Trade, renewable energy, and market power in power markets

Energy markets are shifting toward renewable sources and increased integration, but the implications under market power remain underexplored. We analyse a model with a home region relying on storable hydropower—where a dominant firm competes with a fringe—and a foreign region with intermittent wind power and competitive pricing. When trade is possible and wind conditions drive high prices in the first period and low prices in the second, the dominant firm may reallocate production toward the low-price period to raise domestic prices. Under constrained transmission, this behaviour can remove the bottleneck in the low-price period, resulting in de facto integration. Paradoxically, increasing production or transmission capacity may raise domestic prices due to strategic withholding. While market power boosts firm profits, it may also benefit domestic consumers, suggesting that more competition does not always improve welfare. Thus, the policy implication is that market power makes the effects of network integration in the presence of renewable energy and large price fluctuations less clear cut. • A region with hydropower production can have large gains from trade with a region with intermittent production. • Reallocation of production over time in the region with hydropower production can equalize prices across time periods if no market power. • Market power by the hydropower producer may lead to more sales in low price period, eliminating a bottleneck, to have less production and higher prices in high price period. • Market power by the hydropower producer can lead to not only more profits, but it can also in some cases benefit domestic consumers and domestic welfare.