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Allocating Transmission to Mitigate Market Power in Electricity Markets
Rand Journal of Economics (2004)
  • Richard Gilbert, University of California, Berkeley
  • Karsten Neuhoff, University of Cambridge
  • David Newberry, University of Cambridge

We ask under what conditions transmission contracts increase or mitigate market power. We show that the allocation process of transmission rights is crucial. In an efficiently arbitraged uniform price auction generators will only obtain contracts that mitigate their market power. However, if generators inherit transmission contracts or buy them in a 'pay-as-bid' auction, then these contracts can enhance market power. In the two-node network case banning generators from holding transmission contracts that do not correspond to delivery of their own energy mitigates market power. Meshed networks differ in important ways as constrained links no longer isolate prices in competitive markets from market manipulation. The paper suggests ways of minimising market power considerations when designing transmission contracts.

  • electricity,
  • transmission,
  • de-regulation
Publication Date
November, 2004
Citation Information
Richard Gilbert, Karsten Neuhoff and David Newberry. "Allocating Transmission to Mitigate Market Power in Electricity Markets" Rand Journal of Economics Vol. 35 Iss. 4 (2004)
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