Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1184: The Competitive Effects of Linking Electricity Markets Across Space and Time

Thomas TangerĂ¥s () and Frank A. Wolak ()
Additional contact information
Thomas TangerĂ¥s: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Frank A. Wolak: Program on Energy and Sustainable Development and Department of Economics, Postal: Stanford University, Stanford, CA, USA

Abstract: We show that a common regulatory mandate in electricity markets that use location-based pricing that requires all customers to purchase their wholesale electricity at the same quantity-weighted average of the locational prices can increase the performance of imperfectly competitive wholesale electricity markets. Linking locational markets strengthens the incentive for vertically integrated firms to participate in the retail market, which increases competition in the short-term wholesale market. In contrast, linking locational markets through a long-term contract that clears against the quantity-weighted average of short-term wholesale prices does not impact average wholesale market performance. These results imply that a policy designed to address equity considerations can also enhance efficiency in wholesale electricity markets.

Keywords: Electricity markets; Equity; Market design; Market performance; Market power; Vertical integration

JEL-codes: C72; D43; G10; G13; L13

41 pages, October 17, 2017

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