Virtual Power Plant Auctions in the Western Denmark Electricity Market: An Econometric Analysis

Abstract

In July 2006, two of Denmark’s largest energy companies, Elsam A/S and DONG A/S, merged to form DONG Energy A/S. In the years directly leading up to this merger, Elsam had been accused of abusing its dominant position in the Western Danish spot market for wholesale electricity (DK1) by charging unreasonably high power prices. In light of this, and in an effort to prevent any anticompetitive effects that could result from the merger, the Danish Competition and Consumer Authority (DCA) required DONG Energy both to physically divest several power plants in DK1 and to sell off electric power production capacity through Virtual Power Plant (VPP) auctions. Although VPP auctions have been widely implemented in European power markets, there has been some debate over whether they effectively reduce market power; even the DCA expressed doubts about their effectiveness in DK1 shortly after the merger. This paper explores the impact of the physical and virtual divestitures on competition in DK1 by using time series Ordinary Least Squares (OLS) and generalized autoregressive conditional heteroskedasticity (GARCH) model specifications to determine whether the price spread between DK1 and the competitive Swedish power market changed when these divestitures were implemented. After controlling for price determinants of electricity in DK1, the results of this analysis suggest that neither the VPP auctions nor the physical divestitures appear to have coincided with any significant procompetitive effects in DK1, thus confirming the suspicions of the DCA. The general implication that follows is that neither physical divestitures nor VPP Auctions are guaranteed to reduce market power in electricity markets even if they decrease concentration.