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Market Power and Price Exposure: Learning from Changes in Renewables' Regulation

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  • Fabra, Natalia
  • , Imelda

Abstract

In many regulatory settings, regulators often debate whether to pay producers at fixed prices or at market-based prices. In this paper, we assess how firms' price exposure affects the degree of market power. We find that fixed prices mitigate market power by directly affecting the dominant firms' incentives to exert market power, while market-based prices do so indirectly by promoting the fringe firms' incentives to engage in arbitrage. To empirically identify these effects, we exploit a natural experiment that took place in the Spanish electricity market, where the regulator switched back and forth from paying renewable energies according to fixed or to market-based prices. Overall, we find that fixed prices were relatively more effective in weakening firms' market power, even though the market-based price regime led to more active price arbitrage.

Suggested Citation

  • Fabra, Natalia & , Imelda, 2020. "Market Power and Price Exposure: Learning from Changes in Renewables' Regulation," CEPR Discussion Papers 14729, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14729
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    Cited by:

    1. Bohland, Moritz & Schwenen, Sebastian, 2022. "Renewable support and strategic pricing in electricity markets," International Journal of Industrial Organization, Elsevier, vol. 80(C).
    2. Fabra, Natalia, 2021. "The energy transition: An industrial economics perspective," International Journal of Industrial Organization, Elsevier, vol. 79(C).

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    More about this item

    Keywords

    market power; Forward contracts; Arbitrage; Renewables; Renewables' auctions;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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