Thursday, February 25, 2016
Measuring Market Power and the Efficiency of Alberta's Restructured Electricity Market: An Energy-Only Market Design
David P Brown, University of Alberta - Department of Economics and Derek E.H. Olmstead, Alberta Market Surveillance; Carleton University are Measuring Market Power and the Efficiency of Alberta's Restructured Electricity Market: An Energy-Only Market Design.
ABSTRACT: We measure the degree of market power execution and inefficiencies in Alberta's restructured electricity market. Using hourly wholesale market data from 2008 to 2014, we find that firms exercise substantial market power in the highest demand hours with limited excess production capacity. The degree of market power execution in all other hours is low. Market inefficiencies are larger in the high demand hours and elevate production costs by 14%-19% above the competitive benchmark. This reflects 2.35% of the average market price across all hours. A recent regulatory policy clarifies that certain types of unilateral market power execution is permitted in Alberta. We find evidence that suggests that strategic behavior changed after this announcement. Market power execution increased. We illustrate that the observed earnings are often sufficient to promote investment in natural gas based technologies. However, the rents from market power execution can exceed the estimated capacity costs for certain generation technologies. We demonstrate that the energy market profits in the presence of no market power execution are generally insufficient to promote investment in new generation capacity. This stresses the importance of considering both short-run and long-run performance measures.