Trade, renewable energy, and market power in power markets

Kurt Brekke (), Odd Rune Straume and Lars Sørgard

No 10/2023, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: Energy markets are undergoing a radical shift towards renewable energy and network integration. We study the effects of integrating regions with storable (hydro) and intermittent (wind) energy sources in the presence of market power. Based on a two-period model with price fluctuations in the wind power region and bottlenecks in transmission of energy between regions, we show that a dominant firm (facing a competitive fringe) has an incentive to reallocate more hydropower production to the low-price period in order to induce higher prices in the high-price period. This incentive might be so strong that the bottleneck in the low-price period is removed and the two regions become de facto integrated. Paradoxically, we find that higher hydropower production capacity and/or larger transmission capacity can lead to higher (average) prices in the hydropower region due to the strategic responses by the dominant firm. Moreover, we find that the presence of market power in many cases enables the dominant firm to appropriate a larger share of the surplus from trade without harming domestic consumers, implying that stronger competition in the hydropower region might not be welfare improving.

Keywords: Hydropower; trade; market power (search for similar items in EconPapers)
JEL-codes: L13 L94 Q41 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-com, nep-ene, nep-env, nep-ind and nep-reg
References: Add references at CitEc
Citations:

Downloads: (external link)
https://repositorium.sdum.uminho.pt/handle/1822/87281 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nip:nipewp:10/2023

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in NIPE Working Papers from NIPE - Universidade do Minho Núcleo de Investigação em Políticas Económicas e Empresariais, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal. Contact information at EDIRC.
Bibliographic data for series maintained by NIPE ().