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A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000

Paul L. Joskow and Edward Kohn

Year: 2002
Volume: Volume23
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol23-No4-1
View Abstract

Abstract:
During the Summer of 2000, wholesale electricity prices in California were nearly 500% higher than they were during the same months in 1998 or 1999. This price explosion was unexpected and has called into question whether electricity restructuring will bring the benefits of competition promised to consumers. The purpose of this paper is to examine the factors that explain this increase in wholesale electricity prices. We simulate competitive benchmark prices for Summer of 2000 taking account of all relevant supply and demand factors-gas prices, demand, imports from other states, and emission permit prices. We then compare the simulated competitive benchmark prices with the actual prices observed. We find that there is a large gap between our benchmark competitive prices and observed prices, suggesting that the prices observed during Summer 2000 reflect, in part, the exercise of market power by suppliers. We then proceed to examine supplier behavior during high price hours. We find evidence that suppliers withheld supply from the market that would have been profitable for price-taking firms to sell at the market price.



Estimating the Volatility of Wholesale Electricity Spot Prices in the US

Lester Hadsell, Achla Marathe and Hany A. Shawky

Year: 2004
Volume: Volume 25
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol25-No4-2
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Abstract:
This paper examines the volatility of wholesale electricity prices for five US markets. Using data covering the period from May 1996 to September 2001, for the California-Oregon Border, Palo Verde, Cinergy, Entergy, and Pennsylvania-New Jersey-Maryland markets, we examine the volatility of electricity wholesale prices over time and across markets. We estimate volatility using a TARCH model to study the differences among markets and the seasonal characteristics of each market. For all markets, we find strong evidence for a downward trend in the ARCH term and a significant negative asymmetric effect over the sample period. We also document important differences among the regional electricity markets not only with respect to wholesale price volatility and seasonal variations, but also with respect to asymmetric properties and persistence of volatility.



Markets for Power in the United States: An Interim Assessment

Paul L. Joskow

Year: 2006
Volume: Volume 27
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No1-2
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Abstract:
The transition to competitive wholesale and retail markets for electricity in the U.S. has been a difficult and contentious process. This paper examines the progress that has been made in the evolution of wholesale and retail electricity market institutions. Various indicia of the performance of these market institutions are presented and discussed. Significant progress has been made on the wholesale competition front but major challenges must still be confronted. The framework for supporting retail competition has been less successful, especially for small customers. Empirical evidence suggests that well-designed competitive market reforms have led to performance improvements in a number of dimensions and benefited customers through lower retail prices.



Supply Function Equilibrium with Asymmetric Capacities and Constant Marginal Costs

Par Holmberg

Year: 2007
Volume: Volume 28
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol28-No2-3
View Abstract

Abstract:
This paper analytically derives a Supply Function Equilibrium (SFE) of a real-time electricity market with multiple firms and asymmetric production capacities. There is a unique SFE, which is piece-wise symmetric when firms have identical constant marginal costs. It is believed that some of the properties of the derived SFE are valid for real-time markets in general. Firms� capacity constraints bind at different prices (i). Still, firms with non-binding capacity constraints have smooth residual demand (ii). Approximating an asymmetric real-time market with a symmetric one, tends to overestimate mark-ups for small positive imbalances and underestimate mark-ups for large positive imbalances (iii).



Welfare Impacts of Electricity Storage and the Implications of Ownership Structure

Ramteen Sioshansi

Year: 2010
Volume: Volume 31
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No2-7
View Abstract

Abstract:
Increases in electricity price volatility have raised interest in electricity storage and its potential arbitrage value. Large utility-scale electricity storage can decrease the value of energy arbitrage by smoothing differences in prices on- and off-peak, however this price-smoothing effect can result in significant external welfare gains by reducing consumer energy costs and generator profits. As such, the incentives of merchant storage operators, consumers, and generators may not be properly aligned to ensure socially-optimal storage use. We examine storage use incentives for these different agent types and show that under most reasonable market structures a combination of merchant and consumer ownership of storage maximizes potential welfare gains from storage use.



