A new design for market power monitoring in the electricity market. A simulation for Italy

Abstract

The liberalization of electricity markets has been dominated by conditions of oligopoly and market power, as shown in numerous studies in empirical literature on the supply side. However, regulators have used statistical measurements to monitor the extent of market power, making little reference to founded theoretical approaches. This paper provides a new contribution to the literature on the electricity market by presenting a theoretical and empirical model to construct competitive equilibrium, and estimating market power on both the supply and demand side of the day-ahead electricity market. We implement an accurate measurement of the welfare loss associated with non-competitive market conditions, based on ex-ante demand and supply behavior.This model provides a useful analytical tool for regulators and policy-makers in order to implement pro-competitive regulation. We perform an empirical simulation to show the effects of non-competitive equilibria on the Italian hourly markets over the period 2013–2014. In an ideal competitive market, prices would be lower than historical prices by about 2–5% and quantities would be higher by about 0.5–1%.