Price Signals in “Energy-only” Wholesale Electricity Markets: An Empirical Analysis of the Price Signal in France

Abstract

This paper analyzes the price signals of the French wholesale electricity market. We build a model of electricity prices that takes into account several key features of the French electricity market in order to assess the capacity of the price signal to guide investments. Wholesale prices should reflect the imbalances in the generation mix but the signal can be distorted if monopoly rents and/or “missing money” are present. We simulate over the 2003-2005 period theoretical perfectly competitive prices with the installed capacity and with the optimal mix to estimate the capacity imbalances and scarcity rents. We then compare the investment signal sent by observed electricity prices and the theoretical prices with the installed capacity. Although there are signs of market contestability for the mid-merit load, through market integration with the other continental markets, observed prices are too high for the baseload and too low for the peakload, as a result distorting the signal.

Keywords

Price signals Wholesale electricity markets Empirical analysis France

Get full access to this article

View all access options for this article.

References

Bellman

(1957). Dynamic Programming. Princeton University Press, Princeton New Jersey.

Boiteux

(1949). “La tarification des demandes en pointe: application de la theorie de la vente au cout marginal.” Revue generate de l’electricite 58: 321-340.

Boiteux

(1960). “Peak-Load Pricing.” The Journal of Business 33(2): 157-179.

Caramanis

M.C.

(1982). “Investment Decisions and Long Term Planning under Electricity Spot Pricing.” IEEE Transactions on Power Apparatus and Systems 101(12): 4640-4648.

Cramton

Stoft

(2006). “The Convergence of Market Design for Adequate Generating Capacity.” University of Maryland, Working Paper 06-007, April.

Direction Générale de l’Energie et des Matieres Premieres (2003). “Couts de référence de la production électrique. Ministere de l’Economie des Finances et de l’Industrie.” Accessed at http://www.developpement-durable.gouv.fr/energie.

Hirst

Hadley

(1999). “Generation Adequacy, Who Decides.” The Electricity Journal 12(8): 11-21.

Joskow

Tirole

(2007). “Reliability and Competitive Electricity Markets.” RAND Journal of Economics 38(1): 68-84.

Joskow

(2006). “Competitive Electricity Markets and Investments in New Generating Capacity.” MIT CEEPR, Working Paper 06-009, April.

10.

Lucas

Taylor

(1994). “Structural Deficiencies in Electricity Pricing in the Pool.” Utilities Policy 4(1): 72-76.

11.

Masse

(1946). Les Reserves et la Regulation de l.Avenir dans la Vie Economique. Hermann & Cie Paris.

12.

NERC (2003). “Generating Availability Report.” Generator Availability Data System North American Electric Reliability. Accessed at http://nerc.com.

13.

Newbery

D.M.

Green

(1992). “Competition in the British Electricity Spot Market.” Journal of Political Economy 100: 929-953.

14.

Newbery

D.M.

(1998). “Competition, Contracts and Entry in the Electricity Spot Market.” RAND Journal of Economics 29(4): 726-749.

15.

Pereira

Campodominico

Kelman

(1999). “Application of Stochastic Dual DP and Extensions to Hydrothermal Scheduling.” PSRI Technical report 012/99, April.

16.

Schwartz

H.G

Lang

(2006). “The Rise in German Wholesale Electricity Prices: Fundamental Factors, Exercise of Market Power, or both?” IWE Working Paper No 02/06, August.

17.

Schweppe

F.C.

Caramanis

M.C.

Tabors

R.D.

Bohn

(1988). Spot Pricing of Electricity. Kluwer Academic Publishers.

18.

Stoft

(2002). Power System Economics: Designing Markets for Electricity. IEEE Press, John Wiley and Sons Publishers.

19.

Ventosa

Baillo

Ramos

Rivier

(2005). “Electricity Market Modelling Trends.” Energy Policy 33: 897-913.

20.

Von der Fehr

N - H.

Harbord

(1998). “Competition in Electricity Spot Markets, Economic Theory and International Experience.” University of Oslo, Memorandum 05/1998, February.

21.

Wolfram

(1999). “Measuring Duopoly Power in the British Electricity Spot market.” American Economic Review 89: 805-826.