Korean Energy Economic Review ISSN:1599-7057(Print) 에너지경제연구

The paper examines the incentives of power generating companies (GENCOs) for efficient fuel procurement for power generation under the Cost-Based Generation Pool (CBP) of Korean electricity market. With a 2-player, multi-plant model depicting the bidding and settlement rules of the CBP, the relationship between fuel costs and profits of GENCOs has been analyzed. It is shown that the GENCOs that possess both the peak-load and mid-load generation plants have little incentives for efficient fuel procurement for the peak-load generation fuel, as they could raise their profits by raising their own fuel costs for peak-load generation. The disincentive arises from the CBP operation rule that all generation bids accepted in the dispatch plan, except by the base-load generation, are settled with the same SMP at the highest variable cost, consisting mostly of fuel cost, irrespective of their variable costs. Higher fuel costs for peak-load generation plant is likely to lead to higher SMP, and accordingly, the profit margins for mid-load generation plants, the difference between the SMP and the costs of mid-load generation fuel, are also likely to be higher.