Arbitrage in Energy Markets: Competing in the Incumbent’s Shadow

Kupper Gerd () and Bert Willems
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Kupper Gerd: K.U.Leuven-Center for Economic Studies

Energy, Transport and Environment Working Papers Series from KU Leuven, Department of Economics - Research Group Energy, Transport and Environment

Abstract: This paper studies the welfare implications of using market mechanisms to allocate transmission capacity in recently liberalized electricity markets. It questions whether access to this essential facility should be traded on a market, or whether the incumbent should retain exclusive usage rights. We show that granting exclusive use to the incumbent might be optimal, if the capacity of the essential facility is small and the incumbent can reduce production costs by taking advantage of interregional production-cost di?erences. This result counters the intuition that arbitrage will improve the social surplus when there is no output contraction. The reason is that when competition is imperfect, arbitrage might reduce production e?ciency. We advise policymakers to introduce market mechanisms for the allocation of transmission capacity only if su?cient investment in the network is ensured or if the market power of the incumbent is broken in at least one of the markets in which it is active.

Keywords: Arbitrage; electricity sector; price discrimination (search for similar items in EconPapers)
JEL-codes: D40 L10 L50 Q48 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2007-11
New Economics Papers: this item is included in nep-com and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://feb.kuleuven.be/drc/Economics/misc/ete_workingpapers/ete-wp-2007-07.pdf (application/pdf)

Related works:
Working Paper: Arbitrage in energy markets: competing in the incumbent's shadow (2007)
Working Paper: Arbitrage in Energy Markets: Competing in the Incumbent's Shadow (2007)
Working Paper: Arbitrage in Energy Markets: Competing in the Incumbent's Shadow (2007)
Working Paper: Arbitrage in Energy Markets: Competing in the Incumbent's Shadow (2007)
Working Paper: Arbitrage in Energy Markets: Competing in the Incumbent's Shadow (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ete:etewps:ete0707

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