Mitigate Market Power to Improve Market Efficiency

This chapter discusses the interaction of market power and market efficiency, and particularly considers the implications of market power mitigation in improving the efficiency of operation of electricity markets. Competitive price levels are the prices that would prevail in a clearing‐price market where no market participant can individually affect prices. The chapter discusses the market power and efficiency in detail. It describes price formation in electricity markets, price and offer caps, and the ability and incentive to exercise market power. Several market power mitigation approaches are also discussed. The chapter reiterates the backstop function of price and offer caps. It describes conduct and impact tests, structural tests and the "Texas two‐step", respectively. Analysis of the incentives to exercise market power reveals how exercise of market power is also generally associated with inefficient production. Market power mitigation can be aimed at influencing the supply side, or increasing the discipline provided by the demand side.