IDEAS home Printed from https://ideas.repec.org/a/eee/enepol/v173y2023ics0301421522006279.html
   My bibliography  Save this article

The effect of retail price regulation on the wholesale price of electricity

Author

Listed:
  • Castro Pérez, José E.
  • Flores, Daniel

Abstract

In this article, we study—both theoretically and empirically—the effects of changes in the regulated retail price of electricity on the unregulated wholesale price. We develop a relatively general supply and demand model that includes both regulated and unregulated market demands. We find that a reduction (or an increase) of the regulated price leads to an increase (a reduction) in the wholesale price. Moreover, we use a regression discontinuity approach to estimate the effect of the residential summer tariff—which generates a large reduction in the regulated retail price—over the wholesale price of electricity in Monterrey, Mexico. We find that the elasticity of the wholesale electricity price with respect to the regulated retail price was around −1 before the pandemic. Nevertheless, the most recent estimate is around −0.26. Because these figures are not negligible, authorities should consider the interdependence of retail and wholesale markets when changing the regulated retail price.

Suggested Citation

  • Castro Pérez, José E. & Flores, Daniel, 2023. "The effect of retail price regulation on the wholesale price of electricity," Energy Policy, Elsevier, vol. 173(C).
    • Handle: RePEc:eee:enepol:v:173:y:2023:i:c:s0301421522006279
    DOI: 10.1016/j.enpol.2022.113408
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0301421522006279
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.enpol.2022.113408?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lucas W. Davis, 2008. "The Effect of Driving Restrictions on Air Quality in Mexico City," Journal of Political Economy, University of Chicago Press, vol. 116(1), pages 38-81, February.
    2. Labandeira, Xavier & Labeaga, José M. & López-Otero, Xiral, 2017. "A meta-analysis on the price elasticity of energy demand," Energy Policy, Elsevier, vol. 102(C), pages 549-568.
    3. Bhattacharyya, Ranajoy & Ganguly, Amrita, 2017. "Cross subsidy removal in electricity pricing in India," Energy Policy, Elsevier, vol. 100(C), pages 181-190.
    4. Jia, Zhijie & Lin, Boqiang, 2021. "The impact of removing cross subsidies in electric power industry in China: Welfare, economy, and CO2 emission," Energy Policy, Elsevier, vol. 148(PB).
    5. Flores, Daniel & Luna, Edgar M., 2019. "An econometric evaluation of daylight saving time in Mexico," Energy, Elsevier, vol. 187(C).
    6. Catherine Hausman & David S. Rapson, 2018. "Regression Discontinuity in Time: Considerations for Empirical Applications," Annual Review of Resource Economics, Annual Reviews, vol. 10(1), pages 533-552, October.
    7. Apt, Jay, 2005. "Competition Has Not Lowered U.S. Industrial Electricity Prices," The Electricity Journal, Elsevier, vol. 18(2), pages 52-61, March.
    8. Green, Richard J, 1996. "Increasing Competition in the British Electricity Spot Market," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 205-216, June.
    9. Severin Borenstein & James Bushnell, 2015. "The US Electricity Industry After 20 Years of Restructuring," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 437-463, August.
    10. Hancevic, Pedro Ignacio & Lopez-Aguilar, Javier Alejandro, 2019. "Energy efficiency programs in the context of increasing block tariffs: The case of residential electricity in Mexico," Energy Policy, Elsevier, vol. 131(C), pages 320-331.
    11. Hartley, Peter R. & Medlock, Kenneth B. & Jankovska, Olivera, 2019. "Electricity reform and retail pricing in Texas," Energy Economics, Elsevier, vol. 80(C), pages 1-11.
    12. Swadley, Adam & Yücel, Mine, 2011. "Did residential electricity rates fall after retail competition? A dynamic panel analysis," Energy Policy, Elsevier, vol. 39(12), pages 7702-7711.
    13. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, vol. 104(2), pages 537-563, February.
    14. Andrew Gelman & Guido Imbens, 2019. "Why High-Order Polynomials Should Not Be Used in Regression Discontinuity Designs," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 37(3), pages 447-456, July.
    15. Lang, Corey & Siler, Matthew, 2013. "Engineering estimates versus impact evaluation of energy efficiency projects: Regression discontinuity evidence from a case study," Energy Policy, Elsevier, vol. 61(C), pages 360-370.
    16. Yihsu Chen & Alexander Whalley, 2012. "Green Infrastructure: The Effects of Urban Rail Transit on Air Quality," American Economic Journal: Economic Policy, American Economic Association, vol. 4(1), pages 58-97, February.
    17. Trujillo-Baute, Elisa & del Río, Pablo & Mir-Artigues, Pere, 2018. "Analysing the impact of renewable energy regulation on retail electricity prices," Energy Policy, Elsevier, vol. 114(C), pages 153-164.
    18. Mehta, Tarun & Sarangi, Gopal K., 2022. "Is the electricity cross-subsidization policy in India caught between a rock and a hard place? An empirical investigation," Energy Policy, Elsevier, vol. 169(C).
    19. Noah Dormady, Matthew Hoyt, Alfredo Roa-Henriquez, and William Welch, 2019. "Who Pays for Retail Electric Deregulation? Evidence of Cross-Subsidization from Complete Bill Data," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    20. Razeghi, Ghazal & Shaffer, Brendan & Samuelsen, Scott, 2017. "Impact of electricity deregulation in the state of California," Energy Policy, Elsevier, vol. 103(C), pages 105-115.
