Market Power and Price Exposure: Learning from Changes in Renewable Energy Regulation

Abstract

Given the critical role of renewable energies in current and future electricity markets, it is important to understand how they affect firms’ pricing incentives. We study whether the price-depressing effect of renewables depends on their degree of market price exposure. Paying renewables with fixed prices, rather than market-based prices, is more effective at curbing market power when the dominant firms own large shares of renewables, and vice versa. Our empirical short-lived changes to renewables regulation in the Spanish market and shows that switching from full-price exposure to fixed prices caused a 2–4 percent reduction in the average price-cost markup. (JEL L13, L94, L98, Q42, Q48)