Predicting market power in wholesale electricity markets

The traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of …rms to raise prices in an electricity market with contracts and capacity constraints and …nd that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to …t this case better than might be expected, but suggests an alternative de…ntion of the RSI de…ned over ‡exible output that should give a more reliable relationship.