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Comprehensive study sheds light on market power

Electricity markets have been studied extensively in regard to the impact of market power on the efficient operation of markets, partly because there is a high level of data transparency and partly because the dispatch process is repeated many times each day.

A new study led by Australian Cigré member David Bowker (Hydro Tasmania) and supported by Alex Cruickshank (AGL) in their Cigré working group roles has considered the exercise of market power by generators. The study covered 19 markets around the world, market power mitigation measures and how exercise of market power may erode the benefits of a competitive market. An overview of this study’s findings follows.

For maximum efficiency, all participants in the market must trade off their volume of sales with the price per unit of sale. Where a participant is able to vary their price without due impact on their volume (or volume without due impact on return), the efficiency of markets break down. This is called 'market power' and is considered undesirable in competitive markets. Jurisdictions seek to prevent situations where market power can arise and, where this is not possible, to penalise those who abuse it.

However, market power is a complex topic. It typically exists in periods of scarcity that may be caused by network constraints or high loads due to extreme temperatures. Markets may also require some measure of market power to operate to allow low utilisation plants to recover their costs.

The objective of this working group was to document which measures are in place in various markets around the world and to form a view on the effectiveness of these measures. Information was also collected on markets where there are no market power mitigation measures in place and an assessment was carried out of the correlation with specific market design features.

Market power is typically managed through the regulatory environment, market design, industry structure and measures that act in the dispatch time frame. Whilst the focus of this study is those measures that act in the dispatch timeframe, the study also considers the environment within which these measures are implemented.

The European Union Agency for the Cooperation of Energy Regulators (ACER) has recognised the significance of market power and recently introduced a monitoring programme to deter market manipulation.

This working group analysed the measures that are in place in various electricity markets across the globe to manage market power. One of the key design criteria for any electricity market is to manage the impact of market power, as it generally will reduce the efficiency of the market.

The working group posed a series of questions across a variety of areas and responses were received from 19 markets and from all continents.

The study considers the various responses and presents several detailed observations across a variety of areas such as interconnection and downstream competition.

The main report also includes three case studies that provide a deeper insight into three approaches to market mitigation measures. These are for the PJM, Ontario and ERCOT (Texas) markets.

This global study showed that there are clearly measures, like increased contract offerings and some basic market design parameters, that may reduce the need for specific market power mitigation measures in the dispatch timeframe.

It was also observed that there are many approaches to ensure market power does not erode the benefits of a competitive market. Importantly, it was recognised that mitigation measures can also reduce the efficiency of the market. Consideration of any market power mitigation measure must therefore recognise the costs as well as the benefits of any market power mitigation intervention or regulation.

A detailed 43-page report is available to members – click here.