The creation of an internal competitive market for electricity

generators

Equipped with the new economic approach and his system design professional competence, Hveding introduced a re-framing of the sector governance system. Each investment project should no longer be calculated as an autonomous project, but as an integrated part of the entire national electricity system. This turned the overall design of the system into focus.

Efficient coordination of the entire system and the quality of marginal investments became important, as projects differed in their contributions to the overall efficiency of the system. This turned Hveding’s attention in three directions: Firstly, towards what could be achieved by introducing thermal power to the 100% hydro-power based system, secondly towards ranking new hydropower projects according to their system contribution characteristics, and thirdly, towards what could be achieved from an efficient system for short term power exchange across regions with statistical differences in precipitation and variations in reservoir capacities. These elements were important technical and governance system elements in a network system which we may denote “the Hveding collective”. Each of these elements shaped networks and events within the sector in line with the new framing. In the world model surrounding the core concept of the program, the dominant command position was that of the system planner, where as both economic theory, sector actors and technical or institutional governance systems where given the more supportive roles.

His first publication on his approach was a paper denoted “Digital simulation techniques in power system design” (Hveding, 1968) in which he outlined the principles for a numeric simulation-model for the hydropower system which later became known as the EFI-model. The model became a very useful and powerful instrument to system planners as well as to electricity companies and network operators. With modifications and substantial upgrading it is still used by practitioners within the electricity system.

Simulations by the model showed that substantial economic gains would follow from an efficient short term trade system and from the introduction of thermal power to the system. These gains became known under the label

“joint operation gains”⁵⁷.

In Sweden the two engineers Sven Stage and Yngve Larsson had done some early work on the EdF hydropower system theory and came to influence Hveding’s work. Larsson advised Hveding on how to construct a numerical simulation model rather than a statistical model, and Stage demonstrated to Hveding by the use of marginal cost theory, that thermal power plants would never be used for peak-load purposes if introduced to a hydro-power system.

This followed because if the price approached marginal costs in a thermal power plant, it would be more economic to produce thermal power at full capacity and then use hydro-power for peak-load purposes⁵⁸. These insights became essential elements in Hveding’s new electricity system design approach.

From the insights obtained from his simulation model, and already before taking over as the new director general of the NVE in 1968, Hveding argued that the unification of the national grid system should be followed by the establishing of an organized market system for short term trade with electricity between generators. One of the essential problems in the hydro-power system which had been addressed by the EdF, was the stochastic variation in precipitation across regions and across seasons and years. Each individual dam would have a stochastic variation much larger than the aggregated system. In order to increase the amount of power which could be produced with high security of supply standards, all the reservoirs had to be coordinated. In the centralized EdF system, this could be done by calculating the marginal storage value (shadow prices) in each dam, rank all the dams in accordance with their marginal values and then command those with the lower values to produce before those with the higher values. This would

57 “samkjøringsgevinsten”, my translation

58 Interview with Hveding, 18.03.99

correspond to an efficient “imitated” market as suggested for instance by Oscar Lange.

In the Norwegian case, the hierarchical option was not plausible. The solution to the problem advocated by Hveding, was to establish a real marked in accordance with economic theory and with the standard institutional arrangements needed for an efficient and practical trading system. To calculate marginal storage values would then remain a local responsibility as well as the decision whether to store or produce at the margin in a straight forward market system.

Such an internal competitive market system was established after the final merging of the northern electricity network with the southern in 1970, and after substantial pressures from Hveding and the NVE on Samkjøringen to create it. In 1971 - after three-four years of argument - NVE director general Hveding had to put substantial pressures on a grudging Samkjøringen to create an exchange system through which the generators could trade electricity with each other based on a single market price. Pressures were also mobilized through the parliament which criticized Samkjøring for not utilizing national resources efficiently, and through Statkraftverkene as a member of Samkjøringen. To Hveding’s apparent surprise, the system became operational only a few months later, from July 5^th 1971, and was denoted “the occasional power market”⁵⁹ (Barth Jacobsen, 1998: 136)

Samkjøringen had been arguing for a different system based on bilateral power exchange in line with practices in other countries and similar to the contractual arrangements for longer term contracts. As it turned out, Norway already from 1971 came to establish a unique “ideal” market system for short term electricity trade within the central station system, with third party access and common carrier principles within the high voltage national grid system. (Within the regional and local networks however, each network owner controlled access). Over the years, the new market system came to represent approximately 10% of the total volume traded in the Norwegian electricity system.

The presentation demonstrates that the new market system was not something which “emerged in some natural way” from within the sector – for instance as a consequence of the merging of the regional high voltage systems or from the economic interests of individual generators. Rather, it was constructed through the application of economic theory, system design

59 Tilfeldigkraft markedet

theory and new governance technologies by actors engaged in re-framing and re-configuring the industry from the basis of a specific scientific reform program. The merging of the system into one national grid system, however, provided a “window of opportunity” for creating such a system – by overthrowing traditional practices and resistance from within the sector.

The creation of the new market was done by establishing a very simple exchange institution with standardized contracts for a homogenous commodity, in which the generators could engage in an anonymous auction which externalized social networks or other links between the buyers and the sellers. Nothing but the price, the calculated marginal value of stored water and the expected future demand remained within the relevant context of decision-making.

The initial institutional arrangements were primitive by any comparison to other organized exchange markets. There was only a weekly organized auction organized over telephone communication and with manual calculation of market equilibrium prices. There was only one type of contracts; weekly spot contracts for physical delivery, and regulatory services for shorter periods of time were operated by Statkraftverkene alone⁶⁰. However, the construction of a market institution from a theoretical ideal model represented a radical but only partial remaking of the sector and its actors – as the trading system only related to a marginal share of the entire trading system.

Soon the new computer technology was introduced to do the fairly complex calculations, and Samkjøringen gradually developed more efficient procedures which permitted for an extension of the market in terms of more frequent auctions and additional trading instruments. The new market quickly gained strong support from the members of Samkjøringen and its new director Rolf Wiedswang engaged in improving and expanding the new system. In figure 7.1. I have drawn up the simplified elements of the

“Hveding-collective and its efforts at transforming the electricity sector:

Figure 7.1. Simplified elements in the Hveding collective

Time

60 Barth Jacobsen, 1998: 135

Market liberalism (Trygve Hoff) Electrical

system design theory

Pathway to

realization/stabilization

Conceptual programs are represented by circles. Quadrangles indicate actants in the Hveding collective. Shaded quadrangles indicate elements/

systems (actants) constructed by the collective.

The Hveding collective became shaped by the joining of electricity system design as an engineer discipline with the EdF electricity economics, and its authority and major support came from this economic system design tradition, from Hveding’s relations to leading World Bank managers and professionals and from the institutional powers of the NVE director general position. The program became influenced by early market-liberal economic influences and by a related critical view on the outcome of the state-hierarchical social democratic post war economic policy. Through the State Energy Council report and the mediations with representatives of the

Kuwait Fund

Occasional power market

Thermal power plants

Cable to Denmark

Program:

Efficient electricity system (design)

World Bank managers Stage, Larsson

NVE, director general

EFI simulation model State Energy

Nordic power exchange system Coalition government

energy program

EdF- electricity economic

theory

hierarchical restructuring and the atomic energy programs within the council, the Hveding collective came to shape the principles of the coalition government electricity system policy.

7.2 Hveding and the Norwegian electricity economists