From accusations towards analysis - A method for analyzing firm-level market power in Nord Pool Spot electricity market

Abstract

PURPOSE OF THE THESIS

The purpose of the thesis is to propose a method for analyzing market power on firm-level in Nord Pool Spot electricity market. As no firm-level market power analyses of Nord Pool Spot have been conducted, the thesis aims as well to communicate issues that should be taken account in order to conduct a reliable firm-level market power analysis of Nord Pool Spot.

METHODOLOGY

The method proposed in this study is aimed to analyzing electricity markets characterized by oligopolistic market structure. The method is formulated assuming that only a single generator, the oligopolist, can exercise market power. This description applies to many bidding areas of Nord Pool Spot. Briefly, the method is as follows. First, residual demand of the oligopolist in a given bidding area is estimated providing the relationship between the market price and the quantity supplied by the oligopolist, while accounting the supply response of the rest of the market. After estimating the residual demand, it is applied to model the best-response behavior of the oligopolist. The best-response behaviors are modeled applying three different assumptions of firm conduct: perfect competition and Cournot competition with and without forward contracting. Finally, the conduct of the oligopolist and effects of market power can be assessed by comparing the modeled best-response behaviors with the actual behavior of the oligopolist.

CONCLUSIONS

The method proposed in this study can be applied to analyze market power on firm-level in Nord Pool Spot. Particularly, the proposed method can be applied to analyze any bidding area in which a single generator controls significant share of the total electricity supply compared to its competitors. The method is most suitable for analyzing behavior of a generator whose generation fleet consists mainly of thermal generation. In general, this description applies to many bidding areas of Nord Pool Spot.