Dynamic Competition and Arbitrage in Electricity Markets: The Role of Financial Players

Ignacia Mercadal,

October 2018

I study the role of purely financial players in electricity markets, where they trade alongside physical buyers and sellers. Using detailed individual data, I examine physical and financial firms’ response to regulation that exogenously increased financial trading. I find this reduced generators’ market power and increased consumer surplus. I develop a structural test of static Nash equilibrium, and reject it in favor of dynamic competition consistent with tacit collusion by a group of firms. To implement the test, I present a new method to study the competitive structure of electricity markets using machine learning tools to define markets.