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An experimental test of automatic mitigation of wholesale electricity prices

Listed author(s):
  • Shawhan, Daniel L.
  • Messer, Kent D.
  • Schulze, William D.
  • Schuler, Richard E.

In several major deregulated electricity generation markets, the market operator uses an "automatic mitigation procedure" (AMP) to attempt to suppress the exercise of market power. A leading type of AMP compares the offer price from each generation unit with a recent historical average of accepted offer prices from that same unit during periods when there was no transmission-system congestion to impede competition. If one or more units' offer prices exceed the recent historical average by more than a specified margin, and if these offer prices raise the market-clearing price by more than a specified margin, the market operator replaces the offending offer prices with lower ones. In an experiment, we test an AMP of this type. We find that it keeps market prices close to marginal cost if generation owners have low market power in uncongested periods. However, with high market power in uncongested periods, a condition that may apply in many parts of the world, the generation owners are able to gradually raise the market price well above short-run marginal cost in spite of the AMP. We also test the effect of the AMP on the frequency with which high-variable-cost units are used, inefficiently, in place of low-variable-cost units.

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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 29 (2011)
Issue (Month): 1 (January)
Pages: 46-53

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Handle: RePEc:eee:indorg:v:29:y:2011:i:1:p:46-53
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  1. Helman, Udi, 2006. "Market power monitoring and mitigation in the US wholesale power markets," Energy, Elsevier, vol. 31(6), pages 877-904.
  2. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
  3. Carine Staropoli & Céline Jullien, 2006. "Using Laboratory Experiments To Design Efficient Market Institutions: The Case Of Wholesale Electricity Markets," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 555-577, December.
  4. Lynne Kiesling & Bart Wilson, 2007. "An experimental analysis of the effects of automated mitigation procedures on investment and prices in wholesale electricity markets," Journal of Regulatory Economics, Springer, vol. 31(3), pages 313-334, June.
  5. Isemonger, Alan G., 2007. "Conduct and Impact versus Direct Mitigation," The Electricity Journal, Elsevier, vol. 20(1), pages 53-62.
  6. García José A. & Reitzes James D., 2007. "International Perspectives on Electricity Market Monitoring and Market Power Mitigation," Review of Network Economics, De Gruyter, vol. 6(3), pages 1-28, September.
  7. John Bernard & William Schulze & Timothy Mount, 2005. "Bidding behaviour in the multi-unit Vickrey and uniform price auctions," Applied Economics Letters, Taylor & Francis Journals, vol. 12(10), pages 589-595.
  8. Hans-Theo Normann & Roberto Ricciuti, 2009. "Laboratory Experiments For Economic Policy Making," Journal of Economic Surveys, Wiley Blackwell, vol. 23(3), pages 407-432, July.
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