عبور از طریق قیمت عمده فروشی به قیمت نهایی خرده فروشی در بازار برق نروژ

In this paper we estimate the pass-through of wholesale electricity price to the end consumer price with variable price contracts in the Norwegian electricity market using weekly data. We find substantial asymmetry when retailers pass on the impact of price changes in the wholesale market to the retail prices as price increases are transmitted more quickly than price decreases. By examining the cumulative adjustment function of price change, we identify that some dominant retailers might be exercising market power in the retail electricity market. For an average Norwegian household with variable price contract, the cost of asymmetric price pass-through due to 2.5 Øre/kWh change in the wholesale price over the complete life of pass-through in a year reaches to a high of 2.28 NOK. This cost sums up to 3.8 million NOK for all the Norwegian households on variable price contracts for one time price change. To deal with this asymmetric price setting behavior, end consumers should switch to spot price contracts and make use of “smart grid” technologies.

Norway was one of the first European countries to deregulate its electricity market under the Energy Act of 1991. Apart from opening up the market for generation, liberalization of the retail market was probably the most significant development for more efficient utilization of available generation capacity. This regulation changed the face of electricity market from a centralized and vertically integrated structure to a more open and competitive setup. The wholesale spot market with prices being set on hourly basis has become a predominant feature of electricity trade in Norway. This movement towards a deregulated structure however, has been coupled with large fluctuations in the wholesale electricity prices, and sudden spikes constitute a large part in the total variations of spot prices. Contrary to the structural changes at the wholesale generation level, the underlying structure of the retail market in terms of contract types and electricity metering has not changed much. Low volume retail customers are charged on the basis of their estimated load profile rather than the actual consumption, and they do not observe short-run time varying differences prices. This limits their ability to react to price signals.2 These consumers thus cannot influence their expenditures on electricity even by adjusting their short-term intertemporal consumption profile. Only the producers respond to changes in spot price and alter their production decisions accordingly. This stark difference in the way these markets operate raises a number of regulatory concerns. Prices act as signals for an efficient resource allocation. Since most of the end consumers exhibit limited responses to recurrent variations in prices, they tend to “over-consume” in the hours with high prices and “under-consume” in the periods with low prices compared to a real time pricing scheme. This represents an inefficient market outcome as the cost of electricity becomes higher than the necessary because high-cost generators remain in operation for too many hours. The retail prices thus fail to convey scarcity in wholesale market to the retail level. Limited capability of the consumers to respond to price changes also increases the ability of wholesale producers to exercise market power and artificially raise the prices above the marginal cost of production (Borenstein et al., 1999, Johnsen et al., 1999 and Wolfram, 1999). Exercise of market power not only adds to price volatility, but also results in significant wealth transfers from consumers to the suppliers. On the flipside, wholesale/pool electricity prices are inherently volatile and can vary substantially between hours, days and across seasons. A competitive retail market is the link between the wholesale electricity pool and the end consumers to hedge them against sudden price spikes. Effective retail competition creates a natural protection for consumers by developing different price contracts to mitigate price risk for them. In this regard, the structure of the contracts itself is important in determining the strength of relationship between wholesale and retail prices. If retailers directly pass on the price changes in the wholesale market to end users, the retail market is considered to be efficient. As the prices in the household electricity market are not observed in real time by the consumers, it provides an opportunity to the retailers to pass on the impact of price changes asymmetrically to the consumers. This strategy by the retailers, among other factors weakens the link between wholesale and retail markets. There are a number of factors that affect the transmission of wholesale prices to the retail prices including; First, it is costly to make price changes at the retail level as the retailers have to notify their customers in advance to the price change occurs. Retailers weigh the adjustment cost towards the profitability of their price change itself (Ginsburgh and Michel, 1988, Johnsen and Oslon, 2008 and Lago-González and Salas-Fumás, 2005). Balke and Fomby (1997) suggest that the presence of fixed costs of adjustment might prevent economic agents from adjusting prices quickly and frequently. Only when deviation from equilibrium exceeds a critical threshold and the benefits of adjustment exceed the costs, are economic agents going to change prices to move the system back towards equilibrium. Madsen and Yang (1998) demonstrate that the presence of menu costs implies that prices adjust asymmetrically to nominal demand shocks and the net gain from adjusting prices is positively related to price elasticity of demand in the wake of an adverse nominal demand shock. Second, frequent upward price revisions by a retailer might lead to the loss of consumer confidence in the retailer and compel them to search for other suppliers. To keep their customer base intact, retailers may therefore avoid making rapid price changes. Third, several studies argue that prices are sticky downwards and suppliers have more tendency to revise the prices upwards than downwards (Davis and Hamilton, 2004). This is quite intuitive in the sense that cost increases are passed on completely and rapidly to the consumers than retailer cost savings. A number of competing theories have been put forward to explain this asymmetric wholesale-retail price transmission. These include market power, consumer search cost and the behavior of markup during business cycles (Borenstein and Shepard, 2002 and Johnson, 2002). Price stickiness has implications specifically for the inactive segment of consumers in the retail market, and it may be profitable for retailers to keep their margins at the higher level. By staying inactive, a consumer signals indifference or resignation about the retail electricity price. Thus, the suppliers may find it possible to maintain a high price without losing many customers. Competition in the market is one the factors determining the threshold of margins before the supplier starts to lose customers. Keeping in view the above discussion, this paper explores the relationship between wholesale and retail electricity market for Norway from price pass-through perspective. Using weekly data on NordPool system price and the average retail electricity price by different contract types from 2000, week 36 to 2010, week 34, we seek to answer the following questions: 1) What is the magnitude of pass-through of wholesale price on retail price for electricity? 2) Is the wholesale price pass-through symmetric? If asymmetric, what is the extent of asymmetry? 3) If the pass-through is asymmetric, what is the financial cost of asymmetry to the end consumers? 4)What is the total adjustment lag in full transmission of wholesale prices on the retail prices? The rest of the paper is organized as follows. Section 2 gives an overview of related literature for retail electricity market, while Section 3 discusses the developments in Norwegian retail electricity market. In Section 4 we first lay out a theoretical model to reflect how a retailer with market power can control the pass-through of wholesale price to the retail price, and then we explain the empirical methodology followed in this paper. Section 5 provides discussion of results while Section 6 concludes.

