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This study is part of a research project on China's electricity industry conducted jointly with the Université de la Méditerranée in France, and Swiss Electricity Ltd, and is funded by the EU. Despite three decades of market-oriented reforms in China, the electricity price-formation process is still state-controlled. The study shows how this process induces electricity producers to manipulate costs to gain an advantage when negotiating prices with the state. Consequently, despite government intervention, industrial consumers in China pay as much as their counterparts in developed Western economies with liberalised electricity sectors. These findings have informed the latest plans for price reform being prepared by the electricity regulator in China.
The banking crisis that followed the collapse of Northern Rock in 2007 resulted in an urgent need to inject liquidity into the financial system. In order to resolve these issues, the Bank of England asked Professor Klemperer, an expert in auction theory, to help re-dseign its long-term market operations to allow the Bank of England to auction loans backed by financial collateral of varying quality. Since 2010, this has been adopted as the Bank of England's standard mechanism for its long-term repurchase operations. The potential impact of the new auction design extends beyond the Bank of England to other central banks, private industry and to industry regulators.
Derek Bunn has led a research programme on understanding competition, market evolution, and prices in electricity markets. He and other researchers in the LBS Energy Markets Group have modelled production facilities in detail, their explicit ownerships, and the price-formation process. Their use of computational learning provides subtle insights which have eluded conventional approaches. The LBS group was the first to do this, and the approach is now widely applied. Relevance of the work is recognised via funding from major energy companies and research organisations. In terms of external impact, this work has informed extensive advice to several government inquiries, stimulated further research, and is actively used by commericial businesses.
Research at the University of Strathclyde between 2003 and 2008 directly produced the following impacts from 2008 onwards: 10 wind farms (17 MW aggregate capacity) connected to the Orkney power network from 2009 to 2013 with accompanying economic and environmental benefits; Orkney power network reinforcement deferral saving of £30M from 2009 with repeat deployments of Active Network Management (ANM) technology in other UK power networks; spin-out company formed in September 2008 with total revenues to date of £6.1M, equity investment totalling £3.5M and 35 FTE jobs created; provision of new power system options for long term network plans impacting the 2013 investment decisions in distribution network companies; contribution to the emerging Smart Grid business sector in the UK and overseas from 2008.
Research at Bath has developed a new network charging methodology, known as "Long Run Incremental Cost (LRIC) pricing for electricity distribution systems". The methodology enables the calculation of location-specific annual network charges for electricity generators and suppliers. It has replaced the flat-rate charging approach used by the industry for the previous 25 years. Bath's work on LRIC has led to: 1) major impact on government policy, because in 2008 the UK regulator Ofgem required Distribution Network Operators (DNOs) to adopt LRIC as an industry standard, using the evidence provided by Bath that LRIC's uptake can lead to efficiency savings over the next 20 years of about £200 million for DNOs, and 2) major impact on industrial practice, because the subsequent industrial adoption of LRIC over 80% of the UK distribution area has enabled the DNOs to promote efficient use of the existing infrastructure. Further, LRIC's adoption in the UK has triggered a wide review of transmission and distribution pricing in countries including Brazil, Ireland, India and China. It also led to the establishment of the IEEE International Working Group on Network Charging, chaired by Li (Bath). Many of LRIC's key researchers at Bath have subsequently taken key roles in network planning and pricing in UK and international industry.
The Electricity Policy Research Group (EPRG), led by Professor David Newbery, has undertaken research into electricity market restructuring, privatisation and regulation that has achieved internationally leading status among public policy makers. Government users, both national and international (in the UK, Ireland and the European Commission) request EPRG policy advice on electricity market design, monitoring for market abuse, regulation of transmission and distribution, and design of access pricing. Industrial users demand analytical briefings and credit EPRG for moving the debate from rhetoric to more quantitative approaches.
Geman's research has made contributions to exotic option pricing, insurance and catastrophic risk, high frequency trading, and the whole spectrum of commodities, from crude oil and electricity to metals and agricultural commodities. Her research identified complex options and derivatives for commodities, and their applications for risk management and the valuation of physical assets for energy and mining companies, as a relatively under-researched and neglected field, and has made several scientific contributions to it (detailed in section 2).
There are four impacts detailed in this case study:
The Power Systems research team at Imperial made pivotal contributions in the design of power transmission networks, the equipment within these networks, and non-conventional electricity systems. Since 2008, the impact of their research has been to:
I1) influence government policies by contributing to House of Common Select Committee (2010);
I2) support the Fundamental Review of Supply Quality and Security Standards;
I3) assist National Grid in defining new investment affecting £3bn worth of network assets now approved by the regulator (2013);
I4) provide tools to develop the first offshore networks design standards in 2008, saving an estimated £500m by 2013 to date and a projected overall saving of £1-2bn by 2020;
I5) advance Alstom's design concept for next generation HVDC converter stations for offshore wind connection from TRL 1 in 2009 to TRL 4 in 2013 supported by 3 new patents;
I6) enable UK Power Network to plan network investment of £1.18bn and make savings of £130m (2013) through applying new technologies and demand response;
I7) facilitate a scheme for off-grid energy kiosks for electrification in rural Africa yielding social gains and a business opportunity.
Professor Michael Waterson demonstrated how two consumer activities — search and switching — are necessary if competition is to benefit consumers. He showed how search and switching costs inhibit the competitive process; highlighted how firms increase these costs in retail, banking, insurance and energy markets, and recommended government measures to empower consumers. Regulators around the world have used Waterson's research to enhance the consumer benefits from competition. Professor Gregory Crawford also analysed switching costs, estimating the costs of automatically renewable contracts in the UK telephone market. Based on this analysis, Ofcom banned rollover contracts for all residential and small business customers of voice telephone and broadband services, reducing households' and small businesses' switching costs by at least £340 million/year.
Financial engineering and optimisation provide both power companies and consumers with better decision support in deregulated energy sectors. UCL research has delivered the following benefits to decision makers: (i) a clearer understanding of the role of statistical analysis in imputing missing data on wind speeds and (ii) reduction in energy costs by optimised scheduling of energy technologies. Other benefits have been (i) investment in follow-up research projects by industrial companies and (ii) knowledge transfer via workshops.