Competitive effects of transmission constraints in the German electricity market

2026-07-01

AI Summary

This study investigates how cross-border transmission constraints exacerbate the exercise of market power in Germany’s wholesale electricity market. Leveraging data from gas- and coal-fired generation units between 2022 and 2024, the authors employ a two-stage residual inclusion (2SRI) instrumental variable approach, using regional net position limits as a proxy for transmission congestion severity. Strategic generator behavior—such as capacity withholding and price suppression—is identified by deviations between actual dispatch and competitive benchmarks. The analysis provides the first empirical evidence that, under binding transmission constraints, each 1 GW reduction in available import or export margin significantly increases the likelihood of suspected capacity withholding and price suppression by 15% and 16%, respectively. These findings offer quantitative support for enhancing cross-border grid interconnectivity to improve market efficiency and fairness.

Abstract

This paper estimates the effect of cross-border transmission constraints on suspected market power abuse in the German wholesale electricity market. Using a 2SRI instrumental variables approach, we study suspected strategic behavior by German gas- and coal-fired power plants in 2022-2024. Cross-border transmission constraints are measured using the maximum and minimum bounds of zonal net position, while suspected market power abuse is measured as the upward or downward deviation of observed dispatch from a modeled competitive benchmark. We find that transmission constraints significantly elevate the likelihood of suspected market power abuse. When headroom for further imports is already scarce, reducing import headroom by one Gigawatt (GW) increases the odds of suspected capacity withholding by 15%. Similarly, reducing export headroom by one GW when it is scarce increases the odds of suspected capacity push-in, a strategy to depress prices, by 16%. These results provide empirical support for interconnection expansion as an instrument to mitigate market power.

Problem

• transmission constraints
• market power abuse
• electricity market
• capacity withholding
• cross-border trade

Innovation

• transmission constraints
• market power abuse
• 2SRI instrumental variables
• capacity withholding
• zonal net position