Market Power in Markets for Power

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I study how electricity generation firms exert market power, raising price above marginal cost. Typical studies of market power in electricity markets focus on how firms sustain markups in the short-run energy market. I explore other channels electricity generation firms use to strategically maximize profits. First, I analyze strategic investments and disinvestments. I find that firms with market power choose a portfolio of generators which significantly departs from a least-cost planner's optimal portfolio. Next, I test if firms that have common owners, which gives them less incentive to compete, sustain higher markups. I find evidence of this effect using a reduced-form approach, but a structural approach has less convincing conclusions. Finally, I study the capacity market, a relatively new market where generators can earn extra revenue. In a stylized model, I find that current capacity market designs result in overpaying for capacity. I then use a regulatory feature of the PJM electricity market to analyze if higher capacity prices do indeed drive higher net investment, and I find no convincing evidence.

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  • 04/01/2019
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