Market Power in a Hydro-Dominated Wholesale Electricity Market

Concerns about market power have led to regulatory constraints on the price-setting process in nearly all wholesale electricity markets around the world. We study the conditions that led to the exercise of market power in the Colombian wholesale electricity market between 2008 and 2016, focusing on the two most recent occurrences of the climatic phenomenon known as El Niño. During the 2015-16 event, the mean wholesale price was more than three times higher than in 2009-10, even though water levels, fuel prices, and the market structure were relatively unchanged. We show that the higher prices in 2015-16 can be attributed to a large increase in the ability of generation unit owners to exercise market power, resulting from a narrower gap between system demand and available system capacity.