Empirical Modeling and Its Applications. Chapter 6: A Comparison between the Presence and Absence of Regulation in the Spanish Electricity Market

Abstract

There is an important gap in the literature on the promotion of competition in electricity markets in what pertains to the analysis of two different streams: the absence and presence of regulation. Accordingly, the main objective of this study is to analyze the interactions among market power indexes, marginal costs, and bidding strategies in the two mentioned scenarios, for comparative purposes. The methodology used is based on panel cointegration methods. The results point to the significant inclusion of different bidding strategies in the retail market: (i) fuel prices exercise a differential impact on the power plants’ marginal costs, (ii) the marginal costs have a significantly positive effect on quantity sold and on net quantity, and (iii) the market power measures under regulation have a significantly positive long-term impact on the quantity sold and a negative impact on net quantity supplied in wholesale market. Although there is some literature on this issue, the main novelty of this article is the discussion of the regulatory implications that could have been adopted in order to control and mitigate the market power, to encourage new investments in new technologies, and to recover sunk costs with the transition to a competitive market.