Futures market manipulations in deregulated electricity markets

The characteristics of electricity production and consumption make electricity markets highly susceptible to the exercise of unilateral market power. However, it is a recognized view that a well-functioning financial power market will contribute to a comp etitive price level in the associated wholesale market. First, by offering hedging possibilities producers may reduce the considerable price risk due to fluctuations in demand, thus making more firms financial viable. Second, if a substantial share of a l arge firm's production is tied up in contracts for future sales, the motivation for lifting the spot price is dampened. On the other hand, if producers are permitted to acquire so called long positions i.e. buy contracts for future purchases - as is the c ase at Nord Pool, the Nordic Power Exchange - the last argument may no longer be valid. The cost of hedging will increase and the liquidity of the financial market is threatened. In other words, the market outcome could in stead be anti-competitive. Ana lyzing the possible scope and welfare effects of this trading option is the primary objective of this project. Our motivation is twofold. First, the international academic literature contains few analyses of the potential consequences of producers having a similar mix of production technologies combined with the set of financial trading possibilities as is available at Nord Pool. This is mainly due to the relatively short history of electricity industry restructuring processes around the world. Therefore, the results of this project will contribute to a more comprehensive theory of futures market manipulations which could be useful for the competition authorities and industry regulators in the Nordic countries. Second, as deregulated electricity industrie s evolve and mature, this subject should attract substantial international interest. The novelty of the research topic constitutes both the most important R&D challenges and the attractiveness of the project.