    21. Proskuryakova, Liliana & Starodubtseva, Alena & Bianco, Vincenzo, 2020. "Modelling a household tariff for reducing sectoral cross-subsidies in the Russian power market," Energy, Elsevier, vol. 213(C).
    22. Pu, Lei & Wang, Xiuhui & Tan, Zhongfu & Wang, Huaqing & Yang, JiaCheng & Wu, Jing, 2020. "Is China's electricity price cross-subsidy policy reasonable? Comparative analysis of eastern, central, and western regions," Energy Policy, Elsevier, vol. 138(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li, He & Fang, Debin & Zhao, Chaoyang, 2024. "Retail competition among multi-type retail electric providers in social networks," Energy Economics, Elsevier, vol. 132(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zarnikau, J. & Cao, K.H. & Qi, H.S. & Woo, C.K., 2023. "Has retail competition reduced residential electricity prices in Texas?," Utilities Policy, Elsevier, vol. 84(C).
    2. Gugler, Klaus & Haxhimusa, Adhurim & Liebensteiner, Mario, 2023. "Carbon pricing and emissions: Causal effects of Britain's carbon tax," Energy Economics, Elsevier, vol. 121(C).
    3. Dang, Hai-Anh H. & Trinh, Trong-Anh, 2021. "Does the COVID-19 lockdown improve global air quality? New cross-national evidence on its unintended consequences," Journal of Environmental Economics and Management, Elsevier, vol. 105(C).
    4. Davis, Lucas W., 2021. "Estimating the price elasticity of demand for subways: Evidence from Mexico," Regional Science and Urban Economics, Elsevier, vol. 87(C).
    5. Alexander Luttmann & Cody Nehiba, 2020. "The Effects of Employee Hours‐of‐Service Regulations on the U.S. Airline Industry," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 39(4), pages 1043-1075, September.
    6. Ovaere, Marten & Kenis, Michiel & Van den Bergh, Kenneth & Bruninx, Kenneth & Delarue, Erik, 2023. "The effect of flow-based market coupling on cross-border exchange volumes and price convergence in Central Western European electricity markets," Energy Economics, Elsevier, vol. 118(C).
    7. Wright, Nicholas A. & Dorilas, Ernest, 2022. "Do Cellphone Bans Save Lives? Evidence From Handheld Laws on Traffic Fatalities," Journal of Health Economics, Elsevier, vol. 85(C).
    8. Felipe Bedoya-Maya & Agustina Calatayud, 2023. "Enhanced port-city interface through infrastructure investment: evidence from Buenos Aires," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 25(2), pages 249-271, June.
    9. Catherine Hausman & David S. Rapson, 2018. "Regression Discontinuity in Time: Considerations for Empirical Applications," Annual Review of Resource Economics, Annual Reviews, vol. 10(1), pages 533-552, October.
    10. Lee, Wang-Sheng & Tran, Trang My & Yu, Lamont Bo, 2023. "Green infrastructure and air pollution: Evidence from highways connecting two megacities in China," Journal of Environmental Economics and Management, Elsevier, vol. 122(C).
    11. Mauricio Villamizar‐Villegas & Freddy A. Pinzon‐Puerto & Maria Alejandra Ruiz‐Sanchez, 2022. "A comprehensive history of regression discontinuity designs: An empirical survey of the last 60 years," Journal of Economic Surveys, Wiley Blackwell, vol. 36(4), pages 1130-1178, September.
    12. Gillingham, Kenneth & Huang, Pei, 2021. "Racial disparities in the health effects from air pollution: Evidence from ports," ZEW Discussion Papers 21-058, ZEW - Leibniz Centre for European Economic Research.
    13. Zhu, Junming & Wang, Jiali, 2021. "The effects of fuel content regulation at ports on regional pollution and shipping industry," Journal of Environmental Economics and Management, Elsevier, vol. 106(C).
    14. Ye, Jingjing & Qin, Zhilong & Chen, Xiaoguang, 2021. "Adapt by adopting cleaner vehicles? — Evidence from a low-emission zone policy in Nanchang, China," China Economic Review, Elsevier, vol. 66(C).
    15. Simon Briole & Augustin Colette & Emmanuelle Lavaine, 2023. "The Heterogeneous Effects of Lockdown Policies on Air Pollution," CEE-M Working Papers hal-04084912, CEE-M, Universtiy of Montpellier, CNRS, INRA, Montpellier SupAgro.
    16. Yang, Zhiqing & Liang, Jing, 2023. "The environmental and economic impacts of phasing out cross-subsidy in electricity prices: Evidence from China," Energy, Elsevier, vol. 284(C).
    17. Lovett, Nicholas & Xue, Yuhan, 2022. "Rare homicides, criminal behavior, and the returns to police labor," Journal of Economic Behavior & Organization, Elsevier, vol. 194(C), pages 172-195.
    18. Paul J. Burke & Ashani Abayasekara, 2018. "The Price Elasticity of Electricity Demand in the United States: A Three-Dimensional Analysis," The Energy Journal, , vol. 39(2), pages 123-146, March.
    19. Segarra, Ignacio & Atanasova, Christina & Figuerola-Ferretti, Isabel, 2024. "Electricity markets regulations: The financial impact of the global energy crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 93(C).
    20. Liang Guo & W. D. Walls & Xiaoli Zheng, 2023. "Waste Import Bans and Environmental Quality: Evidence from China’s Electronic Waste Disposal Towns," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 85(1), pages 65-108, May.

    More about this item

    Keywords

    Price regulation; Retail; Wholesale; Electricity;
    All these keywords.

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:enepol:v:173:y:2023:i:c:s0301421522006279. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/enpol .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.