IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1507.04478.html
   My bibliography  Save this paper

Antimonopoly regulation method in energy markets based on the Vickrey-Clarke-Groves mechanism

Author

Listed:
  • Vadim Borokhov

Abstract

We evaluate the applicability of the generic Vickrey-Clarke-Groves (VCG) mechanism as an antimonopoly measure against a profit-maximizing producer with market power operating a portfolio of generating units at the centralized two-settlement energy market. The producer may indicate in its bid not only the altered cost function but also the distorted values of the technical parameters of its generating units, which enter the system-wide constraints of the centralized dispatch optimization problem. To ensure the applicability of the VCG method in this setting, we identify an additional assumption on the changes of the feasible set of the centralized dispatch optimization problem induced by variations of the producer's technical parameters. In the framework of the generic VCG mechanism, we propose an antimonopoly regulation method based on a regulator estimate of the producer's truthful bid. If this estimate is exact, the producer's maximum profit coincides with that in the case of the truthful bidding when no antimonopoly measure is applied. If the estimate is not exact, the error affects neither the producer's (weakly) dominant bid nor its optimal nodal output but manifests itself in the total uplift payment. This ensures an efficient allocation in the form of the optimal output/consumption schedule and shields the (pre-uplift) market prices from the producer's market power. We compare the suggested method with the alternative antimonopoly regulation approach based on the replacement of the producer's bid by a bid composed by the regulator.

Suggested Citation

  • Vadim Borokhov, 2015. "Antimonopoly regulation method in energy markets based on the Vickrey-Clarke-Groves mechanism," Papers 1507.04478, arXiv.org, revised Aug 2021.
    • Handle: RePEc:arx:papers:1507.04478
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1507.04478
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    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. 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.
    3. Roger E. Bohn & Michael C. Caramanis & Fred C. Schweppe, 1984. "Optimal Pricing in Electrical Networks over Space and Time," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 360-376, Autumn.
    4. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, June.
    5. Paul L. Joskow & Edward Kohn, 2002. "A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-35.
    6. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-124, March.
    7. Allaz, Blaise, 1992. "Oligopoly, uncertainty and strategic forward transactions," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 297-308, June.
    8. Littlechild, S. C., 1988. "Spot pricing of electricity Arguments and prospects," Energy Policy, Elsevier, vol. 16(4), pages 398-403, August.
    9. Frank Wolak, 2000. "An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market," International Economic Journal, Taylor & Francis Journals, vol. 14(2), pages 1-39.
    10. Blaise Allaz, 1992. "Oligopoly, uncertainty and strategic forward transactions," Post-Print hal-00511812, HAL.
    11. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
    12. William W. Hogan, 1997. "A Market Power Model with Strategic Interaction in Electricity Networks," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 107-141.
    13. Paul Twomey & Richard Green & Karsten Neuhoff & David Newbery, 2005. "A Review of the Monitoring of Market Power: The Possible Roles of TSOs in Monitoring for Market Power Issues in Congested Transmission Systems," Working Papers 0502, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Baldursson , Fridrik M. & von der Fehr, Nils-Henrik, 2007. "Vertical Integration and Long-Term Contracts in Risky Markets," Memorandum 01/2007, Oslo University, Department of Economics.
    2. Miguel Vazquez, 2012. "Analysis of the strategic use of forward contracting in electricity markets," RSCAS Working Papers 2012/13, European University Institute.
    3. Hesamzadeh, M.R. & Biggar, D.R. & Bunn, D.W. & Moiseeva, E., 2020. "The impact of generator market power on the electricity hedge market," Energy Economics, Elsevier, vol. 86(C).
    4. Yao, Jian & Oren, Shmuel S. & Adler, Ilan, 2007. "Two-settlement electricity markets with price caps and Cournot generation firms," European Journal of Operational Research, Elsevier, vol. 181(3), pages 1279-1296, September.
    5. Frederic H. Murphy & Yves Smeers, 2005. "Generation Capacity Expansion in Imperfectly Competitive Restructured Electricity Markets," Operations Research, INFORMS, vol. 53(4), pages 646-661, August.
    6. Furió, Dolores & Meneu, Vicente, 2010. "Expectations and forward risk premium in the Spanish deregulated power market," Energy Policy, Elsevier, vol. 38(2), pages 784-793, February.
    7. SMEERS, Yves, 2005. "How well can one measure market power in restructured electricity systems ?," LIDAM Discussion Papers CORE 2005050, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. de Bragança, Gabriel Godofredo Fiuza & Daglish, Toby, 2017. "Investing in vertical integration: electricity retail market participation," Energy Economics, Elsevier, vol. 67(C), pages 355-365.
    9. Holmberg, Pär & Willems, Bert, 2015. "Relaxing competition through speculation: Committing to a negative supply slope," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 236-266.
    10. Javad Khazaei & Golbon Zakeri & Shmuel S. Oren, 2017. "Single and Multisettlement Approaches to Market Clearing Under Demand Uncertainty," Operations Research, INFORMS, vol. 65(5), pages 1147-1164, October.
    11. Dressler, Luisa, 2016. "Support schemes for renewable electricity in the European Union: Producer strategies and competition," Energy Economics, Elsevier, vol. 60(C), pages 186-196.
    12. Rubin, Ofir D. & Babcock, Bruce A., 2011. "A novel approach for modeling deregulated electricity markets," Energy Policy, Elsevier, vol. 39(5), pages 2711-2721, May.
    13. Paizs, László & Mészáros, Mátyás Tamás, 2003. "Piachatalmi problémák modellezése a dereguláció utáni magyar áramtermelő piacon [Modelling problems of market power on the Hungarian electricity-generation market after deregulation]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 735-764.
    14. van Eijkel, Remco & Kuper, Gerard H. & Moraga-González, José L., 2016. "Do firms sell forward for strategic reasons? An application to the wholesale market for natural gas," International Journal of Industrial Organization, Elsevier, vol. 49(C), pages 1-35.
    15. Paul Joskow & Jean Tirole, 2007. "Reliability and competitive electricity markets," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 60-84, March.
    16. Liski, Matti & Montero, Juan-Pablo, 2006. "Forward trading and collusion in oligopoly," Journal of Economic Theory, Elsevier, vol. 131(1), pages 212-230, November.
    17. Jian Yao & Ilan Adler & Shmuel S. Oren, 2008. "Modeling and Computing Two-Settlement Oligopolistic Equilibrium in a Congested Electricity Network," Operations Research, INFORMS, vol. 56(1), pages 34-47, February.
    18. Remco van Eijkel & Jose Luis Moraga, 2010. "Do Firms sell forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas," Tinbergen Institute Discussion Papers 10-058/1, Tinbergen Institute.
    19. Van Moer, Geert, 2019. "Electricity market competition when forward contracts are pairwise efficient," MPRA Paper 96660, University Library of Munich, Germany.
    20. Christian Redl & Derek Bunn, 2013. "Determinants of the premium in forward contracts," Journal of Regulatory Economics, Springer, vol. 43(1), pages 90-111, January.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1507.04478. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.