Competition in Electricity Spot Markets: Economic Theory and International Experience

auctions, electricity markets

Unilateral market power in wholesale electricity markets - A Cournot based analysis

This thesis studies the unilateral market power in wholesale electricity markets, its reasons and its extent. The study is constructed on a Cournot competition model. I first go through the Cournot duopoly competition and then present the Cournot competition for n firms. I show that the Cournot equilibrium always settles between the competitive and the monopoly equilibriums. I then construct an electricity market specific duopoly game considering different marginal costs for different (base and peak load) capacities. I play five games, each with a slightly different setting. I prove that firms' unilateral market power rises along with the marginal costs of electricity. When capacity gets more expensive firms have less incentives to offer it to the market and are therefore also more aware of their rival's preferred strategies. I prove my point by presenting some of the most relevant previous empirical studies from two chosen markets, the United Kingdom and California. I study the British electricity market from its reform in 1990 until 2001. The empirical work shows that the market power abuse was maintained at a very low level in Britain's duopolistic market thanks to strict regulation. However evidence of collusive behavior towards the end of the decade is strong. Also evidence for regulation-responding behavior is found. I also examine California's electricity market during its crisis in 1998-2000. Researchers have found that large part of the increase in electricity's wholesale prices was due to decreased hydroelectric energy input, increased natural gas price and increased demand. However strong evidence of capacity withholding exists and the hypothesis for market power abuse cannot be rejected. Certain studies also show prices to be very close to Cournot equilibrium

The Supply Function Equilibrium and Its Policy Implications for Wholesale Electricity Auctions

The supply function equilibrium provides a game-theoretic model of strategic bidding in oligopolistic wholesale electricity auctions. This paper presents an intuitive account of current understanding and shows how welfare losses depend on the number of firms in the market and their asymmetry. Previous results and general recommendations for divisible-good/multi-unit auctions provides guidance on the design of the auction format; setting the reservation price; the rationing rule; and restrictions on the offer curves in wholesale electricity auctions.Wholesale Electricity Markets; Supply Function Equilibria; Competition Policy

Using Laboratory Experiments to Design Efficient Market Institutions: The case of wholesale electricity markets

This paper assesses the contribution of laboratory experiments to the economics of design applied to the electricity industry. The analysis is dedicated to wholesale markets, and reviews the results accumulated to date concerning both the general architecture of power markets and the very details of the market rules or institution, that is the auction rule. We argue that these experimental results contribute to a better understanding of the performances properties and implementation features of competitive market designs and that experimental economics has proven very useful to public authorities to inform the restructuring of electricity industry. It thus confirms the role of experimental economics as a complement to theoretical approaches in the design effort.Experimental economics; market design; design economics; electricity auction;

Price Spikes in Electricity Markets: A Strategic Perspective

This paper aims to analyze the issue of price spikes in electricity markets through the lens of noncooperative game theory. The case we consider is Australia’s long established National Electricity Market (NEM). Specifically, we adapt von der Fehr and Harbord’s multi-unit auction model to settings that more closely reflect the structure of the NEM, showing that price spikes can be related to a specifiable threshold in demand.Electricity Markets, Spot Price Behaviour, Non-Cooperative Game Theory.

Analysis of collusion and competition in electricity markets using an agent-based approach

As a result of liberalization, deregulated electricity markets were formed to provide affordable electricity for consumers through promoting competition. Although the new market is expected to serve this purpose, even the earliest deregulated electricity markets are prone to threats that may disrupt the competition. While the independent system operator, responsible for administering the electricity markets, aims to provide the consumer with the lowest possible electricity price, lack of competition may increase prices. We consider the effect of three major factors hand-in-hand on that may affect the level of competition in the market: the independent system operator’s market-clearing mechanism as a strategic choice, strategic bidding behavior of generation companies and the transmission network

The Supply Function Equilibrium and its Policy Implications for Wholesale Electricity Auctions

The supply function equilibrium provides a game-theoretic model of strategic bidding in oligopolistic wholesale electricity auctions. This paper presents an intuitive account of current understanding and shows how welfare losses depend on the number of firms in the market and their asymmetry. Previous results and general recommendations for divisible-good/multi-unit auctions provides guidance on the design of the auction format, setting the reservation price, the rationing rule, and restrictions on the offer curves in wholesale electricity auctions

Electricity Pricing and Market Power - Evidence from Germany

The aim of this paper is to develop a methodology for measuring the exercise of potential market power in liberalized electricity markets. We therefore investigate producer behavior in the context of electricity pricing with respect to fundamental time-dependent marginal cost (TMC), i.e. CO2- and fuel cost. In doing so, we do not - in contrast to most current approaches to market power investigation - rely on an estimate of the entire generation cost, which inevitably suffers from the lack of appropriate available data. Applying an analytical model of a day-ahead electricity market, we derive work-on rates, which provide information about the impact of TMC variations on electricity prices in the market constellations of perfect competition, quasi-monopoly and monopoly. Comparing these model-based work-on rates with actual work-on rates, estimated by an adjusted first-differences regression model of German power prices on the cost for hard coal, natural gas and emission allowances, we find evidence of the exercise of market power in the period 2006 to 2008. However, our results reveal that German market competitiveness increases marginally. We confirm our results by simulating a TMC-driven diffusion model of futures power prices estimated by maximum-likelihood.energy; electricity; market power analysis; spot-futuresprice relation