Paul Twomey, Karsten Neuhoff
Market Power and Technological Bias: The Case of Electricity Generation
EPRG 0501 | Non-Technical Summary | PDF
Abstract: It is difficult to eliminate all market power in electricity markets and it is therefore frequently suggested that some market power should be tolerated: extra revenues contribute to fixed cost recovery, facilitate investment and increase security of supply. This suggestion implicitly assumes all generation technologies benefit equally from market power. We assess a mixture of conventional and intermittent generation, eg coal plants and wind power. If all output is sold in the spot market, then intermittent generation benefits less from market power than conventional generation. Forward contracts or option contracts reduce the level of market power but bias against intermittent generators persists.
Keywords: market power, technology choice, electricity markets, intermittent output, forward and option contracting