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Cost pass-through in the British wholesale electricity market

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  • Guo, Bowei
  • Castagneto Gissey, Giorgio

Abstract

Cost pass-through (CPT) rates give a useful perspective of market competition. This article studies how input costs of electricity generation are passed through to the wholesale price in Great Britain between 2015 and 2018. Our empirical results fail to reject the null hypothesis of 100% CPT rates for gas costs and EUA prices (and coal costs for most hours), suggesting a competitive British wholesale electricity market in most hours. We observe a higher CPT rate for coal costs in peak and off-peak periods. This is due to coal plants usually bidding at rates somewhat lower than marginal costs during off-peak periods in order to dispatch at their minimum load to avoid the costs of shutting down and starting back up. Instead, during peak periods the rate of capacity utilisation is high and marginal coal plants tend to exercise their market power, resulting in a higher CPT rate for coal costs. We extend the argument by assessing coal plants’ bidding and find evidence of coal plants exercising market power in hours with high residual demand, generating extreme prices.

Suggested Citation

  • Guo, Bowei & Castagneto Gissey, Giorgio, 2021. "Cost pass-through in the British wholesale electricity market," Energy Economics, Elsevier, vol. 102(C).
  • Handle: RePEc:eee:eneeco:v:102:y:2021:i:c:s0140988321003820
    DOI: 10.1016/j.eneco.2021.105497
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    3. Ma, Rufei & Liu, Zhenhua & Zhai, Pengxiang, 2022. "Does economic policy uncertainty drive volatility spillovers in electricity markets: Time and frequency evidence," Energy Economics, Elsevier, vol. 107(C).
    4. Wang, Hao-ran & Feng, Tian-tian & Zhong, Cheng, 2023. "Effectiveness of CO2 cost pass-through to electricity prices under “electricity-carbon” market coupling in China," Energy, Elsevier, vol. 266(C).

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    More about this item

    Keywords

    Electricity market; Cost pass-through; Competition; Carbon price;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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