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Diagnosing and Mitigating Market Power in Chile’s Electricity Industry

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  • Arellano, M.S.

Abstract

This paper examines generators’ incentives to exercise market power and the strategies they would follow if all electricity supplies were traded in an hourly-unregulated spot market. The industry is modelled as a Cournot duopoly with a competitive fringe; particular care is given to the hydro scheduling decision. Quantitative simulations of generators’ strategic behaviour indicate that the largest (Endesa) would have the incentive and power to act unilaterally. It would schedule its hydro resources to take advantage of differences in price electricity: too little supply in high demand periods and too much in low demand periods. Two market power mitigation measures are analysed: requiring Endesa to divest some of its generating capacity, and fixed price forward contracts for dominant generators. Conditions for the development of a voluntary contract market are analysed, as it is not practical to rely permanently on vesting contracts imposed for the transition period.

Suggested Citation

  • Arellano, M.S., 2003. "Diagnosing and Mitigating Market Power in Chile’s Electricity Industry," Cambridge Working Papers in Economics 0327, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0327
    Note: CMI27, IO
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    File URL: http://www.econ.cam.ac.uk/electricity/publications/wp/ep27.pdf
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    References listed on IDEAS

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    1. Severin Borenstein & James Bushnell & Christopher R. Knittel, 1999. "Market Power in Electricity Markets: Beyond Concentration Measures," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 65-88.
    2. Donatos, George S. & Mergos, George J., 1991. "Residential demand for electricity: The case of Greece," Energy Economics, Elsevier, vol. 13(1), pages 41-47, January.
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    Cited by:

    1. repec:eee:eneeco:v:65:y:2017:i:c:p:304-314 is not listed on IDEAS
    2. Rego, Erik Eduardo & Parente, Virginia, 2013. "Brazilian experience in electricity auctions: Comparing outcomes from new and old energy auctions as well as the application of the hybrid Anglo-Dutch design," Energy Policy, Elsevier, vol. 55(C), pages 511-520.

    More about this item

    Keywords

    electricity utilities; market power; scheduling hydro-reservoirs; contracts; Chile’s electricity industry;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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