Measuring Market Power and the Efficiency of Alberta's Restructured Electricity Market: An Energy-Only Market Design

33 Pages Posted: 22 Jan 2016

See all articles by David Brown

David Brown

University of Alberta - Department of Economics

Derek Olmstead

Market Surveillance Administrator; Carleton University; University of Calgary - Department of Economics

Date Written: January 21, 2016

Abstract

We measure the degree of market power execution and inefficiencies in Alberta's restructured electricity market. Using hourly wholesale market data from 2008 to 2014, we find that firms exercise substantial market power in the highest demand hours with limited excess production capacity. The degree of market power execution in all other hours is low. Market inefficiencies are larger in the high demand hours and elevate production costs by 14%-19% above the competitive benchmark. This reflects 2.35% of the average market price across all hours. A recent regulatory policy clarifies that certain types of unilateral market power execution is permitted in Alberta. We find evidence that suggests that strategic behavior changed after this announcement. Market power execution increased. We illustrate that the observed earnings are often sufficient to promote investment in natural gas based technologies. However, the rents from market power execution can exceed the estimated capacity costs for certain generation technologies. We demonstrate that the energy market pro ts in the presence of no market power execution are generally insufficient to promote investment in new generation capacity. This stresses the importance of considering both short-run and long-run performance measures.

Keywords: Electricity Markets, Market Power, Regulatory Policy

JEL Classification: D44, L13, L50, L94, Q40

Suggested Citation

Brown, David and Olmstead, Derek, Measuring Market Power and the Efficiency of Alberta's Restructured Electricity Market: An Energy-Only Market Design (January 21, 2016). USAEE Working Paper No. 16-235, Available at SSRN: https://ssrn.com/abstract=2719918 or http://dx.doi.org/10.2139/ssrn.2719918

David Brown (Contact Author)

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

Derek Olmstead

Market Surveillance Administrator ( email )

400 5 Avenue SW
Suite 500
Calgary, Alberta T2P0L6
Canada

Carleton University ( email )

1125 colonel By Drive
Ottawa, Ontario K1S 5B6
Canada

University of Calgary - Department of Economics ( email )

2500 University Dr. N.W.
Calgary, Albetra T2N 1N4
Canada

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