The effect of counter-trading on competition in electricity markets

• Published in: Energy policy 2011-03, Vol.39 (3), p.1764-1773
• Main Authors: Dijk, Justin, Willems, Bert
• Format: Article
• Language: English
• Subjects: Applied sciences; Competition; Competitiveness; Congestion; Congestion management; Congestion management Counter-trading Market power; Cost-effectiveness; Counter-trading; Distortion; Economic data; Electric energy; Electric power plants; Electric rates; Electricity; Energy; Energy economics; Energy market; Energy policy; Exact sciences and technology; General, economic and professional studies; Market analysis; Market power; Marketing; Markets; Power marketers; power plants; prices; Pricing; production costs; social benefit; Studies
• ISSN: 0301-4215; 1873-6777
• DOI: 10.1016/j.enpol.2011.01.008

In a competitive electricity market, nodal pricing is the most efficient way to manage congestion. Counter-trading is inefficient as it gives the wrong long term signals for entry and exit of power plants. However, in a non-competitive market, additional entry will improve the competitiveness of the market, and will increase social benefit by reducing price–cost margins. This paper studies whether the potential pro-competitive entry effects could make counter-trading more efficient than nodal pricing. We find that this is unlikely to be the case, and expect counter-trading to have a negative effect on overall welfare. The potential 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). ► ‘Counter-trading’ and ‘nodal pricing’ manage congestion in electric grids. ► Nodal pricing gives superior locational prices. ► Counter-trading induces extra investments in regions with a production surplus. ► Extra investments improve competition, but are expected to be socially inefficient.