Market Design and Price Behavior in Restructured Electricity Markets : An International Comparison

This paper argues that the market rules governing the operation of a re-structured electricity market in combination with its market structure can have a substantial impact on behavior of marketclearing prices. Using evidence on the design of electricity markets in England and Wales, Norway, the state of Victoria in Australia and New Zealand, this paper illustrates that market structure and market rules are important drivers of the behavior of prices in a competitive electricity market. The paper first summarizes the important features of the market structure and market rules in each country. One conclusion to emerge from this comparison is that there are many differences in how these markets in each country are organized. I then provide an assessment of the relationship between market rules and market structure and the behavior of prices in each market. The paper closes with a discussion of the available evidence that the behavior of prices in each country is the result of the exercise of market power. Several empirical regularities are suggested by this crosscountry analysis. One result is greater unconditional and conditional (on the values of prices from the past week) price volatility in systems dominated by fossil fuels relative to those dominated by hydroelectric power. I also find that electricity supply industries with a larger component of private participation in the generation market tend to have more volatile prices, although the evidence presented also seems to suggest that markets with less participation by government-owned firms also have lower mean electricity prices after controlling for differences in generation technologies used. Electricity spot markets with mandatory participation also tend had more volatile prices than systems with voluntary participation.