Market Power Mitigation Research Articles

Demand response resources: Who is responsible for implementation in a deregulated market?

Demand response resources (DRR) have potential to offer substantial benefits in the form of improved economic efficiency in wholesale electricity markets. Those benefits include better capacity factors for existing capacity, reductions in requirements for new capacity, enhanced reliability, relief of congestion and transmission constraints, reductions in price volatility, mitigation of market power and lower electricity prices for consumers. However, DRR has been slow to penetrate. There has been substantial disagreement as to which entities in a restructured market should promote the expanded implementation of DRR. This paper contends that no single entity can perform this function. But rather, wider implementation will need to accrue from coordinated actions along the electricity supply chain.

Analyzing Two-Settlement Electricity Market Equilibrium by Coevolutionary Computation Approach

Forward contracts play an important role for market power mitigation and risk hedging in electricity markets. In this paper, a two-settlement electricity market including a forward market and a spot market is formulated as a two-stage game. The linear supply function equilibrium (LSFE) model and Cournot model are used to model strategic bidding for the spot market, while the forward market is modeled by Cournot model. A coevolutionary genetic algorithm (CGA) is employed to determine the market equilibrium. The paper then examines the question whether generation companies (GenCos) would voluntarily enter forward markets due to economic inspiration and studies theoretically and numerically the factors which can affect the bidding behaviors of GenCos. The effectiveness of CGA in determining the market equilibrium is investigated and demonstrated based on two test examples. The studies show that GenCos' decisions on the participation in forward markets depend significantly on the type of competition that they have in the spot market. Moreover, GenCos' bidding behaviors in the forward market can be affected by their cost parameters and the slope of system demand function significantly.

Measuring Efficiency in Wholesale Electricity Markets

The mechanisms of the bid-based economic dispatch and market power mitigation algorithms which result in the market clearing price epitomize the complexity of the new regulatory regime. The augmented Lerner Index presented here offers a method to objectively assess the efficiency of the new structure.

Transmission-constrained oligopoly in the Japanese electricity market

We simulate the Japanese wholesale electricity market as a transmission-constrained Cournot market using a linear complementarity approach. First, we investigate the effects of upgrading the bottleneck transmission line between the eastern and western regions, focusing on the mitigation of transmission congestion. Although increasing the bottleneck capacity would lead to welfare gains, they might not be substantial particularly when transmission capacity costs are taken into account. Second, we examine the effects of splitting the largest electric power company, which is located in the eastern region, focusing on the mitigation of market power. Splitting the largest company into two companies would lead to a 25% reduction in the eastern price, and a 50% reduction in deadweight loss. The divestiture of the largest company would have a significant effect of mitigating market power in the Japanese electricity market.

Divesting Power

We study alternative market power mitigation measures in a homogenous goods industry where productive assets have asymmetric costs. We characterise the asset divestment by a dominant fi rm which achieves the greatest reduction in prices (taking the size of the divestment as given). The optimal divestment entails the sale of assets whose costs are close to the post-divestment price (i.e. they are price-setting). A divestment of this type can be several times more e¤ective in reducing prices than divestments of low-cost assets. We also establish that virtual divestments (often employed in the power industry) are at best equivalent to low-cost divestments in terms of their impact on consumer welfare, and cannot replicate the optimal divestment.

Market power mitigation by regulating contract portfolio risk

Abuse of market power by dominant generation firms is a growing concern in worldwide electricity markets. This paper argues that relying only on general competition rules—as is the case in most European countries—is insufficient and that complementary ex-ante regulation is needed. In particular, regulators should incentivize firms to sign contracts with retailers by regulating their risk exposure. In a simulation model we show that this type of regulation can significantly reduce the deadweight loss in the market, without imposing large costs on regulatees.

Competition policy and regulation in hydro-dominated electricity markets

This paper discusses the main competition issues that arise in electricity systems dominated by hydro generation, arguing that technological differences between hydro and thermal plants may allow hydropower producers to exert market power in different and subtler ways compared to thermal generators. The key for market power in hydro-based systems is the strategic allocation of a given amount of output across periods, rather than a straightforward reduction of total output. The paper examines the interaction between strategic hydro reservoir operation and transmission capacity constraints, and summarizes the implications of market power for system reliability. A review of recent relevant literature is included. Finally, possible interventions to mitigate market power are analysed.

Market Power in the German Wholesale Electricity Market: What are the Political Options?

