Market monitoring tools

Transcription

1 Market monitoring tools David Newbery Southeast Europe Electricity Market Monitoring Workshop Athens 4-5 October

2 The Cambridge-MIT Institute A Review of the Monitoring of Market Power Paul Twomey, Richard Green, Karsten Neuhoff and David Newbery download CMI EP 71from Part of the research was funded by the Association of European Transmission Operators ETSO. D Newbery Athens 2

3 Market Power Detection Tools Choose tools suitable for different tasks: Ex-ante versus ex-post analysis Long-term vs. short-term/real time analysis System-level market power vs. local market power vs firm-level market power Horizontal market power vs vertical market power D Newbery Athens 3

4 Applications of Market Power Detection Tools Long-Term Short-Term Ex-Ante - Merger rulings - Assessing applications for market-based rates - Determining potential must-run generators - requiring contracts - Spot market bid mitigation - Must-run activation & other system operator contracting Ex-Post - Litigation cases (e.g. California refund case) - Changing market design - requiring contracts and VPPs - Short term price recalculations - Penalties for withholding Inspired by a similar table in Helman (2004) 4

5 Market Power Detection Tools List Behavioral Indices and Analysis Bid-Cost Margins (e.g. Lerner Index) Net Revenue Benchmark Analysis Structural Indices and Analysis Concentration ratios and HHI Residual Supply Index Residual Demand Analysis Simulation Models Competitive Benchmark Analysis Oligopoly Models D Newbery Athens 5

6 Bid-Cost Margins Lerner Index: Price Marginal Cost LI = Price In a competitive market LI is zero if MC correctly interpreted as scarcity price Cournot oligopoly LI = market share/elasticity Do not require geographic market definitions Is a standard measure of exercise of market power but which MC? Short-run or long-run? D Newbery Athens 6

7 Market share methods Concentration ratios C1: share of largest firm C3, C4 total share of top 3 or 4 firms Capacity, available capacity, with or without imports (depending how interconnector controlled?) shares of production also revealing C1 > 20% can be a concern but depends on extent of spare capacity D Newbery Athens 7

8 Concentration ratios Installed capacity 2001 C1 C1 net of impor capacity C3 Cyprus Malta Albania Latvia Croatia Greece Estonia** Belgium France Ireland Slovakia Slovenia Portugal Czech Italy Lithuania Sweden Spain Denmark Austria* Germany Norway Hungary Finland UK Poland Source: EU 3rd Benchmarking Report D Newbery Athens 8 percent

9 Herfindahl Hirschman Index: HHI Standard tool for anti-trust (esp. in US) HHI = sum of squared market share %: e.g. 5 firms of 20% each => HHI = 2,000 number of equivalent firms n = 10,000/HHI screens <1000 unconcentrated moderately concentrated >1800 highly concentrated => serious concern if HHI>1800 and merger raises HHI by more than 100 D Newbery Athens 9

10 HHI by capacity for England and Wales HHI all fuels and imports HHI for coal capacity Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Oct-96 Apr-97 Oct-97 Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 D Newbery Athens 10 Apr-90 Oct-90

11 Market Share and HHI Difficult to determine appropriate geographic region (e.g. SSNIP test, Hub-and-Spoke) Ignores demand side, entry conditions, strategic incentives and often congestion issues Little empirical justification California - under some market definitions, no single supplier in California had a 20% market share during the crises D Newbery Athens 11

12 Residual Supply Index Measures the extent to which a generator s capacity is necessary to supply demand after taking into account other generators capacity Residual Supply Index continuous variable RSI = Total Capacity Company i's Relevent Capacity Total Demand Sheffrin s screen test: RSI must not be less than 110% for more than 5% of hours per year D Newbery Athens 12

13 California RSI duration curve June-Sep all hours Sheffrin (2002) D Newbery Athens 13

14 130% 125% 120% 115% 110% 105% 100% 95% 90% RSI duration curve GB Winter number of hours RSI lower than D Newbery Athens 14 RSI percent

15 Significant Correlation between RSI and Price-Cost Markup Sheffrin (2002) D Newbery Athens 15

16 Spot price vs Residual Supply Index GB Winter Note - marginal cost provides lower bound /MWh % 100% 110% 120% 130% 140% 150% 160% 170% 180% 190% 200% 210% 220% RSI % D Newbery Athens 16

17 Generation companies have MP within countries... and retain market power due to transmission constraints capacity demand 150% 125% 100% 75% 50% 25% 0% Austria Belgium France Germany Italy Netherlands Switzerland Spain Gen 1 Gen 2 Gen 3 Fringe Imports D Newbery Athens 17 Source: Remaining capacity and availability factor from UCTE Power Balance Forecasts , NTC from ETSO (Winter 2001/2002), National Generation Shares from ICF consulting, Annual reports and presentations

18 Residual Supply Index Takes account of capacity scarcity Suited to dynamic analysis on an hour-byhour basis and local market power analysis Empirical support of predicting market power Needs access to availability data (from TSO?) Arguably the best tool D Newbery Athens 18

19 Collective dominance if: Market characteristics conducive to tacit coordination, and Tacit coordination sustainable: firms lack ability and incentive to deviate, given incentives for retaliation, and Buyers, fringe firms, entrants cannot challenge tacit coordination D Newbery Athens 19

