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Perfect competition vs. strategic behaviour models to derive electricity prices and the influence of renewables on market power

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  • Susanne Koschker

    (Technische Universität Dresden)

  • Dominik Möst

    (Technische Universität Dresden)

Abstract

A variety of fundamental modelling approaches exist using different competition concepts with and without strategic behaviour to derive electricity prices. To investigate the quality and practicability of these different approaches in energy economics, a perfect competition model, a Cournot model and a Bilevel model are introduced and applied to different situations in the German electricity market. The three electricity market approaches are analysed with respect to their ability to represent electricity prices and the possibility of market power abuse. Market prices are taken as a benchmark for model validity. As a result, the perfect competition model fits best to today’s market situation in most hours of the year. The Bilevel approach explains prices in high load hours sometimes better than the competition model. But complexity and calculation time increase disproportionately. In addition to the analysis of model quality, we use three scenarios to quantify how a high renewable feed-in influences the ability to abuse market power. Results show that the ability to address market power strongly depends on the amount of installed capacities.

Suggested Citation

  • Susanne Koschker & Dominik Möst, 2016. "Perfect competition vs. strategic behaviour models to derive electricity prices and the influence of renewables on market power," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 38(3), pages 661-686, July.
    • Handle: RePEc:spr:orspec:v:38:y:2016:i:3:d:10.1007_s00291-015-0415-x
    DOI: 10.1007/s00291-015-0415-x
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    Cited by:

    1. Mel T. Devine & Valentin Bertsch, 2023. "The role of demand response in mitigating market power: a quantitative analysis using a stochastic market equilibrium model," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 45(2), pages 555-597, June.
    2. Eising, Manuel & Hobbie, Hannes & Möst, Dominik, 2020. "Future wind and solar power market values in Germany — Evidence of spatial and technological dependencies?," Energy Economics, Elsevier, vol. 86(C).
    3. Samuli Honkapuro & Jasmin Jaanto & Salla Annala, 2023. "A Systematic Review of European Electricity Market Design Options," Energies, MDPI, vol. 16(9), pages 1-26, April.
    4. Panos, Evangelos & Densing, Martin, 2019. "The future developments of the electricity prices in view of the implementation of the Paris Agreements: Will the current trends prevail, or a reversal is ahead?," Energy Economics, Elsevier, vol. 84(C).
    5. Wan, Yi & Kober, Tom & Densing, Martin, 2022. "Nonlinear inverse demand curves in electricity market modeling," Energy Economics, Elsevier, vol. 107(C).

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