How well can one measure market power in restructured electricity systems ? ∗

The integration of national electricity systems into a single internal European electricity market is not progressing well with the result that the level of competition in the sector remains unsatisfactory. This had led to proposals to apply ex ante remedies that directly bear on the structure of national incumbents. These measures involve quantitative recommendations such as virtual auctioning of a certain capacities or divestitures in order to arrive at a certain number of competing firms. These evaluations partly rely on computable oligopoly models of the restructured electricity sector. This paper analyses the recent literature of these models and concludes that they are not currently capable of providing the degree of legal and regulatory certainty that the importance of these ex ante remedies requires. The state of the art in these models is such that their results reflect more a set of non-testable assumptions than observed facts or unambiguous theory. More academic work is necessary before these models can be applied in a legal or regulatory context. The conclusion is that this work on the structure of national electricity market distracts from the fundamental objective to introduce competition in the power sector by integrating the national markets into a single electricity market. ∗This paper was prepared as part of the SESSA project. SESSA is a project financed by the European Union under the Sixth RTD Framework Programme and coordinated by Jean-Michel Glachant and François Levêque (Armines – Ecoles des Mines de Paris). †Tractebel Professor of Energy Economics, Department of Mathematical Engineering and Center for Operations Research and Econometrics, Université catholique de Louvain, Louvain-la-Neuve, Belgium.