Vinacomin Power Holding Corporation Limited, a state-owned subsidiary of VINACOMIN. VP is one of the leading Independent Power Producer in Vietnam. VP was established in October 2009 and its main functions are to manage and operate power plants, in which VINACOMIN has invested since 1999. Moreover, VP also develops new projects, mostly thermal power plants. Its Charter Capital is 6,800 billion VND (equiv. US$ 360 mil.).
Total numbers of power projects that VP is managing, implementing and planning are 16 projects:
Coal fired thermal power projects: 14 (included 5 power plants are operating: Na Duong 110 MW, Cao Ngan 110 MW, Son Dong 220 MW, Cam Pha 660 MW, Mao Khe 440 MW).
Combine cycle thermal power projects: 1
Hydro power project: 1
Most of coal fired power projects are using local, low quality coal with CFB technology, only one project is expected to use imported coal.
In 2012, VP has 5 Thermal Power Plants with total installed capacity of 1,540 MW (accounted for 6% of Vietnam's total generation capacity) with the output of 6.5 billion KWh per year. Its revenue is expected to reaches almost 5,400 billion VND (equiv. US$ 270 mil.) in 2012. VP has a very strong workforce with over 2,000 people.
Problem statement
Until early 2012, the electricity sector in Vietnam has been a State monopoly market where Electricity of Vietnam (EVN), a state company, owned more than 71% of all electricity generation capacity, all transmission lines, all electricity operation systems, the electricity distribution and electricity retail. In this monopoly market, electricity prices and the generation output of power plants have all been decided by EVN with the effects that electricity pricing has not been transparent and has not reflected the costs; prices have been low and unattractive for investors.
To develop a competitive electricity market in order to improve the economic efficiencies of power supplies and uses in the country, Vietnam Competitive Generation Market - VCGM has been established and put into operation in 1/7/2012. VCGM aims to increase competitiveness and transparency in generation pricing. Twenty-nine power plants, with a total capacity of about 9-GW (about 36% of total installed capacity), have joined the VCGM since July 1. Among these suppliers 13 are hydroelectric, 11 are coal fired (included 5 VP's Power Plant) and 5 are gas-turbine generators.
During the three months since joining the VCGM, the total revenue of VP has been reduced by 20 billions VND (equiv. US$ 1 mil.) compared to the Contract output revenue. All Vinacomin Power's thermal power plants did not operate at full-load, always generating about 30% of the total installed capacity. The causes of these problems were: Dispatch and Pricing Issues, Contract issues, Market system issues, and Power Plant bidding Strategy issues.
Research objectives and research questions
Research Objective 1: To describe Vietnam Competitive Generation Market - VCGM:
RQ 1.1: What is VCGM's market mechanisms, market rules and procedures?
RQ 1.2: What are problems of VP when joining VCGM?
RQ 1.3: What are the causes of these problems?
Research Objective 2: To describe how VP could become more effective and efficient within VCGM.
RQ 2.1: What should VP's power plants do to increase the generation output?
RQ 2.2: How should VP's power plants bid to get higher profits?
Research objective 3: Conclusions and recommendations
Research question 3.1 What are the major conclusions?
Research question 3.2 What are the major recommendations?
Research question 3.3 What are the first steps to be taken?
Research methodology
The approach of this research will be based on qualitative and quantitative methods.
Primary data
Primary data collection method:
In-depth-interviews (face-to-face) for pre-testing the questionnaire with VP's CEO, a Deputy General Manager and VCGM supervisors in VP Planning Department.
Questionnaire survey (email questionnaire): To collect the opinions of Vinacomin's Thermal Power plants bidding staff and some Independent Power Producers bidding staff. The questionnaire is in Appendix 1.
Sample size:
In-depth-interviews: Pre-test the questionnaire with VP's CEO, a Deputy General Manager and 2 staff who are responsible for VCGM and Bidding supervisor in VP Planning Department.
Questionnaire survey: The questionnaire will be distributed to 20 bidding staff in VCGM from 5 VP's Power plants and 15 IPPs to find VCGM problems.
c) Sampling process:
Convenient sampling: The researcher will do interviews and send questionnaires to staff who are allowed and willing to give information about the bidding strategy and VCGM operation information.
Secondary data
VCGM's market mechanisms, market rules and procedures
Reports from the VP's thermal power plant; VCGM website, academic articles and academic books.
Scope and limitations
The scope and limitations of this study are as follows.
Scope
This research is carried out in VP's Power plants and some IPPs in VietNam. It is a study about the VCGM and its effects on the operation of VP's Power plants. In order to reach the objectives of the study, the researcher firstly analyzes VCGM and identify which elements affect Power plant's revenue most ? Secondly, the researcher find solutions for VP's power plants to increase the generation output and get higher profits in VCGM?. As study of VCGM, the bidding strategies and related actors so we choose many people from different position. They include senior managers, line managers of VP. Several staff that is responsible for bidding in VCGM from 5 VP's Power plants and 15 IPPs will also be included.
Limitations
Since this study is carried out in VP's Power Plants and all are Coal fired; therefore, conclusions and recommendations for other kinds of power plant like Hydro, Gas turbine, Oil fired, Gas fired would be different.
Besides, there are also methodological limits: (i) The questionnaire has been pre-tested by face-to-face interview with four (04) people. (ii) The questionnaire is delivered to about 15% of the employees who responsible for bidding in VCGM (iii) The sampling is convenient. (iv) The limited number of respondents and convenient sampling, the results will not be representative and cannot be generalized to other kinds of power plant.
