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

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

Richard J. Gilbert (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Karsten Neuhoff

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

David M. G. Newbery

University of Cambridge - Department of Applied Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DE
United Kingdom
+44 1223 335 246 (Phone)
+44 1223 335 299 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom
+44 1223 335 246/7 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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