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The effect of counter-trading on competition in electricity markets

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  • Dijk, Justin
  • Willems, Bert

Abstract

In a competitive electricity market, nodal pricing is the most efficient way to manage congestion. Counter-trading is inefficient as it gives the wrong long term signals for entry and exit of power plants. However, in a non-competitive market, additional entry will improve the competitiveness of the market, and will increase social benefit by reducing price-cost margins. This paper studies whether the potential pro-competitive entry effects could make counter-trading more efficient than nodal pricing. We find that this is unlikely to be the case, and expect counter-trading to have a negative effect on overall welfare. The potential benefits of additional competition (more competitive prices and lower production cost) do not outweigh the distortions (additional investment cost for the entrant, and socialization of the congestion cost to final consumers).

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Bibliographic Info

Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 39 (2011)
Issue (Month): 3 (March)
Pages: 1764-1773

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Handle: RePEc:eee:enepol:v:39:y:2011:i:3:p:1764-1773

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Web page: http://www.elsevier.com/locate/enpol

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Keywords: Congestion management Counter-trading Market power;

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  1. Neuhoff, Karsten & Barquin, Julian & Boots, Maroeska G. & Ehrenmann, Andreas & Hobbs, Benjamin F. & Rijkers, Fieke A.M. & Vazquez, Miguel, 2005. "Network-constrained Cournot models of liberalized electricity markets: the devil is in the details," Energy Economics, Elsevier, vol. 27(3), pages 495-525, May.
  2. Bert Willems & Gerd Kupper, 2010. "Arbitrage in Energy Markets: Price Discrimination under Congestion," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 41-66.
  3. Ventosa, Mariano & Baillo, Alvaro & Ramos, Andres & Rivier, Michel, 2005. "Electricity market modeling trends," Energy Policy, Elsevier, vol. 33(7), pages 897-913, May.
  4. Ehrenmann, Andreas & Smeers, Yves, 2005. "Inefficiencies in European congestion management proposals," Utilities Policy, Elsevier, vol. 13(2), pages 135-152, June.
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  6. Kupper, G. & Willems, Bert, 2007. "Arbitrage in Energy Markets: Competing in the Incumbent's Shadow," Discussion Paper 2007-034, Tilburg University, Tilburg Law and Economic Center.
  7. Oren, Shmuel S. & Spiller, Pablo T. & Varaiya, Pravin & Wu, Felix, 1995. "Nodal prices and transmission rights: A critical appraisal," The Electricity Journal, Elsevier, vol. 8(3), pages 24-35, April.
  8. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
  9. Severin Borenstein & James Bushnell & Steven Stoft, 1997. "The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry," NBER Working Papers 6293, National Bureau of Economic Research, Inc.
  10. Richard Green, 2007. "Nodal pricing of electricity: how much does it cost to get it wrong?," Journal of Regulatory Economics, Springer, vol. 31(2), pages 125-149, April.
  11. Stoft, Steven, 1997. "Transmission pricing zones: simple or complex?," The Electricity Journal, Elsevier, vol. 10(1), pages 24-31.
  12. Richard Gilbert & Karsten Neuhoff & David Newbery, 2004. "Allocating Transmission to Mitigate Market Power in Electricity Markets," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 691-709, Winter.
  13. M. Bjørndal & K. Jørnsten & V. Pignon, 2003. "Congestion management in the Nordic power market - counter purchases and zonal pricing," Competition and Regulation in Network Industries, Intersentia, vol. 4(3), pages 271-293, September.
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Cited by:
  1. Holmberg, Pär & Lazarczyk, Ewa, 2012. "Congestion Management in Electricity Networks: Nodal, Zonal and Discriminatory Pricing," Working Paper Series 915, Research Institute of Industrial Economics.
  2. Christine Brandstätt & Gert Brunekreeft & Nele Friedrichsen, 2011. "Improving Investment Coordination in Electricity Networks Through Smart Contracts," Bremen Energy Working Papers 0010, Bremer Energie Institut.

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