Bilateral Market Power and Vertical Integration in the Spanish Electricity Spot Market

Abstract

The Spanish electricity spot market is highly concentrated both on the seller and the buyer side. Furthermore, unlike electricity spot markets in other deregulated electricity systems, large buyers and sellers are typically vertically integrated. This allows both large net sellers and large net buyers to strategically influence the spot market price. We develop a supply function model of this market to analyze the impact of market power on prices and productive efficiency and use it empirically to detect such bilateral market power. Our estimates suggest that market power has had little impact on spot market prices but that substantial productive inefficiencies may have arisen from the exercise of bilateral market power.

Keywords: Market power test, vertical integration, bilateral market power, electricity markets, supply function equilibirum

JEL Classification: L13, L41, L94