A New Perspective
Loyola de Palacio Series on European Energy Policy
Edited by Jean-Michel Glachant, Dominique Finon and Adrien de Hauteclocque
Chapter 6: Imperfect Competition and Long-term Contracts in Electricity Markets: Some Lessons from Theoretical Models
Guy Meunier 1 INTRODUCTION The textbook model of an efficient electricity market is comprised of many producers and consumers, decisions of which are decentralized through an efficient and liquid spot market. A complete set of future markets complete this setting to enable agents to hedge their medium and long-term decisions. Horizontal and vertical relationships can be seen as brakes to the development of such a market. The high concentrations observed on both wholesale and retail electricity markets together with the vertical integration of many major firms, naturally raise concerns about the exercise of market power. This concern is particularly acute because short-term supply and demand are quasiinelastic in situations of tight conditions. Competition authorities are suspicious with regard to long-term contracts (LTCs), particularly when one of the parties is a dominant player on its market. Whereas there is a relatively standard framework to analyse horizontal mergers1 there still lacks such a standard framework to deal with the efficiency of LTCs. Long-term contracts are suspected of draining short-term markets, limiting entry and consequently raising short-term market power. However, contracts have meaningful economics purposes and offer tools to exploit gains from trade. Furthermore, vertical relations are recognized as a cure to market power exercise on the wholesale market, and the development of forward trade has been recommended to limit excessive market power exercise in the very short term. Some aspects of the debate are not new and echo a vivid debate in the US emerging in the 1970s both on academic and...
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