Introduction
Abuse of Market Power
Abuse of Market Power by dominant generators is a major concern in electricity markets. This concern has to be addressed by regulators. Traditionally regulators rely on
- ex-post regulation: abuse of firms is punished by anti-trust authorities
- structural remedies: firms have to divest generation capacity
It has been argued that both methods are not possible in electricity markets:
- ex-post regulation: legal burden of proof for market abuse is too high
- structural remedies: economies of scale and politics make divestitures impossible
Hence, regulators have to develop behavioral remedies to mitigate market power. One such behavioral remedy is to oblige firms to sell long term contracts to consumers. These long term contracts reduce the incentives of generators to raise prices in the spot market.
Research Questions
- How do long term contracts affect the stategic behavior of firms?
- Can long term contracts be used as a regultory device to mitigate market power?
Research Methodology
- As a first step I compared different types of long term contracts and studied their effects on the strategic behavior of firms.
- Currently, I am looking into one specific implementation of a contract remedy where firms face a fine if they contract too little.
Cournot competition, Option contracts and Efficiency
The existing literature on long term contracts and market power considers only one type of contracts: Futures Contracts. In a series of papers I try to fill this gap studying other types of contracts.
- Cournot Competition, Financial Option markets and Efficiency
- Financial and Physical VPPs.
- Will Virtual Divestitures really help? Cournot Competition, Option Markets and Efficiency
The main conclusions are that
- A virtual divestiture should not be a pure financial transaction, but should give the buyer effective control over production decisions.
- Regulators should support markets for financial options as they have large pro-competitive effects.
Implementing Market Power Mitigation by Contracts
Currently, I am studying whether obliging generators to contract a certain percentage of their final production with long term contracts will have positive effect on the market.
- Market Power Mitigation by Contracts
The paper shows that this obligation is not an effective way to mitigate market power. The obligation transfers market power from the spot market to the contract market and the price for electricity rises.