity) market. For example, kW costs are high for nuclear and coal-fired power plants because of their high investment costs, but kWh costs are low because of low fuel prices.
Unfortunately, by splitting the kW and kWh markets, the power system has severed the correlation between the two. Originally, cost minimization should have been achieved by setting a guideline for facility utilization in advance, depending on the fuel used by the power plant.
The current power system splits the kW and kWh markets and does not take into account the relationship between the two (i.e., facility utilization rate). The idea of setting uniform prices for all fuel types in the divided market was fundamentally unreasonable.
Will the supply uncertainty be resolved?
For the time being, we must assume that this situation will continue.
Restarting nuclear power plants will take a considerable amount of time due to the high regulatory, social, and judicial hurdles. The construction of thermal power plants requires a fundamental overhaul of the power system, which the bureaucracy will not allow.
Furthermore, the policy outlook for carbon pricing cap-and-trade for decarbonization is extremely uncertain, which will cloud investment decisions.
We should not expect nuclear power plants to restart or power plants to be built under these conditions. It should be understood that the failure of power system reform will continue to have a major impact for at least three to four years.