Essays on Competition in Electricity Markets
Bustos Salvagno, Ricardo Javier
The first chapter shows how technology decisions affect entry in commodity markets with oligopolistic competition, like the electricity market. I demonstrate an entry deterrence effect that works through cost uncertainty. Technology's cost uncertainty affects spot market expected profits through forward market trades. Therefore, incentives to engage in forward trading shape firms' decisions on production technologies. I show that high-cost but low-risk technologies are adopted by risk-averse incumbents to deter entry. Strategic technology adoption can end in a equilibrium where high-cost technologies prevail over low-cost but riskier ones. In the case of incumbents who are less risk-averse than entrants, entry deterrence is achieved by choosing riskier technologies. The main results do not depend on who chooses their technology first.Chapter two examines the Chilean experience on auctions for long-term supply contracts in electricity markets from 2006 to 2011. Using a divisible-good auction model, I provide a theoretical framework that explains bidding behavior in terms of expected spot prices and contracting positions. The model is extended to include potential strategic behavior on contracting decisions. Empirical estimations confirm the main determinants of bidding behavior and show heterogeneity in the marginal cost of over-contracting depending on size and incumbency.Chapter three analyzes the lag in capacity expansion in the Chilean electricity market from 2000 to 2004. Regarded as a result of regulatory uncertainty, the role of delays in the construction of a large hydro-power plant has been overlooked by the literature. We argue that those delays postponed projected investment and gave small windows of opportunity that only incumbents could take advantage of. We are able to retrace the history of investments through real-time information from the regulator's reports and a simple model enables us to explain the effect of those delays on suggested and under-construction investments.
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