20 Collective dominance criteria Markets concentrated, transparent, mature Low elasticity of demand Homogenous product, similar costs, shares Little excess capacity, barriers to entry Excess pricing, profit little response to cost fall, barriers to switching Electricity as a test case D Newbery Athens 20

21 /MWh (Jan 2000 prices) PG gaming Pool prices since vesting Ofgem price review Nuclear outages reduce plant margin Annual price cap agreed for 2 years French strike & station failure Low availability & Eastern bidding strategy SMP manipulation Capacity withdrawal Scheduling problems Price falls to meet price cap Plant divestment to Eastern NP & PG manipulation Further plant divestment Apr-90 Apr-91 Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 D Newbery Athens 21

22 Generation in England and Wales D Newbery Athens 22

23 40,000 35,000 30,000 25,000 Capacity Ownership of Coal Generation Offer encourages sale of 6,000 MW NETA live PG & NP trade horizontal for vertical integration ALCAN Innogy National Power British Energy Independent AES MW 20,000 15,000 10,000 Intnl Power Edf TXU/Eastern Powergen SS&E 5,000 AEP Edison 0 Apr-90 Oct-90 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Oct-96 Apr-97 Oct-97 Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Source: NGC Seven Year Statements, various years, and data from J Bower and C Humphries, slide from D Newbery 23

24 Collective dominance: the GB Electricity Pool Markets concentrated, transparent, mature Low elasticity of demand homogenous product, similar costs, shares little excess capacity, barriers to entry? excess pricing, profit little response to cost fall, barriers to switching?? Need to be able to test for tacit collusion D Newbery Athens 24

25 Residual Demand Analysis Best response to generator s residual demand Theoretical justification Supply Function Equilibria (locally profit maximising) Requires individual bid data to construct residual demand curves Can detect collusion as well as market power e.g. Wolak, Sweeting, Hortacsu/Puller D Newbery Athens 25

26 D Newbery Athens 26 Hortacsu and Puller (2003)

27 Real GB electricity prices and costs 35 Sweeting s periods Restraint Price control Profit maximising Tacit Collusion plant withdrawal 5000 (2001)/MWh Electricity NETA HHI 10 coal cost gas cost Coal HHI D Newbery Athens 27

28 Net Revenue Benchmark Analysis Compares estimated revenues with total costs Assess financial viability and barriers to entry important in presence of price caps Spark and dark spreads useful proxy need to allow for EUA opportunity cost Persistent excess profit suggestive of market power and barriers to entry Persistent failure to cover total costs suggestive of predatory behaviour? D Newbery Athens 28

29 Spark spread month ahead 50% efficiency NL DE UK EUA cost 1-Sep-02 1-Dec-02 2-Mar-03 1-Jun Aug Nov Feb May Aug Nov Feb May Aug-05 D Newbery Athens 29 Euros/MWh

30 Spark spread month ahead 50% efficiency NL DE UK EUA cost 1-Sep-02 1-Dec-02 2-Mar-03 1-Jun Aug Nov Feb May Aug Nov Feb May Aug-05 D Newbery Athens 30 Euros/MWh

31 Spark spread net of EUA UK DE NL EUA starts 1-Jun Aug Nov-02 1-Mar May Aug Nov Feb May Aug Nov Feb May Aug-05 D Newbery Athens 31 Euros/MWh

32 Competitive Benchmark Analysis Simulate the competitive market in order to calculate Lerner Index of actual price over simulated competitive price Increasingly popular tool of analysis Does not identify individual generators exercising market power Difficulties in identifying appropriate costs Subsequent controversy over quantitative results D Newbery Athens 32

33 Competitive Benchmark Model of German ESI Müsgens (2004) for period 2000 to 2003 Multi-regional approach with dynamics (e.g. hydro) 50 >400,000 variables and equations! Monthly Base EEX 40 Monthly Base SMC Period: Average deviation between marginal costs and prices about 2% 2. Period: Average deviation between marginal costs and prices nearly 50% Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun D Newbery Athens

34 Oligopoly Models Ideally integrates relevant factors (costs, demand, strategic incentives, transmission constraints) Equilibrium problematic, especially with contracts Recent European examples ECN s COMPETES model - Cournot and Conjectured Supply Functions (CSF) model of Netherlands, Belgium, France and Germany with transmission constraints for market integration Frontier s SPARK model a supply function equilibrium model (but there are multiple equilibria) Results influential in Nuon-Reliant Merger Case in the Netherlands D Newbery Athens 34

35 Acronyms - 1 AMPs: Automatic Mitigation Procedure (very US) ATC: Available Transmission Capacity CEC: Commission of European Communities CEGB: Central Electricity Generation Board ESI: Electricity supply industry EUA: EU allowance (permit to trade 1 tonne CO 2 ) FERC: Federal Energy Regulatory Commission GW: Gigawatt = 1000 Megawatt = 1m kw G: Generation HHI: Herfindahl Hirschman Index ISO: Independent System Operator MC: marginal cost MO: market operator 35

36 Acronyms - 2 MOU: memorandum of undestanding MM: Market monitoring MP: Market power NETA: New Electricity trading Arrangements NRA: National Regulatory Authority OTC; Over the counter (markets) PUC: Public Utility Commission PX: Power exchange S: Supply SSNIP: small but significant non-transitory increase in price RSI: Residual Supply Index T: Transmission TSO: Transmission System Operator 36