Search for: All records

Electricity systems in many parts of the world are becoming more dependent upon natural gas as an electricity-generation fuel. As such, electricity and natural-gas markets are becoming more interconnected. Contemporaneously, some electricity and natural-gas markets are integrating vertically, through the merger of electricity and natural-gas suppliers. The market-efficiency impacts of such vertical integration are unclear. On one hand, vertical integration could exacerbate market power, whereas on another it could mitigate double marginalization. To study this question, this paper develops a Nash–Cournot model of the two interconnected markets. The model is converted into a linear complementarity problem, which allows deriving Nash equilibria readily. Some theoretical results are derived for the case of a merger involving symmetric firms. In addition, the model is applied to a stylized example with a range of parameter values. We find that integration is social-welfare enhancing—which implies that mitigating double marginalization outweighs the exercise of market power. In most cases, the effects of merger can give rise to a prisoner’s-dilemma-type outcome. Merger is beneficial to the merging firms. However, profits of non-merging firms and total supplier profits decrease following a merger. Overall, our results suggest that vertical integration in energy markets may be socially beneficial. JEL Classification:C61, C72, D43, L1, L94, L95, Q4 

Increasing use of natural gas for electricity production places added strains on pipeline systems that are used for transporting fuel. Pipeline constraints require power system operators to account for natural gas-supply restrictions in their operational processes. This paper proposes separate optimization models for clearing day-ahead wholesale markets for scheduling power and natural gas systems. We then develop a market-based mechanism that allows for efficient co-ordination of the two systems. Importantly, the co-ordination mechanism only requires the exchange of fuel-price, -supply, and -demand information between the two markets. This can be contrasted with other co-ordination mechanisms that require operations of the two systems by a single entity. Thus, we provide a computationally tractable co-ordination mechanism that does not require the exchange of proprietary information between natural gas and electricity system operators. We demonstrate the effectiveness and scalability of the technique using a numerical example.