The Effect of Counter-trading on Competition in the Dutch Electricity Market

J. Dijk, Bert Willems

Research output: Book/ReportReportProfessional

Abstract

In a competitive market, market splitting (nodal pricing) is the most efficient way to deal with congestion. Counter-trading is inefficient as it gives the wrong long term signals for entry and exit of power plants, and hence, causes over-entry in the market. However, in a non-competitive market, entry will improve the competitiveness of the market, and will increase social benefit by reducing price-cost margins. This paper studies whether the procompetitive entry effects could make counter-trading more efficient than market splitting. We find that this is not the case and that counter-trading is likely to have a negative effect on overall welfare. The benefits of additional competition (more competitive prices and lower production cost) do not outweigh the distortions (additional investment cost for the entrant, and socialization of the congestion cost to final consumers).
Original languageEnglish
Place of PublicationTilburg
PublisherTILEC
Number of pages22
Publication statusPublished - 2009

Publication series

NameTILEC Report
No.2009-002

Fingerprint

Electricity market
Congestion
Costs
Efficient markets
Entry and exit
Production cost
Socialization
Competitive prices
Competitiveness
Market entry
Competitive market
Price-cost margin
Power plant
Social benefits
Pricing

Keywords

  • Congestion management
  • counter-trading
  • market power
  • electricity markets

Cite this

Dijk, J., & Willems, B. (2009). The Effect of Counter-trading on Competition in the Dutch Electricity Market. (TILEC Report; No. 2009-002). Tilburg: TILEC.
Dijk, J. ; Willems, Bert. / The Effect of Counter-trading on Competition in the Dutch Electricity Market. Tilburg : TILEC, 2009. 22 p. (TILEC Report; 2009-002).
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The Effect of Counter-trading on Competition in the Dutch Electricity Market. / Dijk, J.; Willems, Bert.

Tilburg : TILEC, 2009. 22 p. (TILEC Report; No. 2009-002).

Research output: Book/ReportReportProfessional

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AU - Willems, Bert

N1 - Pagination: 22

PY - 2009

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N2 - In a competitive market, market splitting (nodal pricing) is the most efficient way to deal with congestion. Counter-trading is inefficient as it gives the wrong long term signals for entry and exit of power plants, and hence, causes over-entry in the market. However, in a non-competitive market, entry will improve the competitiveness of the market, and will increase social benefit by reducing price-cost margins. This paper studies whether the procompetitive entry effects could make counter-trading more efficient than market splitting. We find that this is not the case and that counter-trading is likely to have a negative effect on overall welfare. The benefits of additional competition (more competitive prices and lower production cost) do not outweigh the distortions (additional investment cost for the entrant, and socialization of the congestion cost to final consumers).

AB - In a competitive market, market splitting (nodal pricing) is the most efficient way to deal with congestion. Counter-trading is inefficient as it gives the wrong long term signals for entry and exit of power plants, and hence, causes over-entry in the market. However, in a non-competitive market, entry will improve the competitiveness of the market, and will increase social benefit by reducing price-cost margins. This paper studies whether the procompetitive entry effects could make counter-trading more efficient than market splitting. We find that this is not the case and that counter-trading is likely to have a negative effect on overall welfare. The benefits of additional competition (more competitive prices and lower production cost) do not outweigh the distortions (additional investment cost for the entrant, and socialization of the congestion cost to final consumers).

KW - Congestion management

KW - counter-trading

KW - market power

KW - electricity markets

M3 - Report

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Dijk J, Willems B. The Effect of Counter-trading on Competition in the Dutch Electricity Market. Tilburg: TILEC, 2009. 22 p. (TILEC Report; 2009-002).