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The effect of counter-trading on competition in electricity markets

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  • 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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  • Dijk, Justin & Willems, Bert, 2011. "The effect of counter-trading on competition in electricity markets," Energy Policy, Elsevier, vol. 39(3), pages 1764-1773, March.
    • Handle: RePEc:eee:enepol:v:39:y:2011:i:3:p:1764-1773
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    Cited by:

    1. Georgios Petropoulos & Bert Willems, 2016. "Providing efficient network access to green power generators- A long-term property rights perspective," Working Papers 17317, Bruegel.
    2. Holmberg, Pär & Lazarczyk, Ewa, 2012. "Congestion Management in Electricity Networks: Nodal, Zonal and Discriminatory Pricing," Working Paper Series 915, Research Institute of Industrial Economics.
    3. Sarfati, M. & Hesamzadeh, M-R. & Holmberg, P., 2019. "Production efficiency of nodal and zonal pricing in imperfectly competitive electricity markets," Cambridge Working Papers in Economics 1919, Faculty of Economics, University of Cambridge.
    4. M. Sarfati & M.R. Hesamzadeh & P. Holmberg, 2018. "Increase-Decrease Game under Imperfect Competition in Two-stage Zonal Power Markets – Part I: Concept Analysis," Working Papers EPRG 1837, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    5. Karhinen, Santtu & Huuki, Hannu, 2020. "How are the long distances between renewable energy sources and load centres reflected in locational marginal prices?," Energy, Elsevier, vol. 210(C).
    6. Sarfati, Mahir & Hesamzadeh, Mohammad Reza & Holmberg, Pär, 2018. "Increase-Decrease Game under Imperfect Competition in Two-stage Zonal Power Markets –​ Part I: Concept Analysis," Working Paper Series 1253, Research Institute of Industrial Economics.
    7. Ambrosius, M. & Egerer, J. & Grimm, V. & Weijde, A.H. van der, 2020. "Uncertain bidding zone configurations: The role of expectations for transmission and generation capacity expansion," European Journal of Operational Research, Elsevier, vol. 285(1), pages 343-359.
    8. Petropoulos, Georgios & Willems, Bert, 2020. "Long-term transmission rights and dynamic efficiency," Energy Economics, Elsevier, vol. 88(C).
    9. Holmberg, Pär & Tangerås, Thomas & Ahlqvist, Victor, 2018. "Central- versus Self-Dispatch in Electricity Markets," Working Paper Series 1257, Research Institute of Industrial Economics, revised 27 Mar 2019.
    10. Abdin, Islam & Li, Yan-Fu & Zio, Enrico, 2017. "Risk assessment of power transmission network failures in a uniform pricing electricity market environment," Energy, Elsevier, vol. 138(C), pages 1042-1055.
    11. Christine Brandstätt & Gert Brunekreeft & Nele Friedrichsen, 2011. "Improving Investment Coordination in Electricity Networks Through Smart Contracts," Bremen Energy Working Papers 0010, Bremen Energy Research.
    12. Georgios Petropoulos & Bert Willems, 2016. "Providing efficient network access to green power generators- A long-term property rights perspective," Working Papers 17317, Bruegel.
    13. Blázquez de Paz, Mario, 2019. "Redispatch in Zonal Pricing Electricity Markets," Working Paper Series 1278, Research Institute of Industrial Economics.
    14. Lang, Lukas Maximilian & Dallinger, Bettina & Lettner, Georg, 2020. "The meaning of flow-based market coupling on redispatch measures in Austria," Energy Policy, Elsevier, vol. 136(C).
    15. Hesamzadeh, M. & Holmberg, P. & Sarfati, M., 2018. "Simulation and Evaluation of Zonal Electricity Market Designs," Cambridge Working Papers in Economics 1829, Faculty of Economics, University of Cambridge.
    16. Blázquez De Paz, Mario, 2017. "Production or Transmission Investments? A Comparative Analysis," Working Paper Series 1158, Research Institute of Industrial Economics.
    17. Ruderer, Dominik & Zöttl, Gregor, 2018. "Transmission pricing and investment incentives," Utilities Policy, Elsevier, vol. 55(C), pages 14-30.
    18. 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).
    19. 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.
    20. Bjørndal, Endre & Bjørndal, Mette & Rud, Linda & Alangi, Somayeh Rahimi, 2017. "Market Power Under Nodal and Zonal Congestion Management Techniques," Discussion Papers 2017/14, Norwegian School of Economics, Department of Business and Management Science.
    21. Martin Weibelzahl & Alexandra Märtz, 2020. "Optimal storage and transmission investments in a bilevel electricity market model," Annals of Operations Research, Springer, vol. 287(2), pages 911-940, April.

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