Market power and strategic interaction in electricity networks

https://halshs.archives-ouvertes.fr/halshs-00617702/document

Smart grids: Another step towards competition, energy security and climate change objectives

Probability theory has had an almost unquestioned foundation since Kolmogorov (1933) [111]. Probability is a (normalized) measure on an algebra of events i.e. subsets of an arbitrary set. The probability of an event may be a result in a theory about any part of the real world. It may be an assumption that the beliefs or knowledge of agents can be expressed as total preorders on a system of subsets of events. Theorem 9 page 98 then gives probability as a representation of this relation. Under the assumptions of this representation theorem the two assumptions — a total preorder on an algebra or a probability measure on this algebra — are therefore equivalent.

A foundation for statistics

Electricity systems present complicated challenges for public policy. In many respects these challenges are similar to those in other network industries in providing a balance between regulation and markets, public investment and private risk taking, coordination and competition. As with other such industries, naturally monopoly elements interact with potentially competitive services, but electricity has some unusual features that defy simple analogy to other network industries. Following a reversal of a long-term decline in real electricity prices, the last two decades of the twentieth century were for the United States a time of reform, reaction, and reforms of reforms in electricity systems, moving slowly towards greater reliance on competition and markets. Changing technology, new entrants in the generation market, and a legislative mandate to provide access to the essential transmission facility accelerated a process that required major innovations in institutions and operations. Complete laissez faire competition is not possible, and the details of an efficient competitive electricity market are neither obvious nor easy to put in place. The benefits of reform may be substantial, but they require careful attention to market design. A review of the past identifies some choices on the road ahead.

Electricity Market Restructuring: Reforms of Reforms

In this paper, we emphasize the role of institutions as the underlying basis for economic and social activity. We describe and compare different institutional classification systems, which is rarely done in the literature, and show how to empirically operationalize institutional concepts. More than 30 established institutional indicators can be clustered into three homogeneous groups of formal institutions: legal, political and economic, which capture to a large extent the complete formal institutional environment of a country. We compute the latent quality of legal, political and economic institutions for every country in the world and for every year. On this basis, we propose a legal, political and economic World Institutional Quality Ranking, through which we can follow whether a country is improving or worsening its relative institutional environment. The calculated latent institutional quality measures can be especially useful in further panel data applications and add to the usual practice of using simply one or another index of institutional quality to capture the institutional environment. We make the Institutional Quality Dataset, covering up to 197 countries and territories from 1990 to 2010, freely available online.

https://www.cambridge.org/core/services/aop-cambridge-core/content/view/S1744137413000192

Institutional quality dataset

[eng] The concept of contract has become essential in economics for the last 30 years. Three main theoretical frameworks emerged : the "incentive theory", the "incomplete contract theory" and the "transaction costs theory". These frameworks enabled scholars to renew their analysis of microeconomic co-ordination problems, with many implications for Industrial Economies. Beyond this, the analyses of the performing of "market" economies and of the institutional framework were also renewed. If substantial progress has been made, new developments are needed. They require a better understanding of bounded rationality and also of interactions between contracts and institutions. [fre] Durant les trente dernieres annees, le concept de contrat est devenu central pour l'analyse economique. Trois courants theoriques en sont nes : « incitations », « contrats incomplets », et « couts de transaction ». Ils ont permis de renouveler notre lecture du fonctionnement des interactions micro-economiques, eclairant d'un jour nouveau de nombreuses questions d'economie industrielle. Mais au-dela, c'est l'analyse du fonctionnement meme des economies « de marche » et celle du cadre institutionnel qui ont ete renouvelees. Si les avancees ont deja ete importantes, des developpements sont neanmoins attendus d'un traitement plus pertinent de la rationalite limitee et des interactions entre contrats et institutions.

Économie des contrats et renouvellements de l'analyse économique

Game theory and Agent-Based Economics approaches have been used to study imperfect competition in electricity markets. In this paper these two approaches are firstly described and compared using a simple text book example. Simulations show that the two approaches converge to the same outcome when unique Nash equilibrium exists and assumptions in the game theory approach are realistic. Finally, a 3 Latin American countries' power market ("Mercado Electrico Andino") is studied. A simple benefits analysis of new interconnection capacity for this regional market shows the importance of proper assumptions and the complementarities of both approaches.

Market Power in Power Markets: Game Theory vs. Agent-Based Approach

Entrepreneurship, transaction-cost economics, and the design of contracts

Congestion on power grids seems a physical reality, a “hard” fact easy to check. Our paper models a different idea: congestion signal may be distorted by transmission system operators (TSOs), which puts the European integrated electricity market at risk. 1° when the TSOs share the revenue produced by congestion’s pricing they have an incentive in distorting data. 2° because congestion signals are not physical data but “home made” conventions, TSOs could be able distorting them. 3° when congestion appears on cross border lines that link several countries with their own regulatory mechanisms, the settlement of this incentive’s problem necessitates a high degree of coordination. Congestion puts undoubtedly the threat of a collapse on interconnected grids. The “capacity constrained situations” have therefore to be avoided. Congestion signalling depends on norms set by TSOs and a signal is given when the power flows attain the “secure” limits set by TSOs. These security norms are not stable and invariable because some flexibility is needed by the very nature of the power flows and because lines physical capacity limits are not constant. Therefore TSOs are defining the congestion signal on a variable, complex and non transparent constraint and may manipulate it for their own interests. In Nordic countries the “Light Handed Regulation” makes this opportunistic behaviour more likely. We need a more effective congestion regulatory mechanism.

/pdf/nordic-electricity-congestion-s-arrangement-as-a-model-for-1w95lb53nm.pdf

Jean-Michel Glachant

Papers

Économie des contrats et renouvellements de l'analyse économique

Market Power in Power Markets: Game Theory vs. Agent-Based Approach

Entrepreneurship, transaction-cost economics, and the design of contracts

Nordic electricity congestion's arrangement as a model for Europe : physical constraints or operators' opportunism?

New Institutional Econometrics: The Case of Research on Contracting and Organization