Swapping Generators’ Assets: Market Salvation or Wishful Thinking?

The idea of rearranging generation assets amongst firms to improve competition has once again surfaced in a recent report on improvements to the New Zealand Electricity Market. We show with examples that rearranging assets, either with asset divestiture to a new firm, or asset swaps between existing firms, may actually reduce competition in electricity markets. Our examples emphasize features that are particular to electricity, such as seasonality and transmission constraints. These results warn that applying economic rules of thumb to electricity markets may lead to erroneous conclusions. ∗Electric Power Optimization Center, University of Auckland †University of Auckland Energy Centre ‡Electric Power Optimization Center, University of Auckland. Corresponding author, [email protected]. The authors would like to thank Lewis Evans, David Caygill, and other participants at the EPOC Winter Workshop 2009 for their helpful comments. Thanks also to Shmuel Oren and Bart van Campen, who read the final drafts, and to participants at the ORSNZ Annual Conference 2009 and INFORMS Conference 2009 for their input.