New ESRI Research Highlights the Need for Regulation and Market Monitoring to Ensure new Electricity Market Design Does Not Lead to Higher Consumer Prices

A Research Note, published today (Tuesday, 10 March 2015) by the ESRI, discusses the level of competition in the Irish electricity market, and the potential impacts of a new market design on competition and electricity prices. Today the Irish electricity market is characterised by one dominant firm, the legacy monopolist. At present, the impact of the dominant firm on the electricity market is minimised through regulation and monitoring of the bids of generators. The Irish electricity market is undergoing a redesign in order to comply with EU regulations regarding electricity trading. This redesign, which will be effective in 2017, will have implications for the manner in which competition in the market is ensured. Specifically, regulation of generators’ bids will become more challenging under the new design, and costs and prices will be less transparent. All of this is likely to have consequences for electricity consumers. This Note discusses various measures which can be considered alongside the new market design to solve the market power problem, focusing on the role played by advanced trading and capacity markets. Commenting on the Note, Muireann Lynch, one of the authors, said: ‘Our research indicates that the Irish market has several features that render it unique compared with other European electricity markets. These include a concentrated market with a dominant firm, high levels of wind generation, low levels of interconnection with Great Britain, which is in turn poorly interconnected with the rest of Europe, and low levels of advance trading between generators and supply companies. Advance trading and interconnection are two of the main ways of ensuring competition in electricity markets, but their impact is severely limited in the Irish case. This means that the main tool remaining for regulators to ensure competitive prices for consumers is continuous monitoring and regulation of the bids made by generators, and of the legacy monopolist in particular. However, the new market structure may not lend itself as easily to monitoring and regulation as the current market’. Dr Lynch continued ‘There are also changes being made to the way the fixed costs of generators are compensated, by means of a capacity payment mechanism. However, this capacity payment mechanism is vulnerable to the exploitation of market power by a dominant firm. Under the current design plans, it seems unlikely that there will be a satisfactory way of ensuring a competitive outcome in the capacity payment mechanism unless there is regulation of all the bids made by the dominant firm’.

Research Notes are short papers on focused research issues. They are subject to refereeing prior to publication.