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

Katira, Yagnesh
Master thesis
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URI
https://hdl.handle.net/11250/3090850
Date
2023
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  • Master Thesis [4657]
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.

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