Ebook Market Power in the German Wholesale Electricity Market: What are the Political Options?
The German wholesale electricity prices have increased by almost 170 % in the last seven years. The average EEX base load spot market price was less than 19 Euros per MWh in 2000 compared to more than 50 Euros per MWh in 2006. Several studies (Müsgens 2004, Schwarz and Lang 2006a, Von Hirschhausen et al. 2007) have shown that an increasing exercise of market power is not the only but one decisive factor for increasing wholesale electricity prices. Indeed, the nature of electricity production and consumption make the power market particularly susceptible to market power.
The two most important factors are: the supply response to price changes is relatively inelastic because electricity cannot be stored cheaply (except in hydro facilities) and short run capacity constraints are binding. In addition, demand responsiveness of electricity customers is limited and therefore very inelastic (Twomey et al. 2005: 11). Studies of the British electricity market have shown that even relatively small suppliers can affect market prices substantially (cf. Newbery 2002: 8, Monopolkommission 2004: 584).
There are several political options to mitigate market power (cf. e.g. Twomey et al. 2005: 12 f.). Especially four options are discussed publicly: a regulatory solution as favoured by the Federal Ministry for Economics and Technology (BMWI 2007), an implementation of a day-ahead flow-based market coupling in the Central West Region as intended by five European regulators (CREG et al. 2007), an expansion of cross border capacity as stipulated by the European Commission (2005, 2007), and a divestiture of dominant suppliers as proposed by the Hessian Ministry of Economics (HMWVL 2007).
The Federal Ministry for Economics and Technology has made a proposal on a revised Gesetz gegen Wettbewerbsbeschränkung (BMWI 2007). According to this, utilities misuse market power as soon as the stipulated prices exceed the costs in an unreasonable way. The proposal aims at an extensive public price control of electricity suppliers and a rigid re-regulation of electricity pricing. The approach of the five European regulators (CREG et al. 2007) as well as of the European Commission (2005, 2007) aims at a decreasing concentration of generation by expanding the geographic market over which suppliers are competing.
The Central West Region covers Belgium, France, Germany, Luxemburg and the Netherlands. In contrast to the status quo of separated spot markets and explicit auctions of cross-border capacities, a flow-based market coupling regime as intended by the five European regulators would lead to a single market with one price for all hours at least when there are no congestions concerning cross-border capacities. The European Commission (2007: 6) mentions 32 key projects with respect to the expansion of cross-border capacities. Especially an expansion of the transmission system from Central Western Europe to Italy and from North-eastern Central Europe to Germany is of high priority (European Commission 2006: 16).
The Hessian Ministry of Economics (HMWVL 2007) demands a revision of the Gesetz gegen Wettbewerbsbeschränkung. In contrast to the regulatory solution of the Federal Ministry for Economics and Technology, the Gesetz gegen Wettbewerbsbeschränkung should be enlarged by rules which permit the divestiture of dominant suppliers. In the first run, this includes the compulsory sale of power plants of the four big German electricity producers to new entrants or municipal utilities.
It is the objective of this paper to discuss and evaluate these four political options. The questions to answer are: are these options adequate measures to mitigate market power? What are the intended or non-intended effects on market efficiency? And how likely is the political implementation?
The paper is organised as follows: the question whether the exercise of market power is necessary for the functioning of wholesale electricity markets is discussed in section 2. Indicators of market power and the situation in the German wholesale electricity market are presented in section 3. Section 4 evaluates the regulatory approach of the Federal Ministry for Economics and Technology. The effects of a market coupling regime as stipulated by five European regulators are discussed in section 5. Section 6 presents the cross-border capacity expansion approach as stipulated by the European Commission. The divestiture approach of the Hessian Ministry of Economics is evaluated in Section 7. Finally, the results are summarized in section 8.
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