A stochastic Cournot model of the Scandinavian electricity market

We investigate the potential for market power in a deregulated hydro and thermal based electricity market through a two-stage stochastic Cournot model. We examine the optimal hydro and forward strategies when producers take into account the commitment effect of these decisions, i.e. the influence on the future play of opponents. The generation capacity of each producer is regarded as given. In the first stage, producers decide on forward contracting, hydro and thermal generation (including nuclear) for the current spot market. In the second stage, producers learn about water inflows to reservoirs before deciding on generation for the second stage spot market. Using cost and capacity data and historical inflow series from the Scandinavian market, we find that large pure hydro producers have little or no market power on the seasonal level, and that the largest producer, Vattenfall, has some incentive to withdraw capacity from the market. The simulated price in an oligopoly case is less than 7% higher than under perfect competition, thus the market is expected to be reasonably competitive.