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Modelling latent market power across gas and electricity markets
Author(s) -
Bunn Derek W.,
Dyner Isaac,
Larsen Erik R.
Publication year - 1997
Publication title -
system dynamics review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.491
H-Index - 57
eISSN - 1099-1727
pISSN - 0883-7066
DOI - 10.1002/(sici)1099-1727(199724)13:4<271::aid-sdr131>3.0.co;2-3
Subject(s) - electricity market , electricity , market power , economics , industrial organization , microeconomics , engineering , electrical engineering , monopoly
The restructuring of energy utilities into new competitive markets is a worldwide fashion of the 1990s. As a consequence, managers must learn to operate in competitive systems for which they have no experience and government agencies must begin to regulate markets where economic analogies may have limited relevance. For markets in transition, where strategic imbalances exist, system dynamics has a useful role to play in developing a better understanding of processes which might shape their evolution. In this paper we develop some insight into the market power which a dominant electricity generator might achieve from its size and ability to trade in both the electricity and gas spot markets. By selectively choosing to sell some gas, rather than generate electricity, a large diversified power company can increase the price of electricity obtained with the rest of its plant, earn returns on the gas sold and also increase the volatility in the spot markets, which should subsequently increase the returns on hedging contracts. The application is to the British case, but the implications are much wider. © 1997 John Wiley & Sons, Ltd.