Abstract
A fundamental characteristic of energy markets is their vulnerability to the presence of market power, which is that one or more suppliers can influence market prices. This vulnerability is related to a number of factors: low price sensitivity of demand, inflexibility of supply, limited abilities to store energy, and restricted capacities of the transportation network. These characteristics are discussed in Sect. 9.3. First, Sect. 9.2 discusses the general conditions and welfare consequences of the presence of firms using market power. Afterwards, Sect. 9.4 discusses how the presence and use of market power in energy markets can be monitored. Finally, Sect. 9.5 discusses a number of regulatory options to address the market failure of market power.
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Notes
- 1.
Actually, the equilibrium price can be a bit higher as this supplier can charge a price equal to the WTP of the marginal buyer, as no other supplier is able to offer the product at a lower price.
- 2.
This was first formulated by Adam Smith in his An Inquiry into the Nature and Causes of the Wealth of Nations (1776) as: ‘Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer’.
- 3.
The HHI can be calculated through measures for market shares expressed as percentages or as perunages (i.e. percentage divided by 100). In the former case, the HHI varies between 0 and 10,000, in the latter between 0 and 1.
- 4.
Cournot competition is where suppliers compete in the number of quantities they offer to the market instead of the prices they ask.
- 5.
In such cases regulation (or in general, policy) is captured by interest groups, in particular the incumbent industry.
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Exercises
Exercises
9.1 What is the difference between ability and incentive to use market power?
9.2 What is difference between economic and physical withholding?
9.3 How does the presence of storage affect market power?
9.4 Why is the Lerner index not a perfect measure in electricity markets?
9.5 How can demand flexibility be stimulated in energy markets?
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Mulder, M. (2021). Market Power in Wholesale and Retail Energy Markets. In: Regulation of Energy Markets. Lecture Notes in Energy, vol 80. Springer, Cham. https://doi.org/10.1007/978-3-030-58319-4_9
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DOI: https://doi.org/10.1007/978-3-030-58319-4_9
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