This paper evaluates four publicly discussed policy options to mitigate market power in the German wholesale electricity market. These four options are: a regulatory solution favoured by the Federal Ministry for Economics and Technology, the implementation of a day-ahead flow-based market coupling in the Central West Region advocated by five European regulators, the expansion of cross border capacity as stipulated by the European Commission and the divestiture of dominant suppliers as proposed by the Hessian Ministry of Economics. The following questions are answered in this paper: are these options adequate measures to mitigate market power? What are the intended and non-intended effects on market efficiency? How likely is the political implementation?

Spot, Bilateral and Futures Trading in Electricity Markets - Implications for Stability

The design of wholesale electricity markets in the transition towards liberalization presents significant differences from country to country. Some spot markets have imposed the concentration of transactions to ensure market liquidity. Other markets are based on bilateral trading. The debate about the optimal trading mechanism mainly concentrates on how to deal with the trade off between the liquidity of the market and the stability of the system. The solution chosen by some market is a mandatory pool with a regulated market for electricity derivatives, that allows to hedge price volatility and to mitigate market power. This paper investigates whether, in the presence of a futures market, spot and bilateral trading can operate together and what are possible outcomes in terms of liquidity of the spot market and stability of the system. The paper extends existing literature on the role of futures market on the behavior of spot market prices, developing a multi-period model in which electricity consumers can choose whether to trade on the spot market or negotiate bilateral contracts. Results suggest that a spot market with futures contracts and a market for bilateral contracts are not necessarily alternative ways to manage stability problems, but may co-exist with positive and synergic outcomes on price behaviors and market power.

Residential Gateway for Electricity Response: Resolve of Customer Access, System Expansion, Market Manipulation, and Environmental Goals

Designers of competitive electricity systems face numerous challenges regarding how to achieve efficient retail customer access, cost-containment, market power mitigation, and environmental goals. The ideal system would provide retail price and demand response, customer satisfaction, meet environmental objectives, be highly reliable, and provide appropriate investment signals for system expansion. Starting in Chicago, the WattSpot residential, real-time interactive gateway is designed to resolve these challenges. It facilitates web-based, automated customer choice based on hourly electricity metering and prices, demand response and energy efficiency options, environmental dispatch, and highly interactive customer education. Research is presented to show how this gateway and the related data can be used resolve critical challenges to competitive electricity markets and leverage customers options.

A Dynamic Analysis of a Demand Curve-Based Capacity Market Proposal: The PJM Reliability Pricing Model

Because of high generation adequacy standards in the power industry, some peaking capacity operates for a limited time during the year and may not receive sufficient energy revenues to meet its fixed costs. This is particularly true when energy prices are capped in order to mitigate market power. The northeastern U.S. independent system operators (ISOs) have responded to this issue by establishing capacity obligations for loads and markets for installed capacity, thus providing a capacity revenue stream to generators. The installed capacity (ICAP) markets in the northeastern U.S. markets are a response to this need for additional incentives to construct generation. The Federal Energy Regulatory Commission (FERC) has accepted the PJM Interconnection's (PJM) proposal to replace the present fixed ICAP requirement that is placed upon load serving entities (LSEs) with a demand curve-based system in which the ISO would be responsible for acquiring residual capacity on behalf of LSEs. The demand curve approach pays more when reserve margins are smaller and provides a reduced incentive for investment when installed reserves are above the target. Another goal is to make revenues more predictable for generators, making investment less costly and, ultimately, lowering prices for consumers. A dynamic representative agent model is presented for projecting effects upon reserve margins, generator profitability, and consumer costs and is applied to alternative demand curves proposed for the PJM market. The consumer costs resulting from a sloped demand curve are robustly lower compared to the present fixed requirement under a wide range of assumptions concerning behavior of generation owners, including risk attitudes, bidding behavior, and willingness to build capacity as a function of forecast profit. The cost savings arise from lower capital costs to generators due to reduced risk and risk premiums. Also, average installed capacity is less for the same level of reliability because of reduced fluctuations in installed reserves

Market power mitigation lacking in order 637

Natural GasVolume 16, Issue 10 p. 30-32 Article Market power mitigation lacking in order 637 William T. Benham, William T. Benham William T. Benham is vice president of regulatory affairs for BP Amoco.Search for more papers by this author William T. Benham, William T. Benham William T. Benham is vice president of regulatory affairs for BP Amoco.Search for more papers by this author First published: 09 January 2007 https://doi.org/10.1002/gas.3410161008 AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Volume16, Issue10May 2000Pages 30-32 RelatedInformation

International Perspectives on Electricity Market Monitoring and Market Power Mitigation

We review the different market monitoring and market-power mitigation policies that arise in world electricity markets. Regulators for electricity markets apparently respond to differences in underlying market structure and design features when choosing between ex-ante (that is, rule-based) behavioral restrictions as opposed to ex-post enforcement (that is, investigations and sanctions) as the principal means for deterring abuses of market power. Particular design features that influence market-monitoring policies are whether the market is one-part (energy only) versus two-part (energy and capacity), and whether there is centralized or bilateral trading. Information-disclosure requirements also are a key element of market monitoring.

