Market power and adverse weather events in a market dominated by hydroelectric energy

Abstract

We studied the effect of adverse weather events on retail electricity prices, focusing on the Colombian case given that this market is dominated by hydroelectric energy and exposed to El Niño weather pattern. This condition is associated with a reduction in the country’s hydrological resources. We apply a structural model to understand the formation of retail prices and how these respond to extreme weather events. Our results show that, under normal conditions, retail firms have control over the pass-through of wholesale cost shocks in retail prices. However, we did not find evidence that the pass-through differs when El Niño occurs. Thus, its effect on retail prices runs exclusively through its effect on wholesale costs. Furthermore, we found that retail prices increase in the presence of El Niño due to the increase in spot prices in the wholesale electricity market. However, the increase in retail prices is less than proportional to the increase in spot prices due to the market power of retail firms.