On Strategic Behavior in Electricity Markets during the 2022 Energy Crisis: An Ex-post Analysis for the German Power Sector

Abstract

During the 2022 energy crisis, electricity prices across Europe have risen to unprecedented heights. In a case study for Germany, this work investigates to which extent price spikes can be attributed to changes in upstream commodity prices, and to which degree strategic behavior by generators may have contributed to the situation. Electricity markets are more prone to the effects of such behavior if the supply curve is either steeply sloped, or has large discontinuous steps. This situation has manifested in 2022 due to an increase in both hard coal and natural gas prices. We compare outcomes of a perfectly competitive market simulation for the German electricity market to a Nash–Cournot-model, where players have an incentive to withhold capacity. Results indicate that the effects of strategic behavior are relevant, but limited under moderately increased upstream commodity prices. However, we find that this changes under extreme fuel price configurations as observed during the summer of 2022. Here, we find that the exertion of market power by generating firms may have significantly contributed to the observed electricity prices.