Market Power Analysis of the German Tertiary Control Market - - PowerPoint PPT Presentation

▶
market power analysis of the german tertiary control
SMART_READER_LITE
LIVE PREVIEW

Market Power Analysis of the German Tertiary Control Market - - PowerPoint PPT Presentation

May 23, 2023 636 likes •877 views

Market Power Analysis of the German Tertiary Control Market Christian Growitsch Felix Hffler Matthias Wissner Institute for Energy Economics (EWI) at the University of Cologne christian.growitsch@uni-koeln.de ewi.uni-koeln.de Infraday

slide-1
SLIDE 1

Christian Growitsch – Infraday 2010

Market Power Analysis

  • f the German Tertiary Control Market

Christian Growitsch Felix Höffler Matthias Wissner Institute for Energy Economics (EWI) at the University of Cologne christian.growitsch@uni-koeln.de ewi.uni-koeln.de Infraday 2010

slide-2
SLIDE 2

Christian Growitsch – Infraday 2010

Outline

2

  • Introduction and problem definition
  • Institutional framework
  • Economic theory
  • Empirical analysis
  • Conclusions
slide-3
SLIDE 3

Christian Growitsch – Infraday 2010 3

  • Economics of the power reserves market
  • Possible disadvantages for consumers: balancing energy

costs passed to consumers via network charges

  • Potential barriers to entry for the energy market: new / small

providers may be discriminated by integrated incumbents

  • Research question:
  • Has market power been exercised on the German tertiary

control market in 2008?

Introduction and problem definition

slide-4
SLIDE 4

Christian Growitsch – Infraday 2010

Institutional framework Balancing Energy

4

  • Electricity storage possibilities are limited.
  • Deviations from energy supply and demand due to frequency

fluctuations (varying demand, blackouts, feed-in of wind energy)

  • Different qualities of balancing energy used by TSOs:
  • Primary control power
  • Secondary control power
  • Tertiary reserves
slide-5
SLIDE 5

Christian Growitsch – Infraday 2010

Institutional framework Bidding process

5

  • Since December 2006: joint and standardised tender auction for

tertiary reserves energy by transmission system operators.

  • Processing via internet platform „www.regelleistung.net“
  • Standardisation of time, time slots and the minimum quantity bid.
  • Bids include a capacity rate (MW), energy rate (MWh) and quantity.
  • Two-step process:
  • Acceptance of bid depending on capacity rate
  • Power request depending on energy rate
  • Discriminatory auction (pay as bid).
slide-6
SLIDE 6

Christian Growitsch – Infraday 2010

Institutional framework Market environment

6

  • The reserves market is preceding the wholesale spot market.
  • Balancing energy suppliers can also participate in the wholesale

market.

  • There are four large and many small bidders in the balancing

energy market.

  • The large suppliers are vertically integrated (for the analysed

period): generators and TSOs are affiliated.

  • Foreign providers are almost irrelevant.
slide-7
SLIDE 7

Christian Growitsch – Infraday 2010

Economic theory Market power − Definition

7

  • Market power = Ability to act independently of competitors
  • Standard definition: Ability to realise prices above a competitive level.
  • Standard benchmark: mark-up on marginal cost (Lerner Index)
  • Legal definition in Germany: „Marktbeherrschung“ (market dominance):
  • if a company has no or no significant competitor

(§ 19 (2) Nr. 1 GWB)

  • if a company has a dominant market position

(§ 19 (2) Nr. 2 GWB)

slide-8
SLIDE 8

Christian Growitsch – Infraday 2010

Economic theory Strategic considerations

8

  • Expected bidding behaviour of competitors on reserves market:

expected stop out price.

