EPRG 0821

 David Newbery

Predicting market power in wholesale electricity markets

EPRG 0821 Non-Technical Summary | PDF

Also published in:

• Newbery, David (2009). “Predicting Market Power in Wholesale Electricity Markets,” RSCAS Working Papers 2009/03, European University Institute

Abstract: The traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship.

Keywords: Residual Supply Index, Cournot equilibrium, Lerner Index, electricity markets, market power