A Pilot Study of Locational Marginal Pricing for Deregulated Electricity Market in Taiwan


Author:King Min Wang and Ting-Wei Kuo

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It has been more than 10 years since UK started privatization and liberalization of its power industry. EU, USA, Australia, New Zealand and other countries of the world all followed the trend of deregulation. The performance of the deregulation policy has been observed in the operation of power market and the power system in each country. Taiwan has the policy of power market deregulation in the reform agenda for more than 10 years. The latest version of the deregulation policy was prescribed by the draft of the Electricity Act amendment that was submitted by Energy Bureau on 13 October, 2005. The amendment deregulates the industry by opening the entry of generation, transmission and distribution business. Independent system operator will be the core body of the future market and system operation. The objectives of the deregulation policy are to enhance the competitiveness of the industry as well as to attract the private investment. The final goal is to keep with the world trend of deregulation and to build a fair and reasonable competitive power market so that the resource allocation of power industry can be more efficient. Traditionally, the industry has been regulated and monopolized by a vertically integrated utility, i.e., Taipower Company. Rate of return method has been used to the electricity tariff structure. Cross subsidy was evident in the different type of customers. This has resulted in resource misallocation and economic inefficiency. After deregulation, this pricing method ought to be changed and should obey the law of market mechanism which is driven by the supply and demand forces. How to develop a suitable pricing approach for the deregulated electricity market in Taiwan to get rid of the price signal distortion and to increase the efficiency is an imperative issue. According to the successful experiences of the advanced countries in their deregulated electricity market, most of them adopted either nodal pricing or locational marginal pricing approach. Under these methods electricity price will vary with time and location to reflect the true marginal value of electricity supply. This paper is intended to act as a pilot study of nodal pricing and locational marginal pricing and their impacts for deregulated electricity market in Taiwan. Firstly, we analysed the deregulation policy of Taiwan electricity supply industry. Secondly, we reviewed the pricing methods of nodal price and locational marginal price adopted by other jurisdictions with the successful experience in power market operation. In light of the review we apply similar pricing approach to the case of Taiwan to explore the extent of electricity price variations. Finally, the results and disscussions were presented to decision makers responsible for the reform of deregulating Taiwan electricity supply industry. It is our hope that the paper with its findings can contribute to the successful reform of deregulating the electricity supply industry in Taiwan.