  • Marginal generation costs.
  • Expected spot market price.
slide-9
SLIDE 9

Christian Growitsch – Infraday 2010

Empirical analysis Research focus

9

  • We concentrate on capacity rates
  • Positive minutes reserve:
  • Per time slot / product annual average capacity demand:

1.1 Mio. MW

  • Per time slot / product annual average capacity called:

4,138 MWh (0.35%)

  • Negative minutes reserves:
  • Per time slot / product annual average capacity demand:

0.73 Mio. MW

  • Per time slot / product annual average capacity called:

7,211 MWh (0.98%)

slide-10
SLIDE 10

Christian Growitsch – Infraday 2010

Empirical analysis Data

10

  • Complete data set for the year 2008
  • All individual bid functions (anonymised)
  • 12 products

(1 product is the capacity for a time slot of 4 hours: 6 x 4h positive minutes reserve, 6 x 4h negative minutes reserve)

slide-11
SLIDE 11

Christian Growitsch – Infraday 2010

Empirical analysis Descriptive statistics

11

Product supply (MW/day)  demand (MW/day)  capacity rate accepted  daily revenue 1 3,459 2,016 28.58 € 57,617 € 2 3,445 2,021 29.34 € 59,296 € 3 3,705 1,981 1.50 € 2,971 € 4 3,757 1,985 1.39 € 2,759 € 5 3,927 1,980 1.39 € 2,752 € 6 3,879 2,063 1.96 € 4,043 € 7 4,978 3,249 4.23 € 13,743 € 8 4,939 3,271 12.85 € 42,032 € 9 5,016 3,308 40.34 € 133,444 € 10 5,055 3,309 28.34 € 93,777 € 11 5,055 3,289 29.46 € 96,893 € 12 4,935 3,279 13.12 € 43,020 €

slide-12
SLIDE 12

Christian Growitsch – Infraday 2010

Empirical analysis Empirical strategy

12

  • Focus on market structure indicators

Net revenue benchmarking analysis Market share and HHI Pivotal Supplier Index, Residual Supply Index Residual demand analysis Withholding analysis Bid-cost- margins (Lerner-Index) Oligopoly models Competitive benchmark analysis Simulation models Structural indices and analysis Behavioural indices and analysis

Twomey et al. (2005): A Review of the Monitoring of Market Power.

slide-13
SLIDE 13

Christian Growitsch – Infraday 2010

Empirical analysis Market shares, overall

13

  • The largest bidder‘s market share exhibits 25%. According to

German cartel law the largest three suppliers have a dominant market position.

bidder #1; 21% bidder #2; 11% bidder #3; 25% bidder #4; 17% fringe supplier; 26%

slide-14
SLIDE 14

Christian Growitsch – Infraday 2010

Empirical analysis Herfindahl-Hirschmann-Index

  • HHI (revenues) between 1,468 and 2,144 indicating market power

due to US Merger Guideline (HHI > 1.800)

assumption: „fringe firms“ = 1 supplier assumption: „fringe firms“ = all suppliers of equal size

slide-15
SLIDE 15

Christian Growitsch – Infraday 2010 15

  • Pivotal Supplier Index (PSI)

0 if : Ctot – Dtot >= Ci PSI = 1 if: Ctot – Dtot < Ci

  • Residual Supply Index (RSI)

RSIi = (Ctot – Ci) / Dtot with Ctot: total capacity (supply) on the market Ci: capacity (supply) of bidder i Dtot: total demand

Empirical analysis Pivotal Supplier Index & Residual Supply Index

slide-16
SLIDE 16

Christian Growitsch – Infraday 2010

Empirical analysis Pivotal Supplier Index

16

  • Some suppliers seem to have price setting power for certain

products (figures in percent of annual days, highlighted if > 5%)