Finally, there are limited resources such as time, human resources and budget to have deep analysis.
Benefits of the study
The outcome of this research will provide the researcher and VP management a real picture about the current situation of VCGM and VP's Power Plants bidding strategies in VCGM. The findings from this study can be used to have a better bidding in VCGM in the future.
Rationale
Understand current issues of VCGM will help the authorities build a competition and transparency in the power market, reduce market Power, attracting investments.
Chapter: Literature review
In this chapter we clarify the major meanings of concepts in form of definitions and discuss the approaches we find in the literature (2.1) that contribute to solve the problem. Finally, in 2.2 we briefly inform on what concepts and approached we use in this study.
2.1. Definitions and approaches
2.1.1. Market Power:
In economics, market power is the ability of a business to increase the prices of a good or service higher than the marginal cost. In perfectly competitive markets, Participants have no market power. A firm with market power can raise prices without losing its customers to competitors.
2.1.2.Measurement of Market Power:
The traditional assessment of market power has focused on "(…) the ability to profitably alter prices away from competitive levels" (Stoft, Power. System Economics, 2002, p. 318).
2.1.3.Electric Pricing
Before developing on the pricing of electricity, we shortly describe the cost structure of electricity generation. Three main elements determine the total cost of consumption:
· the energy used (measured in watt-hour, Wh);
· the maximal load (in watt, W);
· the voltage (in volt, V).
The two last elements related to fixed costs, because they induce a specific level of capacity for generation, transmission and distribution. Once this capacity is built, only maintenance needs to be done. Additional cost derives only from the amount of energy consumed, which varies in time. This variation implies that the total capacity will not be used at all times. The load factor, defined as the ratio of the average load to the maximal load, is a good indicator of the utilization of the production and transmission capacities. The higher the load factor, the more often total capacity is fully used. A lower load factor indicates that a large part of the capacity is idle most of the time, meaning that the investment is not productive. Being productive only in some particular moments creates a cost recovery problem as the periods during which consumers may be charged are limited.
This problem, caused by varying electricity demand and the non-storability of electricity is known as the peak load problem.
2.1.4. Marginal cost pricing
Marginal cost of a product is the "cost" of producing one more unit of product (MIT, Dictionary of Economics (1992)). Marginal cost in electricity markets is the "cost" of producing one more kWh of electrical energy at a certain operating condition.
2.1.5. Vietnam Competitive generation Market (VCGM)
Vietnam Competitive Generation Market - VCGM has been established after long period of research and development. According to Circular No. 18/2012/TT-BCT dated June 29, 2012 of the Ministry of Industry and Trade on the supervision of competitive electricity market, the definition, function and Market operational Principles of VCGM is:
• Entities competing in generation: these are power plants with installed capacity equal to or higher than 30 MW and connected to the national power grid either directly to the transmission network or via a distribution network, but excluding wind power farms and geothermal power plants. These entities are further classified into:
o Indirect trading Generators, including:
- Strategic Multi-Purpose Hydro Power Plants (SMHPs)
- Fast Start Reserve (FSRs)
- Cold Start Reserve (CSRs)
- Reliability Must Run (RMRs)
o Direct trading Generators
• Single Buyer (SB) - this is the Electricity Power Trading Company (EPTC) under EVN and will be subsequently referred to interchangeably as either SB or EPTC
• System and Market Operator (SMO) - this is the National Load Dispatch Center (NLDC)
• Service Providers including the:
o Metering Data Management Service Provider (MDMSP) - this is the Information Technology Center under the EVN Telecom (EVN.IT)
o Power Transmission Service Provider - this is the National Power Transmission Corporation (NPT).
Market operational Principles:
In the VCGM, all electricity generated by power plants is sold to EPTC (the SB), and their generating units are scheduled based on their variable cost-based bids. Payment for the transacted electricity is made at the contract price and the spot market price of each trading interval with the use of contract for difference. During the first year of the market, the proportion of electricity procured at the contract price will be set at 90% - 95% of the total electricity generated by the plant; the remaining will be procured at the spot market price. This proportion will be gradually reduced in the following years to enhance the competitiveness in generation, but shall not be less than 60%.
All Generators that own power plants with capacities above 30 MW are required to participate in the VCGM. The SMO, as a service provider, operates the market, and is responsible for scheduling and dispatching the energy and ancillary services. The required participation in the VCGM differs among the generators.
SMO calculates and schedules the power plant generation based on their bid, merit order (from low to high price) to meet the demand.
2.2. Concepts and approaches used
Marginal cost plays a key role in the economic theory that proves a competitive market is efficient, but there are also two practical uses of marginal cost that increase its importance in a power market. First, many power markets rely on a central day-ahead auction in which generators submit individual supply curves and the system operator uses these to determine the market price. Because price should equal marginal cost in an efficient market, the auction rules should be informed by a coherent theory of marginal cost. Second, many power markets suffer from potential market-power problems which cause the market price to diverge from marginal cost. Market monitors need to understand this divergence.
Although the competitive market price usually equals the marginal cost of production, it is not determined by that alone. At times marginal cost is ambiguous, yet the competitive price is not. Then, marginal value (to customers) plays the decisive role. The competitive price is determined by the intersection of the market's supply and demand curves. Marginal cost determines only the supply curve. A supply curve can be thought of as answering the question, How much would a generator produce if the market price were $P/MWh?
By understanding this concept, VP's Power Plants will have a good bidding strategy in VCGM.
