Dynamic Competition and Arbitrage in Electricity Markets: The Role of Financial Players

Abstract

I study the effects of financial players who trade alongside physical buyers and sellers in electricity markets. Using detailed firm-level data, I examine physical and financial firms’ responses to regulation that exogenously increased financial trading. I show that the effect of speculators on generators’ market power depends on the kind of equilibrium they are in. I develop a test of the null of static Nash equilibrium and reject it. To implement the test, I present a new method to define markets using machine-learning tools. I find that increased financial trading reduced generators’ market power and increased consumer surplus. (JEL C45, D83, G13, L13, L94, L98, Q41)