Markets with power

Notes

Published in the 2023 19th International Conference on the European Energy Market (EEM).**

See related presentations at:

• EEM 2023

Abstract

In the late 2010s, a confluence of events contributed to unprecedented price increases and volatility in the Australian National Electricity Market (NEM). We investigate to what extent market power contributed to elevated prices during this time. We base our analysis on a benchmark model of the NEM, which estimates counterfactual prices under the assumption of perfect competition. We construct marginal cost curves for each interval based on unit characteristics and fuel prices and produce a counterfactual competitive timeseries using actual demand. A comparison of actual market outcomes with our benchmark simulations suggests that, on average, a material fraction of regional prices are a result of market power. Depending on the region and time period, market power can account for 10% to 50% of wholesale prices. Moreover, our analysis indicates that market power tends to be most prevalent within the Queensland region and during high levels of regional demand across the NEM as can be seen in Figure 1.

Figure 1. Price-cost margin distributions by region.

Notes. This plot presents non-parametric means of price-cost margins by region. Actual prices are based on Regional Reference Prices from the Australian Energy Market Operator, while simulated prices are generated using a multistate model with endogenous transmission flows. The curves are local polynomial regressions using a normal kernel with a 1 GW bandwidth, while the range is limited to between $0 and $500 AUD/MW