IDEAS home Printed from https://ideas.repec.org/p/nip/nipewp/10-2023.html
   My bibliography  Save this paper

Trade, renewable energy, and market power in power markets

Author

Listed:
  • Kurt R. Brekke

    (Norwegian School of Economics (NHH), Department of Economics,)

  • Odd Rune Straume

    (NIPE/Center for Research in Economics and Management, University of Minho, Portugal; and Department of Economics, University of Bergen, Norway)

  • Lars Sørgard

    (Norwegian School of Economics (NHH), Department of Economics, Helleveien 30, 5045 Bergen, Norway; and Centre for Applied Research at NHH)

Abstract

Energy markets are undergoing a radical shift towards renewable energy and network integration. We study the effects of integrating regions with storable (hydro) and intermittent (wind) energy sources in the presence of market power. Based on a two-period model with price fluctuations in the wind power region and bottlenecks in transmission of energy between regions, we show that a dominant firm (facing a competitive fringe) has an incentive to reallocate more hydropower production to the low-price period in order to induce higher prices in the high-price period. This incentive might be so strong that the bottleneck in the low-price period is removed and the two regions become de facto integrated. Paradoxically, we find that higher hydropower production capacity and/or larger transmission capacity can lead to higher (average) prices in the hydropower region due to the strategic responses by the dominant firm. Moreover, we find that the presence of market power in many cases enables the dominant firm to appropriate a larger share of the surplus from trade without harming domestic consumers, implying that stronger competition in the hydropower region might not be welfare improving.

Suggested Citation

  • Kurt R. Brekke & Odd Rune Straume & Lars Sørgard, 2023. "Trade, renewable energy, and market power in power markets," NIPE Working Papers 10/2023, NIPE - Universidade do Minho.
    • Handle: RePEc:nip:nipewp:10/2023
    as

    Download full text from publisher

    File URL: https://repositorium.sdum.uminho.pt/handle/1822/87281
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    Hydropower; trade; market power;
    All these keywords.

    JEL classification:

    • 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
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

    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:nip:nipewp:10/2023. 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.

    We have no bibliographic references for this item. You can help adding them by using 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: NIPE (email available below). General contact details of provider: https://edirc.repec.org/data/nipampt.html .

    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.