Market power in the German wholesale electricity market

Since 2001, wholesale electricity prices have increased dramatically in Europe and especially in Germany. It has been argued that utilities have been exercising market power by withholding available power plant capacity. In this paper we investigate the exercise of market power in the German wholesale electricity market with an agent-based simulation model that uses detailed German wholesale power market data. The analysis was carried out for the years 2001, 2004, 2005 and 2006. We start with 2001 as it is seen as a year with well-functioning competition that validates this model. The year 2004 was chosen because it was the last year without emissions trading. In 2005 the EU emissions trading scheme started; this was accompanied by rising prices and "windfall profits" for electricity generating companies; 2006 was chosen because it supposedly suffered from "bad competition". We test our results with the Lerner Index, but find that they do not necessarily confirm the exertion of market power.