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The effect of counter-trading on competition in electricity markets

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  • Dijk, J.
  • Willems, Bert

    (Tilburg University)

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

Paper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-4561526.

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Date of creation: 2011
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Publication status: Published in Energy Policy (2011) v.39, p.1764-1773
Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-4561526

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Web page: http://www.tilburguniversity.edu/

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References

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  1. Severin Borenstein & James. Bushnell & Steven Stoft, 2000. "The Competitive Effects of Transmission Capacity in A Deregulated Electricity Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 294-325, Summer.
  2. Kupper, G. & Willems, Bert, 2007. "Arbitrage in Energy Markets: Competing in the Incumbent's Shadow," Discussion Paper, Tilburg University, Center for Economic Research 2007-094, Tilburg University, Center for Economic Research.
  3. Oren, Shmuel S. & Spiller, Pablo T. & Varaiya, Pravin & Wu, Felix, 1995. "Nodal prices and transmission rights: A critical appraisal," The Electricity Journal, Elsevier, Elsevier, vol. 8(3), pages 24-35, April.
  4. 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, Intersentia, vol. 4(3), pages 271-293, September.
  5. Bert Willems & Gerd Kupper, 2010. "Arbitrage in Energy Markets: Price Discrimination under Congestion," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 3), pages 41-66.
  6. Stoft, Steven, 1997. "Transmission pricing zones: simple or complex?," The Electricity Journal, Elsevier, Elsevier, vol. 10(1), pages 24-31.
  7. Ehrenmann, Andreas & Smeers, Yves, 2005. "Inefficiencies in European congestion management proposals," Utilities Policy, Elsevier, Elsevier, vol. 13(2), pages 135-152, June.
  8. Richard Green, 2007. "Nodal pricing of electricity: how much does it cost to get it wrong?," Journal of Regulatory Economics, Springer, Springer, vol. 31(2), pages 125-149, April.
  9. Ventosa, Mariano & Baillo, Alvaro & Ramos, Andres & Rivier, Michel, 2005. "Electricity market modeling trends," Energy Policy, Elsevier, Elsevier, vol. 33(7), pages 897-913, May.
  10. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, Springer, vol. 4(3), pages 211-42, September.
  11. 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, Elsevier, vol. 27(3), pages 495-525, May.
  12. Lijesen, Mark G., 2007. "The real-time price elasticity of electricity," Energy Economics, Elsevier, Elsevier, vol. 29(2), pages 249-258, March.
  13. 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.
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Cited by:
  1. Christine Brandstätt & Gert Brunekreeft & Nele Friedrichsen, 2011. "Improving Investment Coordination in Electricity Networks Through Smart Contracts," Bremen Energy Working Papers, Bremer Energie Institut 0010, Bremer Energie Institut.
  2. Holmberg, P. & Lazarczyk, E., 2012. "Congestion management in electricity networks: Nodal, zonal and discriminatory pricing," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1219, Faculty of Economics, University of Cambridge.

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