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Allocating Transmission to Mitigate Market Power in Electricity Markets

Author

Listed:
  • Richard Gilbert

    () (University of California, Berkeley)

  • Karsten Neuhoff

    () (University of Cambridge)

  • David Newbery

    () (University of Cambridge)

Abstract

Whether transmission contracts increase or mitigate market power depends crucially on the allocation of transmission rights. In an efficiently arbitraged uniform-price auction, generators will only obtain contracts that mitigate their market power. Contracts inherited or bought in a "pay-as-bid" auction can enhance market power. In the two-node case, banning generators from holding transmission contracts not corresponding to delivery of their own energy mitigates market power. Meshed networks differ in important ways, as constrained links no longer isolate prices from market manipulation. We suggest ways of reducing market power when designing auctions and transmission contracts.

Suggested Citation

  • 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.
  • Handle: RePEc:rje:randje:v:35:y:2004:4:p:691-709
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    2. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, Elsevier.
    3. Georgios Petropoulos & Bert Willems, 2016. "Providing efficient network access to green power generators: A long-term property rights perspective," Working Papers 17317, Bruegel.
    4. Ehrenmann, Andreas & Smeers, Yves, 2005. "Inefficiencies in European congestion management proposals," Utilities Policy, Elsevier, vol. 13(2), pages 135-152, June.
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    6. Luigi De Paoli & Elena Fumagalli, 2013. "Estimating welfare losses and gains in explicit auctions for power trade: an application to the Italian case," ECONOMICS AND POLICY OF ENERGY AND THE ENVIRONMENT, FrancoAngeli Editore, vol. 2013(2), pages 153-181.
    7. Grimm, Veronika & Martin, Alexander & Schmidt, Martin & Weibelzahl, Martin & Zöttl, Gregor, 2016. "Transmission and generation investment in electricity markets: The effects of market splitting and network fee regimes," European Journal of Operational Research, Elsevier, vol. 254(2), pages 493-509.
    8. Pellini, Elisabetta, 2012. "Measuring the impact of market coupling on the Italian electricity market," Energy Policy, Elsevier, vol. 48(C), pages 322-333.
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    12. Bunn, Derek & Koc, Veli & Sapio, Alessandro, 2015. "Resource externalities and the persistence of heterogeneous pricing behavior in an energy commodity market," Energy Economics, Elsevier, vol. 48(C), pages 265-275.
    13. 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.
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    18. Hesamzadeh, Mohammad R. & Biggar, Darryl R. & Hosseinzadeh, Nasser, 2011. "The TC-PSI indicator for forecasting the potential for market power in wholesale electricity markets," Energy Policy, Elsevier, vol. 39(10), pages 5988-5998, October.
    19. Vazquez, Miguel & Hallack, Michelle, 2013. "Need and design of short-term auctions in the EU gas markets," Energy Policy, Elsevier, vol. 63(C), pages 484-493.
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