EBF 483
Introduction to Electricity Markets

11.4 Summary and Final Tasks

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Summary

Because electricity cannot be stored economically at large volumes, and because electricity demand is treated as highly inelastic, markets for electric power are very susceptible to manipulation by suppliers. Market manipulation generally comes in two forms - physical withholding, where generation capacity is removed from the market, driving up prices; and economic withholding, where firms submit offers that are not reflective of marginal costs and are designed to drive up prices. Because electricity markets are so susceptible to manipulation, RTOs in the United States have Independent Market Monitors that continuously oversee market activity. The IMMs run tests to detect the actual exercise of market power using the Lerner Index, and run tests to detect the potential of groups of firms to exercise market power, using pivotal supplier tests. The IMMs generally do calculate Herfindahl-Hirschman Index values as well, but these are generally considered to be inferior to the pivotal supplier test in terms of being able to predict the possession of market power.

Reminder - Complete all of the Lesson 11 tasks!

You have reached the end of Lesson 11! Double-check the to-do list on the Lesson 11 Introduction page to make sure you have completed all of the activities listed there before you begin Lesson 12.