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The effect of counter-trading on competition in electricity markets

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Listed author(s):
  • Dijk, Justin
  • Willems, Bert

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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File URL: http://www.sciencedirect.com/science/article/pii/S0301-4215(11)00018-8
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Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 39 (2011)
Issue (Month): 3 (March)
Pages: 1764-1773

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Handle: RePEc:eee:enepol:v:39:y:2011:i:3:p:1764-1773
Contact details of provider: Web page: http://www.elsevier.com/locate/enpol

Keywords: Congestion management Counter-trading Market power;

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  1. Oren, Shmuel S. & Spiller, Pablo T. & Varaiya, Pravin & Wu, Felix, 1995. "Nodal prices and transmission rights: A critical appraisal," The Electricity Journal, Elsevier, vol. 8(3), pages 24-35, April.
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  5. Swinand, Gregory & Scully, Derek & Ffoulkes, Stuart & Kessler, Brian, 2010. "Modeling EU Electricity Market Competition Using the Residual Supply Index," The Electricity Journal, Elsevier, vol. 23(9), pages 41-50, November.
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  8. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-242, September.
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  10. Ventosa, Mariano & Baillo, Alvaro & Ramos, Andres & Rivier, Michel, 2005. "Electricity market modeling trends," Energy Policy, Elsevier, vol. 33(7), pages 897-913, May.
  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, vol. 27(3), pages 495-525, May.
  12. Ehrenmann, Andreas & Smeers, Yves, 2005. "Inefficiencies in European congestion management proposals," Utilities Policy, Elsevier, vol. 13(2), pages 135-152, June.
  13. Richard Green, 2007. "Nodal pricing of electricity: how much does it cost to get it wrong?," Journal of Regulatory Economics, Springer, vol. 31(2), pages 125-149, April.
  14. 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.
  15. Lijesen, Mark G., 2007. "The real-time price elasticity of electricity," Energy Economics, Elsevier, vol. 29(2), pages 249-258, March.
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Cited by:

  1. Blázquez De Paz, Mario, 2017. "Production or Transmission Investments? A Comparative Analysis," Working Paper Series 1158, Research Institute of Industrial Economics.
  2. Georgios Petropoulos & Bert Willems, 2016. "Providing efficient network access to green power generators: A long-term property rights perspective," Working Papers 17317, Bruegel.
  3. Friedrich Kunz, 2013. "Improving Congestion Management: How to Facilitate the Integration of Renewable Generation in Germany," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
  4. Han, Jinil & Papavasiliou, Anthony, 2015. "Congestion management through topological corrections: A case study of Central Western Europe," Energy Policy, Elsevier, vol. 86(C), pages 470-482.
  5. Holmberg, Pär & Lazarczyk, Ewa, 2012. "Congestion Management in Electricity Networks: Nodal, Zonal and Discriminatory Pricing," Working Paper Series 915, Research Institute of Industrial Economics.
  6. Christine Brandstätt & Gert Brunekreeft & Nele Friedrichsen, 2011. "Improving Investment Coordination in Electricity Networks Through Smart Contracts," Bremen Energy Working Papers 0010, Bremen Energy Research.

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