The Effect of Regulatory Scrutiny Asymmetric Cost Pass-through in Power Wholesale and its End

This paper examines the effect of an investigation report by the competition authority on the pass-through of EU emission allowance (EUA) prices to German electricity wholesale prices.

Since January 2005, the European Emissions Trading Scheme (EU ETS) has obligated larger greenhouse gas emitters in the EU to measure their emissions and submit a corresponding amount of allowances by the end of each year. As a result, rising electricity prices could be observed in several European countries. For the German electricity wholesale market, Zachmann and von Hirschhausen (2008) found an asymmetric response to the price for emission allowances: The increase of the electricity price in response to increasing prices on the EUA market was more pronounced than the decrease in response to decreasing EUA prices.

This paper confirms the result of Zachmann and von Hirschhausen (2008) with different data and a more subtle identification strategy, but also limits the time frame for which the asymmetry can be observed. In March 2006, the German competition authority published a paper in order to prepare for a hearing on emissions trading and electricity price formation with a surprisingly critical assessment of the pass-through of EUA prices to electricity prices. The asymmetric pricing pattern, however, was not detected at the time of the report, nor had it been part of the investigations. Nevertheless, our results suggest that the asymmetric pricing pattern disappeared by the time the report was published. By means of the chosen methodology, we can exclude other major events, such as the sharp fall of EUA prices in April 2006, as driving factors for our results. Our findings therefore evidence the deterring effect of regulatory oversight on firms, exhibiting non-competitive pricing behavior on concentrated markets. For recent years, we cannot find any asymmetric pass-through of EUA prices. Several robustness checks support our results.

Mokinski, Frieder and Nikolas Wölfing (2013), The Effect of Regulatory Scrutiny Asymmetric Cost Pass-through in Power Wholesale and its End, ZEW Discussion Paper No. 13-055, Mannheim.