The Economics of Electricity Markets

The cost-efficient supply of cheap, reliable and environmentally friendly electricity requires (1) a well-functioning market for power generation; (2) appropriately regulated transmission and distribution networks; (3) smooth coordination of transmission demand and wholesale supply; (4) appropriate capacity investment incentives.


The purpose of this research program is to study the welfare economics of electricity markets with respect to competition, regulation and industry structure.

Program Director: Thomas Tangerås



A new tool to capture the system costs of intermittent renewable electricity generation 

This paper develops a new tool, locational marginal network tariffs, to internalize the costs of maintaining system balance that arise from intermittent renewable generation. It demonstrates the practical applicability of this approach by applying the theory to obtain quantitative results for the California electricity market.

Download: Locational marginal network tariffs for intermittent renewable generation by Thomas Tangerås and Frank A. Wolak


An efficient compensation system for reserve capacity in a competitive electricity market

In many countries, producers receive financial compensation for maintaining reserve capacity on the grid. The purpose is to avoid scarcity events during which either the price of electricity becomes extremely high or consumers are curtailed in order to maintain system balance.This research paper shows how to design an efficient compensation mechanism in a market with competitive electricity supply.  

Download: Capacity mechanisms and the technology mix in competitive electricity markets by Pär Holmberg and Robert A. Ritz 

Flow-based pricing of electricity in the spot market increases efficiency

Electricity markets in Europe apply area-based pricing, which implies that bottlenecks within the different price areas are neglected in the clearance of spot markets. Several European countries have recently introduced flow-based pricing to better account for such bottlenecks. These two research papers conduct theoretical analysis and model simulations which indicate that the efficiency of electricity supply is likely to increase as a consequence of this change in market design, not least because inefficient arbitrage between the spot and real-time markets is likely to decrease.

Download: Redispatch in zonal pricing electricity markets by Mario Blázquez de Paz

Download: Production efficiency of nodal and zonal pricing in imperfectly competitive electricity markets by Mahir Sarfati, Mohammad Reza Hesamzadeh and Pär Holmberg

Does central dispatch improve electricity supply?

This research paper compares how different electricity markets in Europe and the USA allocate production capacity and incorporate network bottlenecks in the market outcome. The main question is whether electricity supply can be improved by changing the present Nordic model of self-dispatch in favor of a model with central dispatch. The main lesson to be learnt from US markets concerns how to efficiently account for network bottlenecks. But these are not sufficient reasons to abandon the Nordic model, in particular because increasing shares of intermittent renewable electricity supply favors decentralized dispatch.

Download: Central- versus self-dispatch in electricity markets by Victor Ahlqvist, Pär Holmberg and Thomas Tangerås

Simulation of arbitrage trading in a large zonal price electricity market

European wholesale electricity markets apply zonal pricing. As a consequence, the price is determined in a certain way at the day-ahead market and a different way at the real-time market, which generates inefficiencies. The authors develop in two research papers a simulation model and solution algorithm that enables to quantify this inefficiency in a large electricity network.

Download: Increase-decrease game under imperfect competition in two-stage zonal power markets –​ Part I: Concept Analysis and Part II Solution algorithm by Mahir Sarfati, Mohammad Reza Hesamzadeh och Pär Holmberg

How to create an integrated electricity market?

The world’s first multinational electricity market was formed with the creation of the Nordic power exchange, Nord Pool. Lars Persson and Thomas Tangerås analyze the incentives to undertake transmission network investment in the context of the liberalized Nordic electricity market. Welfare improving investment in a multinational electricity market requires accounting for the cross-border effects of capacity expansion. The authors propose methods to increase voluntary cooperation on international infrastructure projects, with an aim to increase aggregate efficiency and achieve equitable distribution of the gains from market integration.

Download: Transmission network investment across national borders: The liberalized Nordic electricity market by Lars Persson and Thomas Tangerås

Improvement of zonal pricing in wholesale electricity markets

European day-ahead markets for electricity apply zonal pricing. Prices are then allowed to differ across zones because of network congestion, but are the same within each zone. In the real-time market, there can be price differences also within zones because of local bottlenecks. This paper proposes a new market design with the property that prices are the same within zones also in the real-time market. Simulations show that this design substantially would reduce problems associated with strategic behavior in the wholesale market arising from price manipulation between the day-ahead and real-time market.

