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Market power mitigation by regulating contract portfolio risk

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  • Willems, Bert
  • De Corte, Emmanuel

Abstract

Abuse of market power by dominant generation firms is a growing concern in worldwide electricity markets. This paper argues that relying only on general competition rules--as is the case in most European countries--is insufficient and that complementary ex-ante regulation is needed. In particular, regulators should incentivize firms to sign contracts with retailers by regulating their risk exposure. In a simulation model we show that this type of regulation can significantly reduce the deadweight loss in the market, without imposing large costs on regulatees.

Suggested Citation

  • Willems, Bert & De Corte, Emmanuel, 2008. "Market power mitigation by regulating contract portfolio risk," Energy Policy, Elsevier, vol. 36(10), pages 3787-3796, October.
  • Handle: RePEc:eee:enepol:v:36:y:2008:i:10:p:3787-3796
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    References listed on IDEAS

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    1. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
    2. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.
    3. David M. Newbery, 1998. "Competition, Contracts, and Entry in the Electricity Spot Market," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 726-749, Winter.
    4. David Sappington, 1980. "Strategic Firm Behavior under a Dynamic Regulatory Adjustment Process," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 360-372, Spring.
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    Cited by:

    1. Hauteclocque, Adrien de & Glachant, Jean-Michel, 2009. "Long-term energy supply contracts in European competition policy: Fuzzy not crazy," Energy Policy, Elsevier, vol. 37(12), pages 5399-5407, December.
    2. Richard Meade & Seini O’Connor, 2011. "Comparison of Long-term Contracts and Vertical Integration in Decentralized Electricity Markets," Chapters,in: Competition, Contracts and Electricity Markets, chapter 4 Edward Elgar Publishing.
    3. Adrien de Hauteclocque & Yannick Perez, 2011. "Law & Economics Perspectives on Electricity Regulation," RSCAS Working Papers 2011/21, European University Institute.
    4. Howell, Bronwyn & Meade, Richard & O'Connor, Seini, 2010. "Structural separation versus vertical integration: Lessons for telecommunications from electricity reforms," Telecommunications Policy, Elsevier, vol. 34(7), pages 392-403, August.
    5. Argenton, C. & Willems, Bert, 2009. "Exclusivity as Inefficient Insurance," Discussion Paper 2009-24, Tilburg University, Center for Economic Research.
    6. Poletti, Steve, 2009. "Government procurement of peak capacity in the New Zealand electricity market," Energy Policy, Elsevier, vol. 37(9), pages 3409-3417, September.
    7. Adrien de Hauteclocque & Jean-Michel Glachant, 2011. "Long-term Contracts and Competition Policy in European Energy Markets," Chapters,in: Competition, Contracts and Electricity Markets, chapter 9 Edward Elgar Publishing.

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