Do bottlenecks generate market power? : an empirical study of the Norwegian electricity market

Abstract

The present study analyses the potential non-competitive effects of capacity restrictions – socalled bottlenecks - in the Norwegian electricity market. We specify a structural model, and econometrically identifies market power both for the periods with no capacity restrictions on the grid, and the bottleneck periods. We analyse the largest region, Southern Norway that amounts to three fourths of the Norwegian market. The demand side is found to be inelastic. On average we find the market to be competitive. However, the bottleneck period estimates suggest a significant but small short run markup when the grid is capacity restricted. Hence, within the day or hours when bottlenecks appear it seems as the producers exploit some limited market power.