Download: Simulation and evaluation of zonal electricity market designs by Mohammad R. Hesamzadeh, Pär Holmberg and Mahir Sarfati

Standard market designs increase competition while maintaining price equality for consumers 

Thomas Tangerås and Frank A.Wolak show that a common regulatory mandate in electricity markets that use location-based pricing can increase the performance of imperfectly competitive wholesale electricity markets. Requiring all customers to purchase their wholesale electricity at the same quantity-weighted average of the locational prices strengthens the incentive for vertically integrated firms to participate in the retail market, which increases competition in the short-term wholesale market. In contrast, linking locational markets through a long-term contract that clears against the quantity-weighted average of short-term wholesale prices does not impact average wholesale market performance. These results imply that a policy designed to address equity considerations can also enhance efficiency in wholesale electricity markets.

Download: The competitive effects of linking electricity markets across space and time by Thomas Tangerås and Frank A.Wolak

Production or transmission investment?

Mario Blázquez de Paz analyzes the effects of investments in transmission and production capacity on consumer welfare and suppliers’ profits. In the specific context of the model, consumer welfare is shown to be higher when the transmission network is expanded compared to an increase in capacity.

Download: Production on transmission investments? A comparative study by Mario Blazquez de Paz

How did privatization affect prices and efficiency in Swedish electricity distribution companies?

Around the turn of the millennium, a wave of privatizations in the Swedish electricity distribution sector lead to an increase in ownership concentration. In this project, Erik Lundin analyzes the performance of the acquired distribution firms to see if privately owned networks have a stronger incentive to increase prices and reduce costs than non-private ones. Results show that labor costs fell in the privatized networks, but that this reduction did not lead to a reduction in network tariffs.

Download: Effects of privatization on prices and labor efficiency: The Swedish electricitty distribution sector by Erik Lundin

Joint ownership of nuclear power increases wholesale electricity prices

In this research paper, Erik Lundin conducts an empirical investigation of the anticompetitive effects of joint ownership, by examining the operation of three nuclear plants in Sweden.  Using data on production and bidding curves on the day-ahead market, the model is tested against data for three behavioral assumptions: Unilateral profit maximization; joint profit maximization; and a social planner. Modeling for joint profit maximization best matches data, indicating that joint ownership has facilitated coordination of maintenance decisions. Terminating the joint ownership and modeling for unilateral profit maximization would lead to a 5 percent decrease in prices and a 6 percent decrease in system production costs.

Download: Market power and joint ownership: Evidence from nuclear plants in Sweden by Erik Lundin

Market design in electricity markets with transmission constraints

Electricity markets are becoming increasingly integrated. In this research paper, Mario de Blazquez de Paz analyses the performance of uniform and discriminatory price auctions in the presence of transmission constraints and transmission costs. A main finding is that the discriminatory price auction could outperform the uniform price auction when transmission constraints are binding.

Download: Auction performance on wholesale electricity markets in the presence of transmission constraints and transmission costs by Mario Blazquez de Paz

Is there insider trading on the Nordic intra-day electricity market?

In this research paper Ewa Lazarczyk conducts an empirical investigation of market participants’ reactions to news about sudden production and transmission failures on the electricity grid - so-called urgent market messages (UMMs). Market prices in the intra-day market respond to UMMs. However, there is also a significant effect on prices immediately prior to UMM announcement, indicating that private information exists and is being used for trading on the intra-day market.

Download: Public and private information on the Nordic intra-day electricity market by Ewa Lazarczyk

International cooperation

Visiting researchers

Collaborating with others is essential for IFN as a research institute. Our researchers co-author articles with colleagues from other institutes, and many also teach at various universities and colleges.

As part of our extensive program of guest researchers, leading international researchers visit the institute. The visitors present and pursue their research as well as interact and cooperate with researchers at IFN.

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