Indicators and Techniques for the Assessment of Market Power in the Electricity Sector

The many intrinsic (economic, physical and engineering) characteristics substantially differentiate the electrical sector from both other commodities and other public utility services. Within this context, the strategic «gaming» of the operators can generate results that are far from competitive efficiency standards. The main purpose of this article is to illustrate the ways simulation techniques can be used to assess the performance of an electrical system. In particular, the paper explores three specific aspects that might increase market inefficiency and need to be carefully considered when setting the regulations. The first aspect regards the natural monopoly asset of the sector, the second the management of the economic externalities created by the physical constraints of the transmission network, within a context that requires real-time matching of supply and demand. Finally the third aspect concerns the efficient management of peaks in demand within a context of non-storability of the product and limited price elasticity of demand.