Table of Contents

Competition, Contracts and Electricity Markets

Competition, Contracts and Electricity Markets

A New Perspective

Loyola de Palacio Series on European Energy Policy

Edited by Jean-Michel Glachant, Dominique Finon and Adrien de Hauteclocque

This book fills a gap in the existing literature by dealing with several issues linked to long-term contracts and the efficiency of electricity markets. These include the impact of long-term contracts and vertical integration on effective competition, generation investment in risky markets, and the challenges for competition policy principles.

Chapter 4: Comparison of Long-term Contracts and Vertical Integration in Decentralized Electricity Markets

Richard Meade and Seini O’Connor

Subjects: economics and finance, competition policy, energy economics, industrial organisation, law - academic, energy law


Richard Meade and Seini O’Connor INTRODUCTION 1 A common view is that electricity sectors should be unbundled and opened to competition, and that in such decentralized (liberalized) markets long-term contracts are necessary to constrain generator market power, elicit competitive entry in retailing and support new generation investment and hence supply security (Boom and Buehler 2006; Vázquez et al. 2002). However, increasing levels of generation ownership by electricity retailers or large electricity customers (and vice versa) – that is, of vertical (re)integration – have been observed in several liberalized systems (Anderson et al. 2007; Gans and Wolak 2008; Hogan and Meade 2007; Thomas 2004). This has led to concerns about market performance, with policy-makers concerned that wholesale and retail competition might decrease, and generation investment and supply security may be under threat (European Commission 2007, Michaels 2006).1 However, problems have emerged with this ‘conventional’ view regarding sector unbundling and competition (Chao et al. 2005; Finon and Perez, 2008; Green 2006). In particular, excessive competitive entry in retailing may threaten the viability of short- and long-term contracts, and thus threaten – rather than promote – generation investment and supply security. Excessive competition can take the form of ‘hit-and-run’ retail entry, for example, under which retail entrants with low entry costs predate customers from existing retailers when the incumbents have signed long-term energy supply contracts at fixed prices but then wholesale energy prices fall. This creates critical ‘hold-up’ risks between retailers and consumers – that is, the risk that customers, facilitated by low switching costs...

You are not authenticated to view the full text of this chapter or article.

Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.

Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.

Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.

Further information