The effect of counter-trading on competition in electricity markets
AbstractIn 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 InfoPaper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-4561526.
Date of creation: 2011
Date of revision:
Publication status: Published in Energy Policy (2011) v.39, p.1764-1773
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Other versions of this item:
- Dijk, Justin & Willems, Bert, 2011. "The effect of counter-trading on competition in electricity markets," Energy Policy, Elsevier, vol. 39(3), pages 1764-1773, March.
- NEP-ALL-2011-06-18 (All new papers)
- NEP-COM-2011-06-18 (Industrial Competition)
- NEP-ENE-2011-06-18 (Energy Economics)
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