The Economics of Electricity Markets

The Economics of Electricity Markets

Theory and Policy

The Loyola de Palacio Series on European Energy Policy

Edited by Pippo Ranci and Guido Cervigni

The Economics of Electricity Markets provides a cutting-edge analysis of the critical issues involved in the design and operation of electricity markets, as well as an assessment of alternative institutional arrangements that have either been implemented or are under discussion in Europe and the US.

Chapter 5: Competition policy in the electricity industry

Guido Cervigni and Dmitri Perekhodtsev

Subjects: economics and finance, energy economics, industrial economics


Market power is a company’s ability to profitably raise and maintain prices above the level that would prevail under competition. Market power is a primary concern in wholesale electricity markets for two broad reasons. The first is that electricity is a primary commodity purchased by every household and business, and its price is extremely important for the economy. The second is that the unique technical and economic characteristics of electricity make wholesale electricity markets particularly vulnerable to the exercise of market power. These characteristics are little or no demand responses to price changes, the fact that electricity is not storable, and tight transmission capacity constraints that reduce the scope for competition among generators connected in different locations. As a result, even small generators may have the interest and ability to induce dramatic price increases under certain conditions. The problem is exacerbated by the highly concentrated industries that have resulted in most countries from the liberalisation of electricity generation.

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