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Market Power and Price Exposure: Learning from Changes in Renewable Energy Regulation

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  • Natalia Fabra
  • Imelda

Abstract

Given the critical role of renewable energies in current and future electricity markets, it is important to understand how they affect firms' pricing incentives. We study whether the price-depressing effect of renewables depends on their degree of market price exposure. Paying renewables with fixed prices, rather than market-based prices, is more effective at curbing market power when the dominant firms own large shares of renewables, and vice versa. Our empirical analysis leverages several short-lived changes to renewables regulation in the Spanish market and shows that switching from full-price exposure to fixed prices caused a 2–4 percent reduction in the average price-cost markup.

Suggested Citation

  • Natalia Fabra & Imelda, 2023. "Market Power and Price Exposure: Learning from Changes in Renewable Energy Regulation," American Economic Journal: Economic Policy, American Economic Association, vol. 15(4), pages 323-358, November.
    • Handle: RePEc:aea:aejpol:v:15:y:2023:i:4:p:323-58
    DOI: 10.1257/pol.20210221
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    JEL classification:

    • 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
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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