Application of a conjectural variations model to analyze the competitive behavior in the Iberian electricity market

Electricity market prices can be influenced by many drivers, such as fuel costs, CO₂ emission prices, hydro and other renewable production and strategic behavior of firms that participate in the market. One of the aims of the liberalization process of the electricity industry was to bring electricity prices more in line with costs. Therefore, the influence that the strategic behavior of firms might have in market prices is a concern. This paper analyzes the strategic behavior of three medium size firms acting in the Iberian electricity market (IBELM) in the first year after its implementation, that is, from July 2007 to June 2008. This strategic behavior is analyzed by computing an hourly competitive parameter which is obtained from a conjectural variation model. Then the evolution of the monthly average of this conjectural variation parameter is studied. Results showed that some of the analyzed firms did not reflect in market prices the increase in fuel costs and in CO₂ emission prices that occurred in the first six months of 2008.