Research

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

 

News

Imperfect competition in the Nordic wholesale electricity market 

Erik Lundin and Thomas Tangerås analyze market performance on the Nordic Power exchange, Nord Pool. Results show that producers exercising market power charge prices that on average are 8-11 per cent above marginal production cost. There is some evidence that the division of Sweden in multiple price areas reduced market performance.

Download: Cournot competition in wholesale electricity markets: The Nordic power exchange, Nord Pool by Erik Lundin and Thomas Tangerås

Projects

Market power and forward prices

The authors construct a model of strategic behavior in sequential markets which exhibits a persistent forward price premium. Purchasers are willing to pay a premium for forward contracts because producers with forward commitments have less incentive to raise prices on the spot market.

Download: Market power and forward prices by Keith Ruddell, Tony Downward and Andy Philpott

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

Increased cooperation among system operators reduces total system costs

This paper develops a stylized model of cross-border balancing to show that cooperation among system operators can reduce system costs. The gains of cooperation increase with cost asymmetries and decrease with correlation of real-time imbalances. Based on market data from a set of Eurpoean countries,  cost savings are estimated to be between 160 and 500 million Euro per year.

Download: Cross-border exchange and sharing of generation reserve capacity by Fridrik M.Baldursson, Ewa Lazarczyk, Marten Ovaere and Stef Proost 

The security of electricity supply in a multinational electricity market

An increasing reliance on solar and wind power has raised concern about system ability to consistently satisfy electricity demand. This paper examines countries’ unilateral incentives to achieve supply security through capacity reserves and market integration in a multinational electricity market..

Download: Equilibrium supply security in a multinational electricity market with renewable production by Thomas P. Tangerås

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

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 when firms are privately informed about costs

In this paper, Pär Holmberg and Frank A. Wolak analyse how market design influences bidding behaviour in electricity markets with cost uncertainties. They show that competition improves for increased market transparency. Circumstances are identified under which uniform pricing increases market performance compared to discriminatory pricing.

Download: Electricity markets: Designing auctions where suppliers have uncertain costs by Pär Holmberg and Frank A. Wolak

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

Price instability in electricity markets

This paper considers a procurement auction in which costs are private information to firms and suppliers submit stepped supply functions. The equilibrium features price instability. In wholesale electricity markets, price instability can cause the bid price of the most expensive production unit to change by 1-10%. Instability is reduced when suppliers have more steps in their supply functions. In the limit, as the number of steps increases and the cost uncertainty decreases, the equilibrium converges to the Supply Function Equilibrium.

Download: Price instability in multi-unit auctions by Edward Anderson and Pär Holmberg

Wind power volatility and the impact on failure rates in the Nordic electricity market

The volatility of wind power generation requires other power sources to start up and shut down depending on weather conditions to maintain system stability. The previous literature has used simulations to show that the damage done and the costs associated with such ramping can be substantial. Sara Fogelberg and Ewa Lazarczyk here use a dataset containing all reported failures in the Nordic electricity market and data for Danish wind power generation to analyze the consequences of wind power volatility on failure rates. The analysis shows that the short term effects of wind power volatility are insignificant inside Denmark. Effects are slightly more pronounced for the market as a whole, indicating that the other Nordic countries bear some of the costs for Denmark’s high share of wind power.

Download: Wind power volatility and the impact on failure rates in the Nordic electricity market by Sara Fogelberg and Ewa Lazarczyk

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

Higher electricity prices lead to increased imports of electricity intensive intermediate goods

The price of electricity increased substantially at the start of the millenium in Sweden. Shon Ferguson and Mark Sanctuary show in a new research paper how increased electricity costs caused Swedish manufacturing firms to increase their import of intermediary goods during this period.

Download: Firm productivity and carbon leakage: A study of Swedish manufacturing firms by Shon Ferguson and Mark Sanctuary

Do generation companies disguise strategic withholding as reported production failures?

Sara Fogelberg and Ewa Lazarczyk apply a quasi-experimental design and use data from the Swedish energy market to examine whether generation companies use reported production failures to disguise strategic reductions of capacity with the purpose of influencing prices. In a market without strategic withholding, the decision to report a failure should be independent of the market price. This paper shows that marginal producers in fact base their decision on prices as well, a result which indicates that failure reports are a result of economic incentives and not only technical problems.

Download: Strategic withholding through production failures by Sara Fogelberg and Ewa Lazarczyk

Real-time versus day-ahead market power in a hydro-based electricity market

Thomas Tangerås and Johannes Mauritzen analyze, within a theoretical framework, the link between real-time and day-ahead market performance in a hydro-based wholesale electricity market. The marginal cost of  hydropower is unobservable, since the cost mainly is the foregone value of postponed production - the water value. As the day-ahead price of electricity is also determined by the expected value of production, day-ahead electricity prices contain information about the water value. Theoretical predictions of the model are tested on data from the Nordic power exchange, Nord Pool Spot (NPS). The hypothesis that prices at NPS were at their competitive levels throughout the period under examination is rejected. The empirical approach uses equilibrium prices and quantities and does not rely on bid data or on estimation of demand or marginal cost functions.

Download: Real-time versus day-ahead market power in a hydro-based electricity market by Thomas Tangerås and Johannes Mauritzen

What is the effect of product market competition on network bottlenecks?

Storage possibilities are usually limited in electric power systems; supply and demand need to balance almost instantly. This research paper demonstrates that as a consequence, network bottlenecks create local markets with a potentially large impact on the electricity price and competition.

Download: Supply function equilibria in networks with transport constraints by Pär Holmberg and Andy Philpott

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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