Conduct and Impact versus Direct Mitigation

The methodology for ex ante market power mitigation of energy bids has recently coalesced around two different approaches: “conduct and impact” and “direct mitigation.” While both methods share the same aim, there are significant differences between them for participants, ISOs, and the regulators that administer them.

The New Electricity Market of Singapore: Regulatory framework, market power and competition

This study examines whether the New Electricity Market of Singapore (NEMS) is functioning at a workable level of competition. The generation market of the NEMS appears highly concentrated by a four-firm concentration ratio or the Herfindahl–Hirschman Index. However, other measures of market power present that the NEMS is working at close to a competitive market. First, there seems to be a number of effective competitors in the market. Second, Supply Margin Assessment and Residual Supply Index support that the market is competitive though there are some possibilities in which the largest generator or a few large generators jointly could still have market power. Third, the Lerner Index of the NEMS shows that the generation market is fairly competitive and the Lerner Index adjusted with an industry level price elasticity of demand implies that there has not been much exercise of market power. Finally, vesting contracts—a contractual obligation of a specified quantity of electricity supply to the market—have appeared to be a strong and effective tool to mitigate market power in the NEMS. The vesting contracts are considered the force behind the lowering in the average Uniform Singapore Electricity Price and the Lerner Index in 2004.

Market power mitigation in the UK power market

Market power in generation was a significant problem throughout the 1990s, following the privatisation of the electricity industry in England and Wales. The industry's regulators fought this market power with a series of reports criticising aspects of the dominant generators' behaviour, a temporary cap on prices, and two rounds of plant divestitures (voluntary, but agreed in the face of a possible reference to the competition authorities). At the end of the decade, the regulator and the government imposed a new set of wholesale market rules, just as the industry reached a competitive market structure, and prices fell.

Design of Efficient Generation Markets

The design of spot markets for generation services, such as energy, regulation,and operating reserves, and longer term markets for capacity, remain in evolution in many countries. Market design includes definition of the service, bid, or offer requirements, and rules for pricing and financial settlement. In the United States, most organized regional markets have converged on similar elements of spot market design. The design of capacity markets remains influx. Market power mitigation is currently a regulatory requirement in the United States, and experience with different methods shows that it must be carefully aligned with market design to ensure both efficient pricing and efficient investment. This paper surveys these topics and their relationships to each other and identifies researchable issues.

Market Power Mitigation in Electricity Markets: A Framework for Making Choices

While most experts now agree that the exercise of market power is an important issue for the electricity industry, there is no consensus about how to address the problem. How is a regulator to choose one mitigation approach over another? This paper argues that there is no neutral way to assess recommendations. Debates about market power are occurring on several interrelated levels, from questions of how to measure the phenomenon, to price instrument options, to market design questions. The biases in these debates reflect competing stakeholder interests and underlying normative commitments about how the industry should evolve. Jurisdictions, therefore, should consider market power advice sceptically and in light of their own policy goals.

Market power monitoring and mitigation in the US wholesale power markets

Under current statutory requirements, the Federal Energy Regulatory Commission (FERC) must ensure that prices in US wholesale power markets are ‘just and reasonable’. This has been interpreted by the agency and the courts as requiring the monitoring and mitigation of undue market power. This paper focuses on generation market power. Prior to electricity sector restructuring, wholesale bilateral power trading took place among vertically integrated monopoly utilities trading at the margin or between small independent producers and the utilities. Under those conditions, the authorization of trading at market prices, called ‘market-based rates’, required only that the generation supplier pass a simple market share screen for market power. As restructuring unfolded, and market conditions changed, there has been a steady evolution in FERC's market power mitigation rules, encompassing (a) changes in the market power assessment required for granting market-based rates and related methods for merger approval, and (b) development and refinement of new techniques for screening and mitigating offers into the organized day-ahead and real-time markets operated by Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs). This paper reviews these changes to date, as FERC continues to clarify its approved rules and procedures. It also examines recent methods for quantitative market power analysis that could augment current procedures or supplant them, as found appropriate.

05/01578 Beyond market shares and cost-plus pricing: Designing a horizontal market power mitigation framework for today's electricity markets

05/01578 Beyond market shares and cost-plus pricing: Designing a horizontal market power mitigation framework for today's electricity markets