Will the Nordic Power Market Remain competitive

Abstract:

There is world-wide a clear trend towards the deregulation of power markets. The question is: will the markets stay competitive in the longer run or develop into situations of damaging market concentration?

Studies based on analyses of historical data have not found any indication of abuse of market power in the Nordic power market, Nord Pool. We argue that historical data could be a misleading benchmark for evaluating Nord Pool because of temporary disequilibrium phenomena. The present situation is characterized by excess generating capacity, a heritage from the publicly regulated system. This is one of the major differences between the Nordic electricity market and the liberalized power markets in the UK and California, which are characterized by scarce capacity. Furthermore, the concentration of power companies is rather low in the Nordic area compared to other power markets, but there is a current trend towards higher concentration due to mergers and reciprocal acquisition of shares.

We adopt a scenario approach and simulate likely market structures for 2005, when capacity is expected to be normal. Simulations are based on a numerical model that provides estimates for prices in the Nordic power market under assumption of Cournot competition with an exogenously specified number of identical competitors and a fringe of small price-taking competitors. A novelty compared to other studies of this subject is the inclusion of district heating produced jointly with electricity. We find that the future potential for excess profits is surprisingly large when compared to a traditional measure of market concentration, the Hirschman-Herfindahl Index.