IDEAS home Printed from https://ideas.repec.org/p/tse/wpaper/125447.html
   My bibliography  Save this paper

Imperfect competition in electricity markets with partially flexible technologies

Author

Listed:
  • Crampes, Claude
  • Renault, Jérôme

Abstract

The producers of electricity using dispatchable plants rely on partially flexible technologies to match the variability of demand and intermittent renewables. We analyse flexibility in a two-stage decision process where production decided at the last moment is more costly than if it is planned in advance. We first determine the first best outputs, prices and gains. We then consider a model where two partially flexible firms compete in quantities to supply a random residual demand. We determine the subgame perfect equilibria corresponding to two market designs: one where all trade occurs in a spot market with known demand, the other where a day-ahead market with random demand is added to the ex-post market, first in a general setting, then using a quadratic specification. We show that when all trade occurs ex post, the least flexible firm is not necessarily disadvantaged. We also show that adding a day-ahead market makes consumers better off and firms worse off by increasing total output. It increases welfare but it also transfers risks from firms to consumers.

Suggested Citation

  • Crampes, Claude & Renault, Jérôme, 2021. "Imperfect competition in electricity markets with partially flexible technologies," TSE Working Papers 21-1198, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:125447
    as

    Download full text from publisher

    File URL: https://www.tse-fr.eu/sites/default/files/TSE/documents/doc/wp/2021/wp_tse_1198.pdf
    File Function: Full Text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Paul Joskow & Jean Tirole, 2007. "Reliability and competitive electricity markets," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 60-84, March.
    2. Crampes, Claude & Renault, Jérôme, 2019. "How many markets for wholesale electricity when supply ispartially flexible?," Energy Economics, Elsevier, vol. 81(C), pages 465-478.
    3. Bistline, John E., 2017. "Economic and technical challenges of flexible operations under large-scale variable renewable deployment," Energy Economics, Elsevier, vol. 64(C), pages 363-372.
    4. Klaus Eisenack & Mathias Mier, 2019. "Peak-load pricing with different types of dispatchability," Journal of Regulatory Economics, Springer, vol. 56(2), pages 105-124, December.
    5. Koichiro Ito & Mar Reguant, 2016. "Sequential Markets, Market Power, and Arbitrage," American Economic Review, American Economic Association, vol. 106(7), pages 1921-1957, July.
    6. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
    7. A. Gürhan Kök & Kevin Shang & Şafak Yücel, 2020. "Investments in Renewable and Conventional Energy: The Role of Operational Flexibility," Manufacturing & Service Operations Management, INFORMS, vol. 22(5), pages 925-941, September.
    Full references (including those not matched with items on IDEAS)

    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. Crampes, Claude & Renault, Jérôme, 2022. "Supply Flexibility and risk transfer in electricity markets," TSE Working Papers 22-1350, Toulouse School of Economics (TSE), revised Sep 2023.
    2. Mier, Mathias, 2021. "Efficient pricing of electricity revisited," Energy Economics, Elsevier, vol. 104(C).
    3. Crampes, Claude & Renault, Jérôme, 2018. "Supply flexibility in electricity markets," TSE Working Papers 18-964, Toulouse School of Economics (TSE).
    4. Crampes, Claude & Renault, Jérôme, 2019. "How many markets for wholesale electricity when supply ispartially flexible?," Energy Economics, Elsevier, vol. 81(C), pages 465-478.
    5. Sirin, Selahattin Murat & Camadan, Ercument & Erten, Ibrahim Etem & Zhang, Alex Hongliang, 2023. "Market failure or politics? Understanding the motives behind regulatory actions to address surging electricity prices," Energy Policy, Elsevier, vol. 180(C).
    6. Moritz Bohland & Sebastian Schwenen, 2020. "Technology Policy and Market Structure: Evidence from the Power Sector," Discussion Papers of DIW Berlin 1856, DIW Berlin, German Institute for Economic Research.
    7. Guerra, K. & Haro, P. & Gutiérrez, R.E. & Gómez-Barea, A., 2022. "Facing the high share of variable renewable energy in the power system: Flexibility and stability requirements," Applied Energy, Elsevier, vol. 310(C).
    8. David P. Brown & Andrew Eckert & Douglas Silveira, 2023. "Strategic interaction between wholesale and ancillary service markets," Competition and Regulation in Network Industries, , vol. 24(4), pages 174-198, December.
    9. Liu, Yang & Jiang, Zhigao & Guo, Bowei, 2022. "Assessing China’s provincial electricity spot market pilot operations: Lessons from Guangdong province," Energy Policy, Elsevier, vol. 164(C).
    10. Bajo-Buenestado, Raúl, 2017. "Welfare implications of capacity payments in a price-capped electricity sector: A case study of the Texas market (ERCOT)," Energy Economics, Elsevier, vol. 64(C), pages 272-285.
    11. Koichiro Ito & Mar Reguant, 2016. "Sequential Markets, Market Power, and Arbitrage," American Economic Review, American Economic Association, vol. 106(7), pages 1921-1957, July.
    12. Mier, Mathias & Weissbart, Christoph, 2020. "Power markets in transition: Decarbonization, energy efficiency, and short-term demand response," Energy Economics, Elsevier, vol. 86(C).
    13. Jerry Anunrojwong & Santiago R. Balseiro & Omar Besbes & Bolun Xu, 2024. "Battery Operations in Electricity Markets: Strategic Behavior and Distortions," Papers 2406.18685, arXiv.org.
    14. Roques, F.A. & Savva , N.S., 2006. "Price Cap Regulation and Investment Incentives under Demand Uncertainty," Cambridge Working Papers in Economics 0636, Faculty of Economics, University of Cambridge.
    15. Ricardo Gonçalves & Flávio Menezes, 2022. "Market‐wide impact of renewables on electricity prices in Australia," The Economic Record, The Economic Society of Australia, vol. 98(320), pages 1-21, March.
    16. Ruddell, Keith & Downward, Anthony & Philpott, Andy, 2018. "Market power and forward prices," Economics Letters, Elsevier, vol. 166(C), pages 6-9.
    17. Klaus Eisenack & Mathias Mier, 2019. "Peak-load pricing with different types of dispatchability," Journal of Regulatory Economics, Springer, vol. 56(2), pages 105-124, December.
    18. Paschmann, Martin, 2017. "Economic Analysis of Price Premiums in the Presence of Non-convexities - Evidence from German Electricity Markets," EWI Working Papers 2017-12, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    19. Peter Cramton & Axel Ockenfels & Steven Stoft, 2013. "Capacity Market Fundamentals," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    20. Brown, David P. & Olmstead, Derek E. H. & Shaffer, Blake, 2024. "Electricity Market Design with Increasing Renewable Generation: Lessons From Alberta," Working Papers 2024-3, University of Alberta, Department of Economics.

    More about this item

    Keywords

    Flexibility; electricity; market design; production costs; risk transfer;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:tse:wpaper:125447. 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: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/tsetofr.html .

    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.