Research
Job Market Paper
Wind Integration and Short-Run Market Power in Wholesale Electricity Markets: Evidence from ERCOT
Abstract
Renewable integration changes the competitive environment in wholesale electricity markets, potentially altering conventional generators' incentives to exercise market power. Using data from the Electric Reliability Council of Texas (ERCOT), this paper examines how wind generation affects market power and welfare. I develop a supply-side model of strategic bidding that distinguishes static market power from dynamic operating considerations. Empirical results show that a 1 GW increase in expected wind generation is associated with a $1.38/MWh reduction in bid markups, approximately 30 percent of the average markup. A model-based decomposition identifies shifts in residual demand as the primary mechanism: increased wind generation reduces conventional generators' residual demand, increasing its local price elasticity and lowering optimal markups. Using the calibrated model, counterfactual simulations show that a 1 GW increase in wind capacity lowers average electricity prices, raising annual consumer surplus by $1.30 billion while reducing aggregate producer surplus by $1.01 billion. Conventional generators lose $1.10 billion in producer surplus, partially offset by an $84 million gain for wind generators from additional generation despite lower prices. Endogenous strategic bidding amplifies the redistribution of surplus between consumers and producers by approximately 10 percent, while static market power limits total welfare gains by 54 percent relative to a benchmark without static market power.