Abstract:
The exertion of market power in electricy wholesale markets is an issue of great academic and practical debate. In particular the role of a given amount of hedge on market power has been of considerable interest. However the relationship between risk management spot market power and hedge pricing has not yet received proper attention. The model discussed in this presentation incorporates NZEM features such as demand and cost uncertainty risk aversion oligopoly vertical integration and uniform-price auctions and analyses the effect of volatility on hedging decisions forward prices and market power. In particular we show that usual electricity spot market power measures such as the Lerner Index are not only affected by conduct but also by stochastic variables that influence demand and costs. In other words in highly concentrated electricity markets with forward contracts the usual measure of market power can reflect risk management instead of solely oligopolistic conduct. The results are illustrated with actual NZEM data.
