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Predicting Market Power in Wholesale Electricity Markets

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  • David Newbery

Abstract

The traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship.

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Bibliographic Info

Paper provided by European University Institute in its series RSCAS Working Papers with number 2009/03.

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Date of creation: 02 Feb 2009
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Handle: RePEc:rsc:rsceui:2009/03

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Keywords: Residual Supply Index; Cournot equilibrium; Lerner Index; electricity markets; market power;

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  1. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  2. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
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Cited by:
  1. Vítor Marques & Adelino Fortunato & Isabel Soares, 2010. "Application of a structural model to a wholesale electricity market: The Spanish market from January 1999 to June 2007," GEMF Working Papers 2011-02, GEMF - Faculdade de Economia, Universidade de Coimbra.
  2. Hesamzadeh, Mohammad R. & Biggar, Darryl R. & Hosseinzadeh, Nasser, 2011. "The TC-PSI indicator for forecasting the potential for market power in wholesale electricity markets," Energy Policy, Elsevier, vol. 39(10), pages 5988-5998, October.

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