Anbieter 1 Anbieter 2 Anbieter 3 Anbieter 4 Fringe P1 4.10% 2.19% 1.09% 12.02% 1.91% P2 5.19% 1.91% 0.27% 13.66% 2.46% P3 1.37% 0.82% 0.55% 0.82% 1.37% P4 1.37% 0.82% 0.82% 1.37% 1.37% P5 1.09% 0.82% 0.82% 0.82% 1.09% P6 1.91% 0.27% 0.27% 1.09% 1.09% P7 1.64% 0.55% 1.09% 0.00% 6.83% P8 0.27% 2.73% 0.82% 0.00% 4.37% P9 0.55% 7.10% 2.46% 0.27% 6.01% P10 0.55% 3.28% 1.37% 0.27% 4.64% P11 0.55% 1.91% 1.64% 0.27% 6.56% P12 0.27% 3.01% 1.91% 0.00% 6.83%

slide-17
SLIDE 17

Christian Growitsch – Infraday 2010

Empirical analysis Residual Supply Index

17

  • PSI results confirm RSI results

Produkt 1 Produkt 2 Produkt 3 Produkt 4 Produkt 5 Produkt 6 Produkt 7 Produkt 8 Produkt 9 Produkt 10 Produkt 11 Produkt 12

0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00% 70,00% 80,00% 90,00% 90 100 110 120 90 100 110 120 90 100 110 120 90 100 110 120 90 100 110 120 Bidder 1 Bidder 2 Bidder 3 Bidder 4 Fringe bidder

slide-18
SLIDE 18

Christian Growitsch – Infraday 2010

Empirical analysis Residual Demand Analysis

18

  • The residual demand is – for any price p – the difference between

total demand and the competitors‘ realised supply.

  • The more elastic the residual demand the lower the market power.

x

1 -

x

2

p

1

p

2

quantity

residual demand

Price quantity

x

2

x

1

total demand

Price

supply

slide-19
SLIDE 19

Christian Growitsch – Infraday 2010 19

  • Empirical model:

 Residual demand and prices in logs  No endogeneity bias due to perfectly inelastic demand

Empirical analysis Residual Demand Analysis

i i i i i res

p d D     

,

slide-20
SLIDE 20

Christian Growitsch – Infraday 2010

Bidder 1 Bidder 2 Bidder 3 Bidder 4 Fringe Product 1

  • 3.03
  • 8.61
  • 5.05
  • 8.00
  • 5.70

Product 2

  • 2.88
  • 8.45
  • 4.94
  • 7.66
  • 5.59

Product 3

  • 2.75
  • 9.40
  • 4.80
  • 7.11
  • 6.84

Product 4

  • 2.83
  • 8.84
  • 4.81
  • 7.16
  • 6.82

Product 5

  • 3.04
  • 9.46
  • 5.12
  • 7.22
  • 7.26

Product 6

  • 2.29
  • 7.64
  • 4.23
  • 6.20
  • 6.59

Product 7

  • 3.49
  • 6.64
  • 4.58
  • 5.18
  • 3.16

Product 8

  • 4.49
  • 8.08
  • 5.11
  • 6.15
  • 3.72

Product 9

  • 4.39
  • 7.63
  • 4.94
  • 6.22
  • 3.61

Product 10

  • 4.42
  • 8.21
  • 4.98
  • 6.33
  • 3.55

Product 11

  • 4.47
  • 7.48
  • 4.74
  • 5.96
  • 3.34

Product 12

  • 4.22
  • 6.81
  • 4.72
  • 5.41
  • 3.22

Empirical analysis Residual Demand Analysis

20

  • Bidder 1 / the fringe suppliers show the lowest elasticity of residual

demand for the negative / positive minutes reserve products.

slide-21
SLIDE 21

Christian Growitsch – Infraday 2010 21

  • Different methods of market share and market power analysis

cannot prove specific market power

  • There is a tight oligopoly with joint market dominance
  • Large suppliers seem to realise higher average revenues than the

fringe suppliers.

  • Abuse of market power difficult to prove since we lack a

competitive benchmark.

  • Further analyses necessary.

Conclusions

slide-22
SLIDE 22

Christian Growitsch – Infraday 2010

Institute for Energy Economics (EWI) at the University of Cologne christian.growitsch@uni-koeln.de ewi.uni-koeln.de