Alyzing the Effects of Fuel Price Reform on Electricity Industry’s Financial Balance, Employing a Simulation of the Function of the Market

Subject Areas : Financial Economics

jamshid Pajooyan ¹ , Taymot mohammadi ² , Ali Asghar Ismail Nia ³ , elham gaforiyan ⁴

1 - Department of Economics, Science and Research Unit, Tehran. Iran
2 - Faculty of Economics, Allameh Tabatabai University, Tehran. Iran
3 - Department of Economics, Central Tehran Branch, Islamic Azad University, Tehran, Iran
4 - Financial Group, Islamic Azad University, Tehran, Iran Science and Research Branch

Received: 2022-12-30 Accepted : 2023-03-06 Published : 2023-03-21

Keywords: Q41, exchange rate, L94, Keywords: Simulation, wholesale Electricity Market, Base Availability Payment, Market Price Cap, Fuel Price, Internal Rate of Return JEL Classification: Q5,

Abstract :

  Abstract This article is devoted to the study of the impact of a reform in power plant fuel prices on the key variables of Iran's electricity market (average electricity price and the financial balance of the electricity industry). It is based on a simulation model. In this regard, we employed a model in which the presence or absence of competition in the electricity market is based on the amount of power plant storage factor that is available in every hour. The corresponding critical storage factor, which is based on actual operation, is also calculated. Due to a suppressed price cap and availability rate (that is even lower than what is necessary for sending optimal investment signals), the current price cap and availability rate is not a valid starting point for calculating the desired effects. Hence, before examining the effects of a price reform on the mentioned variables, the price cap and availability rates need to be adjusted to a level that can guarantee a minimum IRR for investors in this sector. According to calculations, in order to sending the necessary signals for investment, by assuming a fixed availability rate, it is necessary to increase the current price cap (nearly 417 Rials per kilowatt hour) to a new level (570 Rials per kilowatt hour). According to that, the average wholesale market price will increase from nearly 600 Rials per kilowatt hour to 706 Rials per kilowatt hour. The implementation of this policy imposes a financial burden of about 29894 billion Rials to the Ministry of Energy. Given that, in markets amid with a price cap (and hence an availability payment), a price reform in fuel price, requires a proportional modification in the market price cap. Based on this obligation, the effects of the price reform on the mentioned variables, is calculated and analyzed. The analysis is based on three different scenarios about fuel price for power plants; The price of gas used in the petrochemical industry (as a raw material for this industry), the price of gas that is exported to Turkey, and, the minimum bound foreseen in the "law on the targeting of subsidies" in relation to the price of natural gas. Implementation of the mentioned scenarios will increase the market cap from 570 Rials per kilowatt hour to 1783, 3655 and 2830 Rials per kilowatt hour respectively. Adjusted average market price, proportional to the adjustment made in the market price cap, would be equivalent to 1922, 3801 and 2973 rials per kilowatt hour respectively. Furthermore, the financial burden corresponding to these scenarios will be 61717, 156574 and 114866 billion Rials respectively.

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