Integration of dispatchable with non-dispatchable renewable systems and market power : An assessment of the Nordlink interconnector

Abstract

An increase in integration of electricity markets is allowing for a frequent collaboration between dispatchable and non-dispatchable technologies. The dispatchable nature of the former technology creates a potential for market power amongst firms that host dispatchable technology. As Europe is increasingly embracing non-dispatchable renewables like wind and solar for power generation, it is crucial to address this issue in the presence of dispatchable hydropower systems in the Nordics. A market power analysis has become imperative ever since the NordLink interconnector was opened between hydro-rich Norway with Germany that has enormous share of renewables in its generation mix. My thesis therefore attempts to empirically contribute to the limited literature that has so far addressed this concern but is surely gathering pace. Relying on the theoretical findings from Brekke et al. (2022) and other limited literature on this aspect, I find evidence of non-competitive behaviour by Norwegian hydropower firms in NO2 area after the interconnector was commissioned. By compiling a rich dataset at hourly frequencies, I could show that gaining pivotal status even for shorter time-period has encouraged firms to engage in non-competitive behaviour. The thesis further compares such behaviour during both pre-NordLink and post-NordLink period and finds key differences in the patterns. Whereas a long-run seasonal price elasticity drove such behaviour earlier, pivotal firms engaged in peculiar short-run as well as long-run non-competitive behaviour concurrently. This new-found short-run behaviour was influenced by variations in prevailing German power prices while the long-run behaviour was induced by an interplay of erstwhile seasonal effect as well as a long run price effect. This long-run price effect is collective influenced by current and future price expectations in Germany and variation in available water endowments. My study is finally made robust by demonstrating a stronger impact of non-competitive behaviour on market outcomes in the post-NordLink regime as compared to pre-NordLink period by a factor of three. After the connection, the market power behaviour contributed significantly to price rise despite the presence of other factors driving German prices. This bodes well with the theoretical findings of Brekke et al. (2022) that attributes presence of non-competitive behaviour in Norway that does not allow high price variations that generate in Germany to smoothen as they propagate into Norwegian electricity markets due to integration.