Pricing Decisions and Market Power in the UK Electricity Market: A VECM Approach

Hulya Dagdeviren; Chrysovalantis Amountzias; Tassos Patokos

doi:10.1016/j.enpol.2017.06.016

Pricing Decisions and Market Power in the UK Electricity Market: A VECM Approach

Hulya Dagdeviren, Chrysovalantis Amountzias, Tassos Patokos

Research output: Contribution to journal › Article › peer-review

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Abstract

This paper examines the influence of market power in the formation of retail and wholesale electricity prices in the UK over 1998–2012 on the basis of Vector Error Correction model (VECM). Market power is measured as the influence of the market share of the Big Six in a dynamic demand and supply VECM. The findings indicate that market power of the Big Six in the wholesale industry has a significant and large positive influence on the wholesale mark-up in the short-run. The long-run estimates support the arguments about ‘revenue rebalancing’
resulting from vertical integration. That is, low market power (and hence low revenues) in the wholesale industry leads to higher prices (hence higher revenues) in the retail industry. These findings are in contrast to the CMA's finding that no market power is exercised in the wholesale industry. Retail electricity prices are affected directly by both the wholesale and retail market concentration ratios in the long-run rather than indirectly through the wholesale mark-up. Overall, the findings in this paper provide support for the view that
the UK electricity market exhibits significant anti-competitive conduct in both the retail and wholesale segments.

Original language	English
Pages (from-to)	467-473
Number of pages	7
Journal	Energy Policy
Volume	108
Issue number	2017
Early online date	27 Jun 2017
DOIs	https://doi.org/10.1016/j.enpol.2017.06.016
Publication status	Published - 1 Sept 2017

Keywords

Market power
Electricity
Retail
Wholesale
The Big Six
UK

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10.1016/j.enpol.2017.06.016

Market_Power_Paper_For_UH_repositoryAccepted author manuscript, 844 KBLicence: CC BY-NC-ND

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title = "Pricing Decisions and Market Power in the UK Electricity Market: A VECM Approach",

abstract = "This paper examines the influence of market power in the formation of retail and wholesale electricity prices in the UK over 1998–2012 on the basis of Vector Error Correction model (VECM). Market power is measured as the influence of the market share of the Big Six in a dynamic demand and supply VECM. The findings indicate that market power of the Big Six in the wholesale industry has a significant and large positive influence on the wholesale mark-up in the short-run. The long-run estimates support the arguments about {\textquoteleft}revenue rebalancing{\textquoteright}resulting from vertical integration. That is, low market power (and hence low revenues) in the wholesale industry leads to higher prices (hence higher revenues) in the retail industry. These findings are in contrast to the CMA's finding that no market power is exercised in the wholesale industry. Retail electricity prices are affected directly by both the wholesale and retail market concentration ratios in the long-run rather than indirectly through the wholesale mark-up. Overall, the findings in this paper provide support for the view thatthe UK electricity market exhibits significant anti-competitive conduct in both the retail and wholesale segments.",

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author = "Hulya Dagdeviren and Chrysovalantis Amountzias and Tassos Patokos",

note = "This document is the Accepted Manuscript version of the following article: Chrysovalantis Amountzias, Hulya Dagdeviren, and Tassos Patokos, 'Pricing Decisions and Market Power in the UK Electricity Market: A VECM Approach', Energy Policy, Vol. 108, pp. 467-473, September 2017. Under embargo. Embargo end date: 27 June 2019. The Version of Record is available online at doi: https://doi.org/10.1016/j.enpol.2017.06.016 {\textcopyright} 2017 Elsevier Ltd. All rights reserved.",

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N1 - This document is the Accepted Manuscript version of the following article: Chrysovalantis Amountzias, Hulya Dagdeviren, and Tassos Patokos, 'Pricing Decisions and Market Power in the UK Electricity Market: A VECM Approach', Energy Policy, Vol. 108, pp. 467-473, September 2017. Under embargo. Embargo end date: 27 June 2019. The Version of Record is available online at doi: https://doi.org/10.1016/j.enpol.2017.06.016 © 2017 Elsevier Ltd. All rights reserved.

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N2 - This paper examines the influence of market power in the formation of retail and wholesale electricity prices in the UK over 1998–2012 on the basis of Vector Error Correction model (VECM). Market power is measured as the influence of the market share of the Big Six in a dynamic demand and supply VECM. The findings indicate that market power of the Big Six in the wholesale industry has a significant and large positive influence on the wholesale mark-up in the short-run. The long-run estimates support the arguments about ‘revenue rebalancing’resulting from vertical integration. That is, low market power (and hence low revenues) in the wholesale industry leads to higher prices (hence higher revenues) in the retail industry. These findings are in contrast to the CMA's finding that no market power is exercised in the wholesale industry. Retail electricity prices are affected directly by both the wholesale and retail market concentration ratios in the long-run rather than indirectly through the wholesale mark-up. Overall, the findings in this paper provide support for the view thatthe UK electricity market exhibits significant anti-competitive conduct in both the retail and wholesale segments.

AB - This paper examines the influence of market power in the formation of retail and wholesale electricity prices in the UK over 1998–2012 on the basis of Vector Error Correction model (VECM). Market power is measured as the influence of the market share of the Big Six in a dynamic demand and supply VECM. The findings indicate that market power of the Big Six in the wholesale industry has a significant and large positive influence on the wholesale mark-up in the short-run. The long-run estimates support the arguments about ‘revenue rebalancing’resulting from vertical integration. That is, low market power (and hence low revenues) in the wholesale industry leads to higher prices (hence higher revenues) in the retail industry. These findings are in contrast to the CMA's finding that no market power is exercised in the wholesale industry. Retail electricity prices are affected directly by both the wholesale and retail market concentration ratios in the long-run rather than indirectly through the wholesale mark-up. Overall, the findings in this paper provide support for the view thatthe UK electricity market exhibits significant anti-competitive conduct in both the retail and wholesale segments.

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KW - Retail

KW - Wholesale

KW - The Big Six

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JO - Energy Policy

JF - Energy Policy

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Pricing Decisions and Market Power in the UK Electricity Market: A VECM Approach

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Keywords

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