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Effects of Liberalizing the Natural Gas Markets in Western Europe

Rolf Golombek, Eystein Gjelsvik and Knut Einar Rosendahl

Year: 1995
Volume: Volume16
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol16-No1-6
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Abstract:
This paper uses a numerical model to examine the long-run impact of a radical liberalization of the West-European natural gas markets. We study profit maximizing Cournot producers facing an ideal third party access regime for gas transport. Producers sell gas either to large users in the manufacturing industry and to gas-fired thermal power plants, or to local distribution companies. We first examine the case where no traders exploit arbitrage possibilities and some producers have limited access to the markets. In this equilibrium net prices differ across markets. These differences disappear in the second case where traders are introduced. The third case focuses on a complete European market for natural gas in which traders exploit all arbitrage possibilities and all producers can sell gas in all markets. We also study the impact on the complete European market of changes in costs for production, transport, and distribution. Finally, welfare implications from a liberalization of the West-European natural gas markets are discussed. We argue that a radical liberalization could increase economic welfare in Western Europe by 15% to 20% in the long run.



Market Structure and the Price of Electricity: An Ex Ante Analysis of the Deregulated Swedish Electricity Market

Bo Andersson and Lars Bergman

Year: 1995
Volume: Volume16
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol16-No2-5
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Abstract:
Following new legislation the Swedish electricity market is about to be deregulated. The new system is designed to ensure competition introduction and supply. The main motive for deregulation is to increase competition and thus achieve lower market prices. A possible threat to this outcome is the high degree of concentration on the seller side that characterizes the Swedish electricity market. In this paper we show that given the current structure of firms on the supply side, deregulation is not a sufficient condition for lower equilibrium prices in the electricity market. We use a numerical model to explore the quantitative relation between the Cournot-equilibrium price, the number of firms, and the size distribution of firms in the Swedish electricity market. We compute equilibrium electricity prices and a welfare measure in order to quantify the effect of asymmetric market concentration on competition.



Market Power in a System of Tradeable CO2 Quotas

Hege Westskog

Year: 1996
Volume: Volume17
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol17-No3-6
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Abstract:
This paper examines the connection between market power and the size of efficiency loss in a market for tradeable CO2 permits. Countries, not firms, are the players in the market. A situation is analyzed where some of the, participants have market power, i.e., they can influence the price of a CO2 quota. Each country with market power decides how many quotas to buy or sell, given the other market power countries' sales or purchases of quotas, and the behavior of countries without market power. The latter countries act as price takers. The market equilibrium is compared to a cost effective market situation in order to quantify the efficiency loss resulting from market power.



Economic Inefficiency of Passive Transmission Rights in Congested Electricity Systems with Competitive Generation

Shmuel S. Oren

Year: 1997
Volume: Volume18
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol18-No1-3
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Abstract:
The main thesis of this paper is that passive transmission rights such as Transmission Congestion Contracts (TCCs) that are compensated ex-post based on nodal prices resulting from optimal dispatch by an Independent System Operator (ISO) will be preempted by the strategic bidding of the generators. Thus, even when generation is competitive, rational expectations of congestion will induce implicit collusion enabling generators to raise their bids above marginal costs and capture the congestion rents, leaving the TCCs uncompensated. These conclusions are based on a Cournot model of competition across congested transmission links where an ISO dispatches generators optimally based on bid prices. We characterize the Cournot equilibrium in congested electricity networks with two and three nodes. We show that absent active transmission rights trading, the resulting equilibrium may be at an inefficient dispatch and congestion rents will be captured by the generators. We also demonstrate how active trading of transmission rights in parallel with 42 competitive energy market can prevent the price distortion and inefficient dispatch associated with passive transmission rights.



Computable Equilibrium Models and the Restructuring of the European Electricity and Gas Markets

Yves Smeers

Year: 1997
Volume: Volume18
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol18-No4-1
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Abstract:
More regulation, not less, is temporarily necessary, if effective, competition is to be established in network industries. This paradox places new requirements on computable models: they should provide realistic descriptions of technologies but also of markets and institutions. Industrial economics and computation of economic equilibrium can help achieve this dual requirement. This paper discusses their potential in the context of the deregulation of the European gas and electricity sectors. Some key elements of the European legislative process are first presented in order to point out the diversity of institutions that can emerge and to highlight the need to model institutions. Perfect competition equilibrium models although institutionally poor are argued to be useful for ex post analysis. Applications of the standard Cournot and' Bertrand paradigms in ex ante analysis of gas and electricity markets are reviewed next. Models combining market power and externalities are then discussed with reference to electricity restructuring. Finally multistage equilibrium models are introduced in the context of investment in gas and electricity. Computation remarks conclude the paper.



