Working Paper Series,
Research Institute of Industrial Economics

Abstract: The integration of electricity markets around the world has increased the importance of congestion between countries/states and has initiated a discussion of how to harmonize network tariffs. This paper analyzes how the transmission capacity and the transmission cost, such as a transmission tariff, influence bidding behavior in electricity markets. It is shown that transmission costs can have seemingly counter-intuitive effects. Normally, more transmission capacity would improve competition, but this is not necessarily the case when one considers transmission costs. The paper also illustrates that there are cases where increasing transmission costs could have a pro-competitive effect and benefit consumers. In contrast, point of connection tariffs, which are used in the majority of the European countries, always push up electricity prices and always hurt consumers.

Keywords: Electricity auctions; Wholesale electricity markets; Transmission capacity constraints; Network tariffs; Energy economics

JEL-codes: D43; D44; L13; L94

Language: English

47 pages, First version: May 29, 2015. Revised: December 16, 2015.

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