The effect of regulatory scrutiny: Asymmetric cost pass-through in power wholesale and its end

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Non-Technical SummaryThis paper examines the effect of an investigation report by the competition authority on the pass-through of EU emission allowance (EUA) prices to German electricity wholesale prices. Since January 2005, the European Emissions Trading Scheme (EU ETS) has obligated larger greenhouse gas emitters in the EU to measure their emissions and submit a corresponding amount of allowances by the end of each year. As a result, rising electricity prices could be observed in several European countries. For the German electricity wholesale market, Zachmann and von Hirschhausen (2008) found an asymmetric response to the price for emission allowances: The increase of the electricity price in response to increasing prices on the EUA market was more pronounced than the decrease in response to decreasing EUA prices.This paper confirms the result of Zachmann and von Hirschhausen (2008) with different data and a more subtle identification strategy, but also limits the time frame for which the asymmetry can be observed. In March 2006, the German competition authority published a paper in order to prepare for a hearing on emissions trading and electricity price formation with a surprisingly critical assessment of the pass-through of EUA prices to electricity prices. The asymmetric pricing pattern, however, was not detected at the time of the report, nor had it been part of the investigations. Nevertheless, our results suggest that the asymmetric pricing pattern disappeared by the time the report was published. By means of the chosen methodology, we can exclude other major events, such as the sharp fall of EUA prices in April 2006, as driving factors for our results. Our findings therefore evidence the deterring effect of regulatory oversight on firms, exhibiting non-competitive pricing behavior on concentrated markets. For recent years, we cannot find any asymmetric pass-through of EUA prices. Several robustness checks support our results. Das Wichtigste in Kürze AbstractWe find an asymmetric pass-through of European Emission Allowance (EUA) prices to wholesale electricity prices in Germany and show that this asymmetry has disappeared in response to a report on investigations by the competition authority. The asymmetric pricing pattern, however, was not detected at the time of the report, nor had it been part of the investigations. Our results therefore provide evidence of the deterring effect of regulatory monitoring on firms which exhibit non-competitive pricin...

Opportunity Cost Pass‐Through from Fossil Fuel Market Prices to Procurement Costs of the U.S. Power Producers

“… For analyses in the electricity market, Zachmann and Von Hirschhausen [] first raised the puzzle of an asymmetric pass‐through from the European Union's CO 2 emission prices to wholesale electricity prices. Mokinski and Wölfing [] document empirical evidence of asymmetric adjustment of wholesale electricity prices in response to CO 2 emission prices. …”

Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms’ competitiveness? Empirical findings from the literature

“…On top of this, the electricity sector may benefit from an asymmetric cost pass-through according to which price increases are passed on to consumers while price decreases may not (Mokinski & Wölfing, 2014; Oberndorfer, Alexeeva-Talebi, & Löschel, 2010; Zachmann & Von Hirschhausen, 2008). Thus, electricity producers may largely benefit from increased prices.…”

Why Does Emissions Trading Under the EU Ets Not Affect Firms' Competitiveness? Empirical Findings from the Literature

“…The electricity sector is found to not only pass-through opportunity costs, but it may on top benefit from an asymmetric cost pass-through according to which price increases are passed on to consumers while price decreases may not (Zachmann and von Hirschhausen, 2008;Oberndorfer et al, 2010;Mokinski, Wölfing, 2014). Thus, producers may largely benefit from increased prices.…”