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Trading in the Downstream European Gas Market: A Successive Oligopoly Approach

Maroeska G. Boots, Fieke A.M. Rijkers and Benjamin F. Hobbs

Year: 2004
Volume: Volume 25
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol25-No3-5
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Abstract:
A model of successive oligopoly is applied to the European natural gas market. The model has a two-level structure, in which Cournot producers are also Stackelberg leaders with respect to traders, who may be Cournot oligopolists or price takers. Several conclusions emerge. First, successive oligopoly ("double marginalization") yields higher prices and lower consumer welfare than if oligopoly exists only on one level. Second, due to the high concentration of traders, prices are distorted more by market power in trading than in production. Third, trader profits depend on whether producers can price discriminate among consuming sectors; if so, producers collect a greater share of the profits. Finally, when traders increase in number, prices approach competitive levels. Thus, it is important to prevent concentration in the downstream gas market. If oligopolistic trading cannot be prevented, vertical integration should not be discouraged, especially if it would increase the number of traders.



Increasing the Value of Wind with Energy Storage

Ramteen Sioshansi

Year: 2011
Volume: Volume 32
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No2-1
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Abstract:
One economic disincentive to investing in wind generation is that the average market value of wind energy can be lower than that of other generation technologies. This is driven by the exercise of market power by other generators and the fact that the ability of these generators to exercise market power is inversely related to real-time wind availability. We examine the use of energy storage to mitigate this price suppression by shifting wind generation from periods with low prices to periods with higher prices. We show that storage can significantly increase the value of wind generation but the currently high capital cost of storage technologies cannot be justified on the basis of this use. Moreover, we demonstrate that this use of storage can reduce consumer surplus, the profits of other non-wind generators, and social welfare. We also examine the sensitivity of these effects to a number of parameters including storage size, storage efficiency, ownership structure, and market competitiveness--showing that a more-competitive market can make storage significantly more valuable to a wind generator.



The Visible Hand: Ensuring Optimal Investment in Electric Power Generation

Thomas-Olivier Léautier

Year: 2016
Volume: Volume 37
Number: Number 2
DOI: 10.5547/01956574.37.2.tlea
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Abstract:
This article formally analyzes the various corrective mechanisms that have been proposed and implemented to alleviate underinvestment in electric power generation. It yields three main analytical findings. First, physical capacity certificates markets implemented in the United States restore optimal investment if and only if they are supplemented with a "no short sale" condition, i.e., producers can not sell more certificates than they have installed capacity. Then, they raise producers' profits beyond the imperfect competition level. Second, financial reliability options, proposed in many markets, are effective at curbing market power, although they fail to fully restore investment incentives. If "no short sale" conditions are added, both physical capacity certificates and financial reliability options are equivalent. Finally, a single market for energy and operating reserves subject to a price cap is isomorphic to a simple energy market. Standard peak-load pricing analysis applies: under-investment occurs, unless production is perfectly competitive and the cap is never binding.



Competition in Electricity Markets with Renewable Energy Sources

Daron Acemoglu, Ali Kakhbod, and Asuman Ozdaglar

Year: 2017
Volume: Volume 38
Number: KAPSARC Special Issue
DOI: 10.5547/01956574.38.SI1.dace
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Abstract:
This paper studies the effects of the diversification of energy portfolios on the merit order effect in an oligopolistic energy market. The merit order effect describes the negative impact of renewable energy, typically supplied at the low marginal cost, to the electricity market. We show when thermal generators have a diverse energy portfolio, meaning that they also control some or all of the renewable supplies, they offset the price declines due to the merit order effect because they strategically reduce their conventional energy supplies when renewable supply is high. In particular, when all renewable supply generates profits for only thermal power generators this offset is complete - meaning that the merit order effect is totally neutralized. As a consequence, diversified energy portfolios may be welfare reducing. These results are robust to the presence of forward contracts and incomplete information (with or without correlated types). We further use our full model with incomplete information to study the volatility of energy prices in the presence of intermittent and uncertain renewable supplies.





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