Market Power and Price Exposure: Learning from Changes in Renewables’ Regulation
Background
We provide theoretical and empirical results regarding the market power implications of different types of renewable support schemes in electricity markets. In particular, we seek to understand how the exposure of renewable energies to wholesale price fluctuations affects the overall degree of market power. Theoretically, we find that shielding renewables from price fluctuations is effective at curbing market power in relatively concentrated markets. Empirically, we leverage several short-lived changes to renewables’ support mechanisms in the Spanish electricity market and find that the switch from fixed to market-based pricing caused a 2-4% reduction in the average price-cost markup.
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