Abstract
During the liberalization process the UK regulatory authority introduced a behavioral remedy (through price-cap regulation) and structural remedy (through divestment series) in order to mitigate an exercise of market power and lower the influence of incumbent producers on wholesale electricity prices. We study the impact of these remedies on the dynamics of the wholesale electricity price during the peak-demand period over trading days. An extended autoregressive and autoregressive conditional heteroscedasticity (AR–ARCH) model with a novel skew generalized error distribution is used. This distribution allows one to capture the features of asymmetry, excess kurtosis, and heavy tails. The model is extended to include individual incumbent producers’ market shares and other explanatory variables reflecting seasonal patterns and regulatory regimes. We find that the structural remedy was more successful than the behavioral remedy because the effect of market share of the previously larger incumbent producer on the wholesale price is statistically insignificant. Moreover, after the second series of divestments, price volatility reduced.
Highlights
Great Britain was the first among the OECD countries to liberalize its electricity supply industry.The aim of liberalization was to introduce competition into electricity wholesale generation
We find that the structural remedy was generally more successful than the behavioral remedy because after the second series of divestments that, firstly, the effect of market share of the previously larger incumbent producer on wholesale prices is statistically insignificant and, secondly, price volatility reduced
Because stationarity in the time series analysis is a usual requirement in order to allow for modeling and statistical inference, we first provide the results of the stationarity test
Summary
Great Britain was the first among the OECD countries to liberalize its electricity supply industry.The aim of liberalization was to introduce competition into electricity wholesale generation. Great Britain was the first among the OECD countries to liberalize its electricity supply industry. The regulatory authority, Office of Electricity Regulation (later renamed the Office of Gas and Electricity Markets), introduced a behavioral remedy (through price-cap regulation) and a structural remedy (through divestment series) at different points of time, which were targeted at the NP and PG producers. Divestment series were introduced in order to lower the influence of the incumbent producers on wholesale electricity prices. The market shares of the incumbent electricity producers declined. Market share is an important factor affecting a firm’s behavior and eventually market prices.
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