Financial Transmission Rights Meet Cournot: How TCCs Curb Market Power

Steven Stoft

Year: 1999
Volume: Volume20
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol20-No1-1
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Abstract:
This paper reconsiders the problem of market power when generators face a demand curve limited by a transmission constraint. After demonstrating that the problem's importance originates in an inherent ambiguity in Cournot-Nash theory, I review Oren's (1997a) argument that generators in this situation capture all congestion rents. In the one-line case, this argument depends on an untested hypothesis while in the three-line case, the Nash equilibrium was misidentified. Finally, the argument that financial transmission rights (and TCCs in particular) will have zero market value is refuted by modeling the possibility of their purchase by generators. This allows transmission owners, who initially own the TCCs, to capture some of the congestion rent. In fact when total capacity exceeds line capacity by more than the capacity of the largest generator, TCCs should attain their perfectly competitive value, thereby curbing the market power of generators.



Modeling Cournot Competition in an Electricity Market with Transmission Constraints

Bert Willems

Year: 2002
Volume: Volume23
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol23-No3-5
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Abstract:
This paper studies Cournot competition with two generators who share one transmission line with a limited capacityto supply price-taking consumers. In such a game the network operator needs a rule to allocate transmission capacity. Three rules are studied: all-or-nothing, proportional, and efficient rationing. The first result is that if the network operator taxes the whole congestion rent, the generators strategically change their production quantities, such that the network operator obtains no congestion rent. This gives poor incentives for investment in transmission capacity. The second result is that the network operator can create competition among the generators, which can increase welfare. Marginal nodal congestion pricing, which is optimal under perfect competition, is sub-optimal when generators can set their production quantities freely. It does not generate revenue for the network operator, nor does it increase competition among the generators.



The Competitive Effects of Ownership of Financial Transmission Rights in a Deregulated Electricity Industry

Manho Joung, Ross Baldick, and You Seok Son

Year: 2008
Volume: Volume 29
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No2-9
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Abstract:
In this paper, we investigate how generators� ownership of financial transmission rights (FTRs) may influence the effects of the transmission lines on competition. In order for concrete analysis, a simple symmetric market model is introduced and FTRs are modeled in two different forms: FTR options and FTR obligations. This paper shows that introducing FTRs in an appropriate manner may reduce the physical capacity needed for the full benefits of competition. Among the competitive effects of ownership of FTRs, we focus on the effects on two possible pure strategy equilibria: the unconstrained Cournot equilibrium and the passive/aggressive equilibrium. We also analyze an extension of the model: asymmetric markets. Finally, a numerical illustration of applying the analysis is presented.



Carbon Charges in Electricity Markets with Strategic Behavior and Transmission

Anthony Downward

Year: 2010
Volume: Volume 31
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No4-7
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Abstract:
We examine the effect of introducing a carbon charge on electricity gen�eration. We model this by way of a two generator Cournot game over a two node electricity network. We find that within the electricity system, emissions of carbon dioxide can increase after a carbon charge is introduced.



Modeling Strategic Electricity Storage: The Case of Pumped Hydro Storage in Germany

Wolf-Peter Schill and Claudia Kemfert

Year: 2011
Volume: Volume 32
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No3-3
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Abstract:
We study the strategic utilization of storage in imperfect electricity markets. We apply a game-theoretic Cournot model to the German power market and analyze different counterfactual and realistic cases of pumped hydro storage. Our main finding is that both storage utilization and storage-related welfare effects depend on storage ownership and the operator's involvement in conventional generation. Strategic operators generally under-utilize owned storage capacity. Strategic storage operation may also lead to welfare losses, in particular if the total storage capacity is controlled by an oligopolistic generator that also owns conventional generation capacity. Yet in the current German situation, pumped hydro storage is not a relevant source of market power.




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