Transmission congestion and market power: the case of the Norwegian electricity market

Faisal Mehmood Mirza and Olvar Bergland

Abstract

ABSTRACT

We estimate the noncompetitive effects of transmission congestion in the Norwegian electricity market and test the hypothesis that opportunities for producers to exercise their market power increase when transmission constraints become binding. By specifying a structural model and using hourly data for southern Norway from February 2004 to April 2008, we find that, on average, prices have remained close to the competitive equilibrium, but producers more often exercise their market power during some specific hours when transmission constraint becomes binding. However, average markups above the marginal costs in any of these specific hours do not exceed 1%.