Price spikes, temporary price caps, and welfare effects of regulatory interventions on wholesale electricity markets

Abstract

There is growing empirical evidence of increasing price volatility and price spikes in electricity markets as a result of variable renewable energy generation, extreme weather events, and other factors. While price spikes are needed to cover the fixed costs of power plants, they may also signal market flaws and anti-competitive behavior. Regulatory authorities have imposed market price caps to protect consumers and prevent abusive supplier behavior. In addition, some regulators have imposed temporary price caps during or after severe events; however, these caps may be driven by political motives rather than economic logic in weak institutional settings. This paper evaluates the welfare effect of the temporary price cap implemented in 2017 on the Turkish electricity market. By using matching and panel data methods, we show that the temporary price cap reduced the total welfare but did not affect market clearing price and projected supply. Our detailed analysis shows that this decision was driven by non-economic motives, and identifies a number of fundamental problems in the Turkish market that limit the effective functioning of the market.