Allocating Transmission to Mitigate Market Power in Electricity Networks

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Allocating Transmission to Mitigate Market Power in Electricity Networks

Author Info

Richard Gilbert
Neuhoff, K.
Newbery, D.

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Abstract

We ask what conditions transmission contracts increase or mitigate market power. We show that the allocation process of transmission rights is crucial. In an efficient arbitraged uniform price auction, generators will only obtain contracts that mitigate their market power. However, if generators inherit transmission contracts or buy them in a ‘pay-as-bid’ auction, then these contracts can enhance market power. In the two-node network case, banning generators from holding transmission contracts that do not correspond to delivery of their own energy mitigates market power. Meshed networks differ in important ways as constrained links no longer isolate prices in competitive markets from market manipulation. The paper suggests ways of minimising market power considerations when designing transmission contracts.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0225.

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Length: 37
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:cam:camdae:0225

Note: CMI IO, Updated version: 1 April 2003
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Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

This paper has been announced in the following NEP Reports:

NEP-ALL-2002-11-04 (All new papers)
NEP-COM-2002-11-18 (Industrial Competition)
NEP-ENE-2002-11-04 (Energy Economics)
NEP-MIC-2002-11-20 (Microeconomics)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Paul L. Joskow & Richard Schmalensee, 1988. "Markets for Power: An Analysis of Electrical Utility Deregulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262600188.

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Brunekreeft, G. & Neuhoff, K. & Newbery, D., 2004. "Electricity transmission: an overview of the current debate," Cambridge Working Papers in Economics 0463, Faculty of Economics, University of Cambridge. [Downloadable!]
Other versions:
- Brunekreeft, Gert & Neuhoff, Karsten & Newbery, David, 2005. "Electricity transmission: An overview of the current debate," Utilities Policy, Elsevier, vol. 13(2), pages 73-93, June. [Downloadable!] (restricted)
Kupper Gerd & Willems Bert, 2007. "Arbitrage in Energy Markets: Competing in the Incumbent’s Shadow," Energy, Transport and Environment Working Papers Series ete0707, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment. [Downloadable!]
Other versions:
- 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. [Downloadable!]
- Kupper, G. & Willems, Bert, 2007. "Arbitrage in Energy Markets: Competing in the Incumbent's Shadow," Discussion Paper 2007-94, Tilburg University, Center for Economic Research. [Downloadable!]
Paul Joskow, 2003. "Electricity Sector Restructuring and Competition: Lessons Learned," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 40(121), pages 548-558. [Downloadable!]
Other versions:
- Paul L. Joskow, 2003. "Electricity Sector Restructuring And Competition - Lessons Learned," Working Papers 0314, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
Daniel A. Benitez, 2004. "On Quantity Competition and Transmission Constraints in Electricity Market," Econometric Society 2004 Latin American Meetings 98, Econometric Society. [Downloadable!]
Gert Brunekreeft & David Newbery, 2006. "Should merchant transmission investment be subject to a must-offer provision?," Journal of Regulatory Economics, Springer, vol. 30(3), pages 233-260, November. [Downloadable!] (restricted)
Other versions:
- Brunekreeft, G. & Newbery, D., 2005. "Should Merchant Transmission Investment be Subject to a Must-offer Provision?," Cambridge Working Papers in Economics 0534, Faculty of Economics, University of Cambridge. [Downloadable!]
Neuhoff, K., 2003. "Integrating Transmission and Energy Markets Mitigates Market Power," Cambridge Working Papers in Economics 0310, Faculty of Economics, University of Cambridge. [Downloadable!]
Olmos, L. & Neuhoff, K., 2004. "‘Definition of a Balancing Point for Electricity Transmission Contracts’," Cambridge Working Papers in Economics 0424, Faculty of Economics, University of Cambridge. [Downloadable!]
EHRENMANN, Andreas & SMEERS, Yves, 2004. "Inefficiencies in European congestion management proposals," CORE Discussion Papers 2004090, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
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. [Downloadable!] (restricted)
Twomey, P. & Green, R. & Neuhoff, K. & Newbery, D., 2005. "A Review of the Monitoring of Market Power The Possible Roles of TSOs in Monitoring for Market Power Issues in Congested Transmission Systems," Cambridge Working Papers in Economics 0504, Faculty of Economics, University of Cambridge. [Downloadable!]
Other versions:
- Paul Twomey & Richard Green & Karsten Neuhoff & David Newbery, 2005. "A Review of the Monitoring of Market Power: The Possible Roles of TSOs in Monitoring for Market Power Issues in Congested Transmission Systems," Working Papers 0502, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
Neuhoff, K. & Newbery, D., 2004. "Integrating Energy Markets: Does Sequencing Matter?," Cambridge Working Papers in Economics 0442, Faculty of Economics, University of Cambridge. [Downloadable!]
Brunekreeft, G., 2003. "Market-based Investment in Electricity Transmission Networks: Controllable Flow," Cambridge Working Papers in Economics 0340, Faculty of Economics, University of Cambridge. [Downloadable!]

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