Pass-through of wholesale price to the end user retail price in the Norwegian electricity market

a r t i c l e i n f o JEL classification: D82 D83 Q49 L11 L12 L94 Keywords: Price pass-through Norwegian electricity market Price asymmetry Market power Transmission lag In this paper we estimate the pass-through of wholesale electricity price to the end consumer price with variable price contracts in the Norwegian electricity market using weekly data. We find substantial asymmetry when retailers pass on the impact of price changes in the wholesale market to the retail prices as price increases are transmitted more quickly than price decreases. By examining the cumulative adjustment function of price change, we identify that some dominant retailers might be exercising market power in the retail electricity market. For an average Norwegian household with variable price contract, the cost of asymmetric price pass-through due to 2.5 Øre/kWh change in the wholesale price over the complete life of pass-through in a year reaches to a high of 2.28 NOK. This cost sums up to 3.8 million NOK for all the Norwegian households on variable price contracts for one time price change. To deal with this asymmetric price setting behavior, end consumers should switch to spot price contracts and make use of " smart grid " technologies. Norway was one of the first European countries to deregulate its electricity market under the Energy Act of 1991. Apart from opening up the market for generation, liberalization of the retail market was probably the most significant development for more efficient utilization of available generation capacity. This regulation changed the face of electricity market from a centralized and vertically integrated structure to a more open and competitive setup. The wholesale spot market with prices being set on hourly basis has become a predominant feature of electricity trade in Norway. This movement towards a deregulated structure however, has been coupled with large fluctuations in the wholesale electricity prices, and sudden spikes constitute a large part in the total variations of spot prices. Contrary to the structural changes at the wholesale generation level, the underlying structure of the retail market in terms of contract types and electricity metering has not changed much. Low volume retail customers are charged on the basis of their estimated load profile rather than the actual consumption, and they do not observe short-run time varying differences prices. This limits their ability to react to price signals. 2 These consumers thus cannot influence their expenditures on electricity …