Mediating Market Power in Electricity Networks

Gilbert, Richard; Neuhoff, Karsten; Newbery, David M. G.

doi:10.2139/ssrn.502742

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Mediating Market Power in Electricity Networks

UC Berkeley, Center for Competition Policy Working Paper No. CPC02-32

37 Pages Posted: 17 Feb 2004

See all articles by Richard Gilbert

Richard Gilbert

University of California, Berkeley - Department of Economics

Karsten Neuhoff

German Institute for Economic Research (DIW Berlin)

David M. G. Newbery

University of Cambridge - Department of Applied Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 7, 2002

Abstract

We ask under what conditions transmission contracts increase or mitigate market power. We show that the allocation process of transmission rights is crucial. In an efficiently arbitraged uniform price auction generators will only obtain contracts that mitigate their market power. However, if generators inherit transmission contracts or buy them in a 'pay-as-bid' auction, then these contracts can enhance market power. In the two-node network case banning generators from holding transmission contracts that do not correspond to delivery of their own energy mitigates market power. Meshed networks differ in important ways as constrained links no longer isolate prices in competitive markets from market manipulation. The paper suggests ways of minimizing market power considerations when designing transmission contracts.

Keywords: Electricity, market power, transmission rights, nodal pricing

JEL Classification: L1, L12, L94

Suggested Citation: Suggested Citation

Gilbert, Richard J. and Neuhoff, Karsten and Newbery, David M. G., Mediating Market Power in Electricity Networks (August 7, 2002). UC Berkeley, Center for Competition Policy Working Paper No. CPC02-32, Available at SSRN: https://ssrn.com/abstract=502742 or http://dx.doi.org/10.2139/ssrn.502742