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Market Power in a Hydro-Dominated Wholesale Electricity Market

Mar 2018
Stanford King Center on Global Development Working Paper
By  Shaun D . McRae, Frank A. Wolak
Concerns about market power have led to regulatory constraints on the price-setting
process in nearly all wholesale electricity markets around the world. We study the con-
ditions that led to the exercise of market power in the Colombian wholesale electricity
market between 2008 and 2016, focusing on the two most recent occurences of the cli-
matic phenomenon known as El Ni~no. During the 2015{16 event, the mean wholesale
price was more than three times higher than in 2009{10, even though water levels, fuel
prices, and the market structure were relatively unchanged. We show that the higher
prices in 2015{16 can be attributed to a large increase in the ability of generation
unit owners to exercise market power, resulting from a narrower gap between system
demand and available system capacity.