Market Design in Wholesale Electricity Markets

Abstract

As European countries move towards complete unbundling in electricity markets, some issues regarding market design are still under discussion. In particular, which market configuration would give the right incentives to promote efficiency and reduce final prices. In this paper we analyze a design in which prices are binding for more than one market period (like in the former British system or in the Australian system) and we compare price equilibria and collusive incentives under proportional and efficient rationing. To do so, we build on Le Coq (2002) and Crampes and Creti (2003) framework to account for stochastic demand. Our results suggest that with stochastic demand, incentives for strategically withholding capacity are still present but incentives to agree on market share are mitigated by efficient rationing.

Keywords: electricity markets, market design, pricing behavior, stochastic demand

JEL Classification: C72, L94