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Electricity Pricing and Market Power - Evidence from Germany

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  • Matthias Janssen
  • Magnus Wobben
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    Abstract

    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.

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    Bibliographic Info

    Paper provided by Institute of Spatial and Housing Economics, Munster Universitary in its series Working Papers with number 200121.

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    Handle: RePEc:muc:wpaper:200121

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    1. Holmberg, Pär, 2004. "Unique Supply Function Equilibrium with Capacity Constraints," Working Paper Series 2004:20, Uppsala University, Department of Economics.
    2. Borenstein, Severin & Bushnell, James & Knittel, Chris, 1999. "Market Power in Electricity Markets: Beyond Concentration Measures," Staff General Research Papers 31548, Iowa State University, Department of Economics.
    3. Willems, Bert & Rumiantseva, I. & Weigt, H., 2007. "Cournot Versus Supply Functions: What does the Data Tell us?," Discussion Paper 2007-63, Tilburg University, Center for Economic Research.
    4. Benth, Fred Espen & Koekebakker, Steen, 2008. "Stochastic modeling of financial electricity contracts," Energy Economics, Elsevier, vol. 30(3), pages 1116-1157, May.
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    6. Bonacina, Monica & Gulli`, Francesco, 2007. "Electricity pricing under "carbon emissions trading": A dominant firm with competitive fringe model," Energy Policy, Elsevier, vol. 35(8), pages 4200-4220, August.
    7. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
    8. Severin Borenstein & James Bushnell, 1998. "An Empirical Analysis of the Potential for Market Power in California's Electricity Industry," NBER Working Papers 6463, National Bureau of Economic Research, Inc.
    9. Ciarreta, Aitor & Gutierrez-Hita, Carlos, 2006. "Supply function vs. quantity competition in supergames," International Journal of Industrial Organization, Elsevier, vol. 24(4), pages 773-783, July.
    10. Green, Richard & Newbery, David M G, 1991. "Competition in the British Electricity Spot Market," CEPR Discussion Papers 557, C.E.P.R. Discussion Papers.
    11. Lise, Wietze & Linderhof, Vincent & Kuik, Onno & Kemfert, Claudia & Ostling, Robert & Heinzow, Thomas, 2006. "A game theoretic model of the Northwestern European electricity market--market power and the environment," Energy Policy, Elsevier, vol. 34(15), pages 2123-2136, October.
    12. Richard Schmalensee & Bennett W. Golub, 1984. "Estimating Effective Concentration in Deregulated Wholesale Electricity Markets," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 12-26, Spring.
    13. Sijm, J. & Neuhoff, K. & Chen, Y., 2006. "CO2 cost pass through and windfall profits in the power sector," Cambridge Working Papers in Economics 0639, Faculty of Economics, University of Cambridge.
    14. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
    15. Bolle, Friedel, 1992. "Supply function equilibria and the danger of tacit collusion : The case of spot markets for electricity," Energy Economics, Elsevier, vol. 14(2), pages 94-102, April.
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