Price Formation and Market Power in the German Electricity Wholesale Market - Is Big Really Beautiful?

Abstract

During 2004 and 2006 German wholesale electricity prices nearly doubled. The purpose of this paper is to estimate the factors for this price increase differentiated by fuel costs, CO2-emission allowances, and market power. We develop a competitive benchmark model, taking into account power plant characteristics, fuel and CO2-allowance-prices, wind generation, and other market characteristics. We estimate the difference between generation costs and observed market prices for a limited number of load data, between 2004 and 2006. We find that the prices at the German wholesale market (EEX) are significantly above the competitive levels for most of the observations. The robustness of the results has been verified by carrying out sensitivity analyses.

Keywords: electricity, Germany, market power, competitive benchmark

JEL Classification: L13, L94, D 43