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Market Power Investigation
Student: Soon-Chee Tan
Supervisor: Zhao Dong
Category: Engineering Thesis Project - Power
The production and supply of electricity plays a significant role in the Australian economy. Over the years, this industry has gone through a significant reform and deregulation. National Electricity Market(NEM) supplies electricity to 7.7 million Australian customers. The grid runs through Queensland, New South Wales, the Australian Capital Territory, Victoria and South Australia. The objective of this thesis is to investigate the characteristics of market power and the techniques used to assess market power. This thesis investigates into the techniques assessing the market power in an electricity market as well as the significance of the impact of market power on electricity markets such as the National Electricity Market of Australia. An example of the significance of market power is to be away from the objective of competitive electrical market, which is to reduce the price.
The ability of a supplier to profitably raise prices above competitive levels and also to hold those prices for a significant period of time is referred as market power. Herfindahl-Hirschman Index (HHI) is used to measure market concentration for a geographic area or a product market. HHI is one of the most common means for measuring market power (H).
The market is regarded as unconcentrated if the HHI values are below 1000, whereas the market is considered as moderately concentrated if the HHI values are between 1000 and 1800. The market is then said to be highly concentrated if the HHI values are above 1800. [1] The market is assumed to be in the critical range when the HHI values lies between 1800 to 2500. It implies that the market lacks of competition when the HHI values go beyond 2500.