Network Expansion to Mitigate Market Power: How Increased Integration Fosters Welfare

Alexander Zerrahn and Daniel Huppmann

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: Lack of transmission capacity hampers the efficient integration of the European electricity market, and thereby precludes reaping the full benefits of competition. We investigate to what extent the expansion of the transmission grid promotes competition, efficiency, and welfare. This work proposes a three-stage model for grid investment: a benevolent planner decides on network upgrades; she considers the welfare benefits of investment through a reduction of market power exertion by strategic generators. These firms anticipate their impact on the Independent System Operator and are able to exert market power, in particular when lines are congested. We illustrate the model on a simple three-node network. Results indicate that network expansion indeed provides a suitable way of enhancing welfare due to a reduction of market power potential.

JEL-codes: C61 L13 L51 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-com, nep-ene and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Network Expansion to Mitigate Market Power: How Increased Integration Fosters Welfare (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100459

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