Price Signals in "Energy-only" Wholesale Electricity Markets: An Empirical Analysis of the Price Signal in France

Philippe Vassilopoulos

Year: 2010
Volume: Volume 31
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No3-5
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Abstract:
This paper analyzes the price signals of the French wholesale electricity market. We build a model of electricity prices that takes into account several key features of the French electricity market in order to assess the capacity of the price signal to guide investments. Wholesale prices should reflect the imbalances in the generation mix but the signal can be distorted if monopoly rents and/or �missing money� are present. We simulate over the 2003-2005 period theoretical perfectly competitive prices with the installed capacity and with the optimal mix to estimate the capacity imbalances and scarcity rents. We then compare the investment signal sent by observed electricity prices and the theoretical prices with the installed capacity. Although there are signs of market contestability for the mid-merit load, through market integration with the other continental markets, observed prices are too high for the baseload and too low for the peakload, as a result distorting the signal.



Strategic Forward Contracting in the Wholesale Electricity Market

Pär Holmberg

Year: 2011
Volume: Volume 32
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No1-7
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Abstract:
This paper analyses a wholesale electricity market with supply function competition. Trade in the forward and spot markets is represented by a two-stage game, and its subgame perfect Nash equilibrium (SPNE) is characterized. It is verified that increased forward sales of a producer constitute a credible commitment to aggressive spot market bidding. The paper identifies market situations when this pro-competitive commitment is unilaterally profitable for the producer. It is also proven that a producer has incentives to sell in the forward market in order to reduce competitors' forward sales, which softens their spot market offers.



Electricity Wholesale Markets: Designs Now and in a Low-carbon Future

Richard J. Green

Year: 2008
Volume: Volume 29
Number: Special Issue #2
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-NoSI2-6
View Abstract

Abstract:
This paper compares electricity wholesale markets in the United States and Europe. The Standard Market Design in the US involves an independent system operator, nodal pricing with financial transmission rights, and integrated markets for capacity and ancillary services. In Europe, there are national, or occasionally zonal, spot markets run by companies independent of the transmission operator, and of the latter's purchases of ancillary services. As the amount of low-carbon generation increases, prices and transmission constraints are likely to become more volatile, increasing the need to adopt an efficient market design. In most respects, the US standard market design is likely to give better results than the European models.



Comparison of congestion management techniques: Nodal, zonal and discriminatory pricing

Pär Holmberg and Ewa Lazarczyk

Year: 2015
Volume: Volume 36
Number: Number 2
DOI: 10.5547/01956574.36.2.7
View Abstract

Abstract:
Wholesale electricity markets use different market designs to handle congestion in the transmission network. We compare nodal, zonal and discriminatory pricing in general networks with transmission constraints and loop flows. We conclude that in large games with many producers and certain information, the three market designs result in the same efficient dispatch. However, zonal pricing with counter-trading results in additional payments to producers in export-constrained nodes, which leads to inefficient investments in the long-run.



Market Power and Renewables: The Effects of Ownership Transfers

Olivier Bahn, Mario Samano, and Paul Sarkis

Year: 2021
Volume: Volume 42
Number: Number 4
DOI: 10.5547/01956574.42.4.obah
View Abstract

Abstract:
Adding renewable energy sources (RES) to an electricity market has an ambiguous effect on wholesale prices. The merit order effect (MoE) has a downward pressure on prices while, with market power, higher inframarginal rents will tend to increase prices. We quantify the interaction of the two effects in the Ontario electricity market. We identify the market power effect by simulating transfers of RES capacity from the fringe to larger firms: these transfers increase prices by up to 24%. We then add RES capacity and allocate it to players with varying levels of market power. Following a net expansion of RES capacity of 5% relative to total capacity, prices decrease by 30% when new capacity is assigned to the fringe, but only by 7% when assigned to the largest firm. Our findings show that the MoE is largely mitigated by market power, hence the importance of the market structure in the design of uniform incentives for RES adoption.




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