Nils-Henrik M. von der Fehr

SPOT MARKET COMPETITION IN THE UK ELECTRICITY INDUSTRY

With particular reference to the structure of the U.K. industry, price competition in a deregulated wholesale market for electricity is modeled as a sealed-bid multiple-unit auction with a random number of units. It is argued that, under the existing regulatory rules, one must expect volatile prices, above marginal cost pricing, and inefficient dispatching. Evidence from the pricing performance of the U.K. industry is presented and shown to be compatible with the model predictions. The authors also discuss alternative regulatory rules and show that offering to supply at marginal cost can be induced as a dominant strategy for all generators, thereby securing efficient dispatching. Copyright 1993 by Royal Economic Society.

Modeling Electricity Auctions

The recent debates over discriminatory versus uniform-price auctions in the UK and elsewhere have revealed an incomplete understanding of the limitations of some popular auction models when applied to real-world electricity markets. This has led certain regulatory authorities to prefer discriminatory auctions on the basis of reasoning from models which are not directly applicable to any existing electricity market. Vickrey auctions, although often recommended by economists, have also been ignored in these debates. This article describes the approach which we believe should be taken to analyzing these issues.

Tradable Emission Rights and Strategic Interaction

The use of tradable emission rights as environmental policy instruments may affect the conditions for strategic interaction between regulated firms and thus have implications for competition policy. This paper presents an analysis of how, and under what conditions, emission rights can be used strategically by oligopolistic firms for predatory and exclusionary purposes.The use of tradable emission rights as environmental policy instruments may affect the conditions for strategic interaction between regulated firms and thus have implications for competition policy. This paper presents an analysis of how, and under what conditions, emission rights can be used strategically by oligopolistic firms for predatory and exclusionary purposes.

Market Design and Investment Incentives

The purpose of this study was to understand how market design affects market performance through its impact on investment incentives. For this purpose, we model capacity choices by two ex ante identical firms which compete in the product market. We analyse a number of different market design elements, including (i) two commonly used auction formats, the uniform‐price and discriminatory auctions, (ii) price caps and (iii) bid duration. We find that although the discriminatory auction tends to lower prices, this does not imply that investment incentives at the margin are poorer; indeed, aggregate capacity is the same under both auction formats.

Prices vs Quantities: The Irrelevance of Irreversibility

We explore the efficacy of price and quantity controls in a dynamic setup in which the decisions of some agents are irreversible. The assumption of irreversibility is shown to improve the performance of a tax relative to that of a system of tradable quotas and significantly alter the equilibrium behavior of agents. We nevertheless conclude that taking into account the fact that agents’ decisions may be irreversible does not lead to policy implications significantly different from those reached in a simpler model in which irreversibility is ignored.

A WHITER SHADE OF PALE: ON THE POLITICAL ECONOMY OF REGULATORY INSTRUMENTS

We consider an intertemporal policy game between changing governments that differ in their attitudes towards a particular feature of market outcomes, exemplified with environmental pollution. When in power, a government will choose policy instruments and set strictness of regulation with a view to influencing the policy of future, possibly different, governments. We demonstrate that a ‘brown’ government favours emission quotas over effluent taxes, as quotas establish property rights that are costly to reverse. Conversely, a ‘green’ government prefers to regulate by taxes, in order to limit the incentives of future ‘brown’ governments to ease regulations. Strategic behaviour tends to exaggerate policy differences (making ‘green’ governments ‘greener’ and ‘brown’ governments ‘browner’) compared to when such strategic considerations were not an issue.

Price Volatility and Risk Exposure: On the Interaction of Quota and Product Markets

We consider an industry with firms that produce a final good emitting pollution to different degree as a side effect. Pollution is regulated by a tradable quota system where some quotas may have been allocated at the outset, i.e. before the quota market is opened. We study how volatility in quota price affects firm behaviour, taking into account the impact of quota price on final-good price. The impact on the individual firm differs depending on how polluting it is—whether it is ‘clean’ or ‘dirty’—and whether it has been allocated quotas at the outset. In the absence of long-term or forward contracting, a grandfathering regime—where clean firms are allocated no quotas and dirty firms are allocated quotas for a part of their emissions—minimizes the impact on firm behavior relative to a risk-neutral benchmark.With forward contracts and in the absence of wealth effects initial quota allocation has no effect on firm behaviour. Allowing for abatement does not change the qualitative nature of our results.

How entry threats induce slack

Abstract Profits of incumbent firms are often observable to potential entrants and signal profit opportunities in a market Incumbents therefore have an incentive to strategically manipulate profit reports Since owners of firms typically derive utility only from profits, incumbent firms have to balance the benefit of large profits against the possibility of entry It is shown that owners will generally accept below maximum profit performance (i.e. tolerate slack) in order to deter entry and, furthermore, that such entry-deterring behaviour is successful even if it is anticipated by rational entrants

Transparency in Electricity Markets

The European Commission is introducing new regulations on submission and publication of data in electricity markets (SPDEM) and on wholesale energy market integrity and transparency (REMIT). I discuss issues relevant for undertaking an evaluation of such regulations. I argue that, for market performance, more information is not always better; indeed, more information may undermine market performance by facilitating behaviour that is either not cost efficient or aims at exercising market power or establishing and maintaining collusion. Moreover, ensuring rational economic behaviour and an efficient and competitive market outcome does not require general access to information at a very detailed level or with a high degree of immediacy. I conclude that to achieve the aims of efficiently functioning wholesale electricity markets, fair and non-discriminatory access to data and a coherent and consistent view of the European wholesale electricity market, it does not seem advisable to go quite so far with respect to immediacy and detail as intended by the new regulations.

Regulation with wage bargaining

In many regulated industries labour unions are strong and there is clear empirical evidence of labour rent-sharing. In this Paper, we study optimal regulation in a model in which wages are determined endogenously by wage bargaining at the firm level. A seemingly robust conclusion, at least when worker bargaining power is considerable, is that incentives for cost efficiency should be stronger than in the standard case in which wages do not depend on the regulatory regime.