“Aftershock: Market Power in Alberta’s Electricity Market 20 Years After Restructuring”
David Brown (University of Alberta), Andrew Eckert (University of Alberta), and Blake Shaffer* (University of Calgary)
In the late 1990s, the electricity sector in many countries, along with telecom and other utilities, began a process of restructuring in an attempt to introduce competition into traditionally regulated markets. The transition to competition involved transitional arrangements to ensure the heavy market concentration of incumbent utilities did not lead to excessive market power. These transitional arrangements variously involved breaking up firms (enforced separation of transmission and generation control) and forced asset divestitures to reduce market concentration. In Alberta, the government created power purchase arrangements (PPAs)—effectively long-term contracts to separate physical ownership from offer control and revenue optimization. Fast forward to the end of 2020, and Alberta’s PPAs have expired, reverting offer control and associated revenue to the original plant owners. With these transitional training wheels removed, we analyse the effect this reversion to original ownership, and heightened market concentration, has on firm bidding behaviour and market outcomes. We motivate this investigation by the fact annual average power prices in Alberta rose from $46 per megawatt-hour (MWh) in 2020 to $102 per MWh in the year after the PPAs expired. We find the largest firm by market share increased their average offer markup over marginal cost by $68/MWh, or roughly 250%. We then compare market outcomes to a constructed counterfactual based on all firms bidding their marginal cost. We find the deviation from a competitive benchmark rose from $11/MWh in 2020 to $76/MWh in 2021. The change in bidding behaviour thus explains the observed change in market prices.