Essays in Energy Market Competition and Policies

My thesis is aimed at understanding how market design and policy affect firms’ competition in the context of U.S. electricity markets. The U.S. deregulated electricity markets are organized through multi-unit auctions and are undergoing constant changes in market competition and policy designs. In the first chapter, I study how wind forecasting information affects strategic competition among electricity producers. In the context of the U.S. Midwest electricity market which has experienced rapid wind energy development, I find wind generation not only brings significant uncertainty to market supply, but also affects local market structures through transmission congestion. I develop a strategic bidding model in which firms compete with imperfect information about wind, and estimate firms’ private wind information, which determines their beliefs about local competition and rationalizes their supply bids. I find firms with wind units bid as if they have better wind information than firms without, and they get more private profits from this information advantage. I also find that, while all big firms exercise market power, firms with better wind information bid more competitively. I then perform a counterfactual analysis in which all firms are provided with accurate wind information and predict that it would greatly increase consumer surplus and market efficiency. In the second chapter, I investigate a recent reform in the U.S. Northeast market, PJM, for its capacity market. The capacity market was created to provide additional compensation to keep sufficient generation capacity available, but its initial design of yearly fixed payment failed to make power plants actually produce when most needed. Exploring PJM’s transition to the reformed capacity market design that combines time-varying scarcity pricing with capacity market payment, I find the reform mitigates producers’ market power exercise, leading to a decrease in their bid prices and large savings in market production cost. Finally, in the third chapter, I study how demand-side deregulation affects the wholesale electricity market. I find evidence that deregulations in electricity retail market create competitive retailers to compete with the utilities. When they act as buyers in the wholesale market, they strategically split their purchase between the day-ahead market and the spot market to lower their procurement cost. Their strategic bidding results in lower market prices when compared to retail regulated regions and has big welfare implication for retail consumers