Futures power markets and market power's future

The liberalisation process of the electricity sector has involved a radical change in the market structure from a centrally controlled system to a decentralised system with new markets, power pools, and financial markets. At the same time several research studies have claimed that few oligopolists will obtain market power at the new power markets. Market power in the liberalised power markets has often been discussed as one of the main market imperfections counter-acting the purpose of the liberalisation and implying high power prices due to an oligopolistic market structure on the production side. This paper discusses the design of futures markets and the interaction with strategic behaviour of oligopolist producers in the physical power market. We will argue that the existence of a futures market may promote competition and imply greater industry output and prices closer to marginal costs. In other words, futures markets seem to eliminate market power in the power markets - but it depends on the design of the futures markets.