Cross-ownership and Market Power in the Nordic Electricity Market

Résumé

It is well established that horizontal cross-ownership may decrease competition. One reason is that cross-ownership enables information- and profit sharing, which increases the prospects for collusion. Another reason is that cross-ownership may induce unilateral incentives to reduce output, which pushes Cournot output levels towards the collusive equilibrium. In this study we examine hourly production levels of the three largest production plants in the Nordic electricity market during 2011-2013, which are nuclear plants located in Sweden. The plants are all subject to partial cross-ownership by two or three of the largest producers in the market. The capacity utilization of Swedish nuclear plants has been relatively low during recent years (around 77% during the time of analysis), which could potentially be explained by involuntary production failures and necessary maintenance. The present study suggests the use of market power as an alternative explanation. Using a simplified theoretical model of semi-collusion in which all production but nuclear is supplied to the market at marginal cost we find that, on average, the observed production levels coincide with the theoretical predictions of semi-collusion. On the contrary, the incentive for the majority shareholder of each plant to unilaterally reduce output is only marginally affected as a result of cross-ownership, keeping the Cournot production levels close to full capacity utilization. The contribution of the present study is twofold: It is the first study to use observed (market level) bidding data to examine the role of market power in the Nordic spot market for electricity. More generally, to the best of the author´s knowledge, it is the first study to empirically distinguish between the Cournot- and the collusive production levels in a setting with cross-ownership of production plants.