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Impact of Reserve Margin Variance on Investment Encouragement and Competition for Creating Price Efficiency: Case of the Java-Bali Electricity System
Ira Savitri (B.Eng)
Project submitted in partial fulfilment of the requirements for the degree of MSc (Energy and Resources), UCL Australia.
The restructure of the Indonesia electricity market system aims to achieve price efficiency and encourage new investment. However, these two intentions are contradictory with regard to spare capacity, also known as the reserve margin level in the system.
This research examined an optimum reserve margin of the Java-Bali prospective competitive market with energy-only and spot-price system, by simulations using PLEXOS® software.
Intense competition in a high reserve margin condition increases price efficiency but reduces incentives for investors. In an energy-only market, these incentives are required to compensate investment cost that is not guaranteed. Failure to obtain them might discourage new investments. Conversely, a low reserve margin condition enables investors to control market prices that can lead to price inefficiency. Hence, an ‘optimum’ reserve margin is sought that establishes a balanced condition that creates price efficiency and encourages investment.
The simulations yielded different levels of optimum reserve margin in perfect and imperfect competition conditions. A sensitivity analysis on the results concerning the existence of market power demonstrates that high reserve margin does not necessarily improve price efficiency. The research suggests the Java-Bali system could increase the reserve margin, consider changing generator technology and fuel used, or lessen market power.