Ignacia Mercadal (11/16/16)

ignaciamercadalIgnacia Mercadal

Columbia University

“Dynamic competition and arbitrage in electricity markets: The role of financial players”

Abstract: I study the role of purely financial trading in wholesale electricity markets, where financial transactions take place alongside sales and purchases by physical participants, which are mostly utilities and generators. I focus on the Midwest electricity market, where a  regulatory change that exogenously attracted more financial bidders in 2011 acts as a natural experiment. Using a rich dataset on individual behavior, I examine how both physical and financial participants responded, and find that  financial trading decreases generators market power, but does not fully eliminate it. As a consequence, consumers are better off but productive efficiency might go down. I develop a test of the hypothesis of static Nash equilibrium, which is required for the validity of standard policy evaluation and structural IO tools. In order to implement the test, I present a new method to study the competitive structure of electricity markets using machine learning tools to define markets. I reject the null of static Nash in favor of dynamic competition.