In this paper we examine the pass-through of wholesale electricity price to the end consumer price with variable price contracts in the Norwegian electricity market using weekly data. This issue has not received much attention in the research literature on electricity markets. The results indicate that asymmetry exists when retailers pass on the impact of price changes in the wholesale market to the retail prices where price increases are transmitted more quickly than the price decreases. On average, for a one time price change in the wholesale market, it takes almost five weeks for the wholesale price to have complete pass-through to the retail price. By examining the cumulative adjustment function of price change, we find some evidence of market power being exercised by the dominant retailers, who in the wake of price change in the wholesale market, seem to have a fixed linear strategy for the price decrease and a quick transmission for the case of price increase. For a Norwegian household with annual electricity consumption below 20,000 kWh on average variable price contract, the cost of this asymmetric price pass-through is 2.28 NOK for one time 2.5 Øre/kWh increase in the wholesale price. This cost is even higher at 7.25 NOK for the end consumers with 5-dominant retailers with the same change in wholesale price over the complete life of adjustment. This cost can also be considered as the deadweight cost of not observing real time electricity prices because this cost of asymmetry not only takes into account the cost associated with the lag adjustment but also the cost related to asymmetric price pass-through. This asymmetric price adjustment behavior in the market can be explained with the help of presence of positive search costs, diamond paradox, switching costs and the consumer inertia. To deal with this asymmetric price setting behavior, the end consumers can shift from the variable price contracts to spot price contracts. To eliminate the lag in price adjustment, consumers can make use of “smart grid” technologies and observe real time prices. Apart from saving asymmetry cost, exposure of consumers to the real time price will not only reduce their expenditures on electricity but it will also increase the efficiency of wholesale market by reducing the extent of market power being exercised.