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Assessing the Potential for Market Power in the National Electricity Market

Industry Commission staff information paper

This paper was released on 8 January 1997. The existence of transmission costs, transmission losses, limited transmission capacity, and the small number of power stations in some regions may mean the introduction of the national electricity market in south eastern Australia results in spatial oligopolistic markets, in the short to medium term.

This paper applies spatial-intertemporal equilibrium theory, using non linear programming, to analyse the incentives that exist for ETSA Generation to exert its market power in the South Australian region of the national market. Specifically, imperfect competition and detailed electricity production and consumption activities are incorporated into the spatial-intertemporal equilibrium models pioneered by Takayama and Judge (1971).

The results indicate that in the short-term, there is an incentive for ETSA Generation to exert market power. Further, that splitting ETSA Generation into separate businesses would not significantly reduce this incentive. The model is also used to explore the use of vesting contracts to reduce market power in the short run, and the impact of new entry of regional generators in the long run.

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Cover, Copyright, Acknowledgments, Contents, Abbreviations

1   Introduction

2   Electricity supply in South Australia

3   Market power

4   Analysis of market behaviour by generators in SA

5   Mathematical programming methodology

6   Basic mathematical model
6.1   Notation
6.2   Equations
6.3   Modelling oligopolistic behaviour

7   Demand

8   Transmission
8.1   Static transmission losses
8.2   Dynamic transmission losses

9   Production model

10   Interstate purchases of electricity

11   Scenarios modelled

12   Results and policy discussion

13   Possible extensions of the technique

14   Conclusions

Appendix A   GAMS code for the basic long run model


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