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How well can one measure market power in restructured electricity systems ?

  • SMEERS, Yves
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    The integration of national electricity systems into a single internal European electricity market is not progressing well with the result that the level of competition in the sector remains unsatisfactory. This had led to proposals to apply ex ante remedies that directly bear on the structure of national incumbents. These measures involve quantitative recommendations such as virtual auctioning of capacity or divestitures that increase the number of competing firms. The evaluation of these measures partly relies on computable oligopoly models of the restructured electricity sector. This paper analyses the recent literature of these models and concludes that they are not currently capable of providing the degree of legal and regulatory certainty that the importance of these ex ante remedies requires. The state of the art in these models is such that their results reflect more a set of non-testable assumptions than observed facts or unambiguous theory. More academic work is necessary before these models can be applied in a legal or regulatory context. The conclusion is that this work on the structure of national electricity market distracts from the fundamental objective to introduce competition in the power sector by integrating the national markets into a single electricity market.

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    File URL: http://alfresco.uclouvain.be/alfresco/download/attach/workspace/SpacesStore/51c9829b-6335-4779-ab36-e82a8bf5fa0b/coredp_2005_50.pdf
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    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2005050.

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    Date of creation: 00 Jul 2005
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    Handle: RePEc:cor:louvco:2005050
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    1. Joskow, P. & Tirole, J., 2004. "Reliability and Competitive Electricity Markets," Cambridge Working Papers in Economics 0450, Faculty of Economics, University of Cambridge.
    2. Rajnish Kamat & Shmuel Oren, 2004. "Two-settlement Systems for Electricity Markets under Network Uncertainty and Market Power," Journal of Regulatory Economics, Springer, vol. 25(1), pages 5-37, January.
    3. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-24, March.
    4. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
    5. Newbery, D. M., 1997. "Competition, Contracts and Entry in the Electricity Spot Market," Cambridge Working Papers in Economics 9707, Faculty of Economics, University of Cambridge.
    6. Paul Joskow & Edward Kahn, 2001. "A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000," NBER Working Papers 8157, National Bureau of Economic Research, Inc.
    7. O'Neill, Richard P. & Sotkiewicz, Paul M. & Hobbs, Benjamin F. & Rothkopf, Michael H. & Stewart, William R., 2005. "Efficient market-clearing prices in markets with nonconvexities," European Journal of Operational Research, Elsevier, vol. 164(1), pages 269-285, July.
    8. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-53, October.
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    10. repec:reg:rpubli:110 is not listed on IDEAS
    11. Ehrenmann, A. & Neuhoff, K., 2003. "A Comparison of Electricity Market Designs in Networks," Cambridge Working Papers in Economics 0341, Faculty of Economics, University of Cambridge.
    12. Cardell, Judith B. & Hitt, Carrie Cullen & Hogan, William W., 1997. "Market power and strategic interaction in electricity networks," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 109-137, March.
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    14. Green, Richard J, 1996. "Increasing Competition in the British Electricity Spot Market," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 205-16, June.
    15. Bartholomew, Emily S. & Siddiqui, Afzal S. & Marnay, Chris & Oren, Shmuel S., 2003. "The New York Transmission Congestion Contract Market: Is It Truly Working Efficiently?," The Electricity Journal, Elsevier, vol. 16(9), pages 14-24, November.
    16. Green, R., 2004. "Retail Competition and Electricity Contracts," Cambridge Working Papers in Economics 0406, Faculty of Economics, University of Cambridge.
    17. Erin T. Mansur, 2003. "Vertical Integration in Restructured Electricity Markets: Measuring Market Efficiency and Firm Conduct," Yale School of Management Working Papers ysm430, Yale School of Management.
    18. Bushnell, James & Wolfram, Catherine, 2008. "Electricity Markets," Staff General Research Papers 31547, Iowa State University, Department of Economics.
    19. Neuhoff, Karsten & Barquin, Julian & Boots, Maroeska G. & Ehrenmann, Andreas & Hobbs, Benjamin F. & Rijkers, Fieke A.M. & Vazquez, Miguel, 2005. "Network-constrained Cournot models of liberalized electricity markets: the devil is in the details," Energy Economics, Elsevier, vol. 27(3), pages 495-525, May.
    20. Neuhoff, K., 2003. "Integrating Transmission and Energy Markets Mitigates Market Power," Cambridge Working Papers in Economics 0310, Faculty of Economics, University of Cambridge.
    21. Anna Creti & Natalia Fabra, 2003. "Capacity Markets for Electricity," Industrial Organization 0309002, EconWPA, revised 26 Nov 2003.
    22. 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, 06.
    23. Newbery, D., 2006. "The relationship between regulation and competition policy for network utilities," Cambridge Working Papers in Economics 0631, Faculty of Economics, University of Cambridge.
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