Working Paper: CEPR ID: DP14060
Authors: Natalia Fabra; Gerard Llobet
Abstract: The energy transition will imply a change in the competitive paradigm of electricity markets. Competition-wise, one distinguishing feature of renewables versus fossil-fuels is that their marginal costs are known but their available capacities are uncertain. Accordingly, in order to understand competition among renewables, we analyze a uniform-price auction in which bidders are privately informed about their random capacities. Renewable plants partially mitigate market power as compared to conventional technologies, but producers are still able to charge positive markups. In particular, firms exercise market power by either withholding output when realized capacities are large, or by raising their bids above marginal costs when realized capacities are small. Since markups are decreasing in realized capacities, a positive capacity shock implies that firms offer to supply more at reduced prices, giving rise to lower but also more volatile market prices. An increase in capacity investment depresses market prices, which converge towards marginal cost when total installed capacity is sufficiently large, or when the market structure is sufficiently fragmented.
Keywords: multiunit auctions; electricity markets; renewables; forecasts
JEL Codes: L12; L51; Q42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| realized capacities (E22) | market power (L11) |
| positive capacity shock (E22) | supply at lower prices (Q11) |
| capacity shocks (D24) | market prices (P22) |
| increase in capacity investment (E22) | market prices (P22) |
| higher capacities (E22) | lower market prices (D41) |
| private information about capacities (Y50) | market power (L11) |