Discussion Papers

Christian Growitsch, Felix Höffler, Matthias Wissner

Market Power on the German Balancing Power Market

No. 337/April 2010

Summary

  • We analyze the German market for tertiary electricity reserves in 2008. The cost of tertiary reserves of about € 200 million accounted for 15% of the total cost of system services.
     
  • The market is organized as a discriminatory (pay as bid) auction. It is a two step process, first considering capacity bids, then bids for actual power supply. We concentrate on capacity bids, since the cost of capacity account for 93% of the overall cost of tertiary reserves.
     
  • The aim of the paper is to analyze the market structure to reveal possible opportunities for the execution of market power.
     
  • To do so, we apply various concentration measures for the total market, as well as for all submarkets (i.e., different time frames, positive and negative reserves). We analyze: market shares, Her-findahl-Hirschman-Index, Pivotal Supplier Index, Residual Supply Index, and the price elasticity of the residual demand of the individual bidders.
     
  • The analysis is based on the complete data set for 2008, including all individual bids of all 29 bidders.
     
  • Based on all concentration indicators, we find that all submarkets are best characterized as tight oligopolies with a (competitive) fringe. The four largest companies always qualify as being jointly dominant according to German competition law (§ 19 Absatz 3 GWB). The role of the fringe firms is, however, not negligible, in particular not for positive reserves. Strongest indication for market power is found for negative reserves from 0-8 a.m.
     
  • As a methodological contribution, our analysis highlights that relying on single concentration indicators (e.g., market shares) can be misleading. It is sensible and often necessary to consider the full set of indicators.
     
  • In terms of absolute levels of the average revenues per unit of capacity, a competition policy judgment is not possible. An interesting observation is that the large bidders can achieve significantly higher average revenues than the fringe bidders.
     
  • In order to evaluate the market outcome, and in order to judge whether (unilateral or multilateral) market power is executed, further research is required. This needs to achieve a better understanding what we would expect under the given market rules if the market was (perfectly, or oligopolistically) competitive.

(Full version only available in German language)

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