Market Design and Price Behavior in Restructured Electricity Markets: An International Comparison

Abstract

This paper argues that the market rules governing the operation of a restructured electricity market in combination with its market structure can have a substantial impact on the behavior of market-clearing prices. It provides an assessment of the relationship between market rules and market structure and the behavior of prices in several markets, including England and Wales, Norway, the State of Victoria in Australia, and New Zealand. The paper closes with a discussion of the available evidence that the behavior of prices in each country is the result of the exercise of market power. Several empirical regularities are suggested by this cross-country analysis. One result is greater price volatility in systems dominated by fossil-fueled power plants relative to those dominated by hydro-electric power plants. I also find that electricity supply industries with a larger component of private participation in the generation market tend to have more volatile prices, although the evidence presented also seems to suggest that markets with less participation by government-owned firms also have lower mean electricity prices after controlling for differences in generation technologies. Electricity spot markets with mandatory participation also tend to have more volatile prices than systems with voluntary participation.Key wordsInternational MarketsMarket DesignPrice VolatilityStrategic BehaviorTime Series Analysis