Predicting collusive patterns in a liberalized electricity market with mandatory auctions of forward contracts

Abstract

In this paper, the main objective is to analyze the effect of the introduction of regulated long-term tariffs in liberalized electricity generation markets, which are supposed to guarantee reasonable and predictable prices to consumers. Several authors have argued that the introduction of this kind of regulation increases competition and leads to offer prices closer to marginal costs.Spanish electricity market brings a unique opportunity to analyze and use mandated auctions as a natural experiment (fixed-price contracts that were implemented between 2007 and 2013). The main contribution of this study is to develop and to validate the hypothesis of the existence of strong incentives to increase prices in daily electricity markets when fixed long-term tariffs are applied. Using triple difference-in-differences, we find that prices increased 15 percent 70 days before the mandated auctions (compared to a control group: Nord Pool market) and that effect disappeared once the auction was no longer carried out.The theoretical and the empirical findings support our policy implications: The uncompetitive outcome seems to be driven by a highly concentrated market, a high elasticity to react to competitive regulations, a context of high volatility and the particularities of the auction design.