1. 1 Market Outcomes and Generator Behaviour in the England and Wales Electricity Wholesale Market 1995-2000 Andrew Sweeting, MIT 22 March 2002 UCEI, Berkeley

2. 2 Question 1.Did simple economic models accurately predict what happened to prices/mark-ups over the 1990s? 2.If not, did generator behavior differ from the simple one-shot profit maximization assumed by those models? NOT talking directly about NETA

3. 3 Operation of the Pool Daily, multi-unit, uniform first price auction giving half-hourly prices and scheduling production and reserve Additional payments relating to capacity and reserve/transmission/congestion costs Generators and supply companies sign hedging contracts that soften incentives to raise Pool prices

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5. 5 Simple theoretical models of the Pool predict that falling concentration (due to divestiture, new entry) should lead to lower prices e.g. Green and Newbery (1992) - SFE Green (1996) von der Fehr and Harbord (1993) – auction simpler Cournot analyses

6. 6 Generation in England and Wales

7. 7 Mark-Ups : Estimated Lerner Indices Wolfram (1999)My Data YearJan92- Mar93 Apr93- Mar94 Apr94- Nov95 Apr95- Mar96 Apr96- Mar97 Apr97- Mar98 Apr98- Mar99 Apr99- Mar00 Apr00 Sep00 Lerner P-MC P 0.241 (0.129) 0.259 (0.228) 0.208 (0.416) 0.057 (0.398) 0.214 (0.342) 0.305 (0.344) 0.361 (0.327) 0.276 (0.343) 0.213 (0.405 )

8. 8 Best Response Analysis Why did simple models fail? Explanation 1: models basically correct but e.g., changing contract cover or Explanation 2 : assumption of one-shot profit maximization incorrect Test: could individual generators have done better by submitting higher or lower bid functions?

9. 9 Assumptions Simplified form of the actual scheduling algorithm Use direct estimates of marginal costs, assume inelastic demand. Consider robustness to changes. Generators take as given: - availability (of own and other’s plant) - bids of other generators

10. 10 Results Calculate “optimal deviation volume” as estimated best response quantity less actual quantity positive if profitable to supply more (lower bid function), negative if profitable to supply less (a higher bid function) Figures show monthly averages for each generator

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13. 13 Interpretation Early/mid 1990s NP and PG were frequently required to produce and could have exercised a lot of market power, but did not. Implicit regulation important. Following divestiture they exercised their potential unilateral market power and may have tacitly colluded to a small degree. Plausible given market rules. Are the results robust?

14. 14 "extending the analysis to incorporate dynamic interaction between generator opens the possibility of tacit collusion...the conditions could hardly be more favourable with daily repeated bidding, inelastic demand and capacity constraints" (Armstrong, Cowan & Vickers, 1994, pg. 304) Is Tacit Collusion Plausible?