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The effect of retail price regulation on the wholesale price of electricity

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  • Castro Pérez, José E.
  • Flores, Daniel

Abstract

In this article, we study—both theoretically and empirically—the effects of changes in the regulated retail price of electricity on the unregulated wholesale price. We develop a relatively general supply and demand model that includes both regulated and unregulated market demands. We find that a reduction (or an increase) of the regulated price leads to an increase (a reduction) in the wholesale price. Moreover, we use a regression discontinuity approach to estimate the effect of the residential summer tariff—which generates a large reduction in the regulated retail price—over the wholesale price of electricity in Monterrey, Mexico. We find that the elasticity of the wholesale electricity price with respect to the regulated retail price was around −1 before the pandemic. Nevertheless, the most recent estimate is around −0.26. Because these figures are not negligible, authorities should consider the interdependence of retail and wholesale markets when changing the regulated retail price.

Suggested Citation

  • Castro Pérez, José E. & Flores, Daniel, 2023. "The effect of retail price regulation on the wholesale price of electricity," Energy Policy, Elsevier, vol. 173(C).
    • Handle: RePEc:eee:enepol:v:173:y:2023:i:c:s0301421522006279
    DOI: 10.1016/j.enpol.2022.113408
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    More about this item

    Keywords

    Price regulation; Retail; Wholesale; Electricity;
    All these keywords.

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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