Empirical investigation and modelling of market power in the Hungarian electricity market

In this project, we empirically examined vertical and horizontal competition in the Hungarian electricity market. We built an econometric and an applied game theory model that can be used to predict the pricing behaviour of producers with market power.

• Econometric (e.g. vector autoregressive) methods for empirical research. Use of the monthly database of the Hungarian Energy and Utilities Regulatory Authority on electricity industry companies.
• Cournot framework for forecasting. On the one hand, we have integrated a database from several sources (MEKH, MAVIR, OMSZ, etc.), which contains all the data for 2019 that directly affect the electricity market, as well as the energy mix expected for 2030 based on the NECP. On the other hand, we have built a Cournot model, which takes into account, among other things, Hungarian companies, weather conditions, technical constraints, cross-border capacities, tariff subsidies, etc. We examined how the ownership concentration of the large amount of subsidized renewable capacity to be installed affects prices and quantities produced. The model simulates hourly volumes and price data in a Cournot equilibrium model.

Empirical research was motivated by the specialties of the liberalization of the Hungarian electricity market (for example, Overhead Reduction). The modelling tasks have been driven by the Government’s decarbonisation plans, which could significantly transform the energy mix in the next decade.

We address market power in the electricity market in three areas. On the one hand, we develop and implement new methods for the empirical study of the phenomenon (e.g., the asymmetric price transmission method). On the other hand, we use existing methods (e.g., vector autoregressive analysis, see Follow-up work) to assess the impact of specific policy interventions on ownership. Finally, in the Cournot framework, we predict future price effects of market power.

Asymmetric price transmission in the Hungarian retail electricity market:

• The research compared the market power of Hungarian electricity traders during the partially liberalised transitional market model from 2004 to 2008 and the fully liberalised period lasting since 2008. The research has found that different regulation regimes lead to different patterns of asymmetry in price transmission and the results underline that the market position of electricity traders have improved since the introduction of the liberalised market model.

Potential effects of market power in Hungarian solar boom:

• The Hungarian Government intends to increase[1] the photovoltaic capacities installed in the country sixfold between 2020 and 2030. New investment is encouraged by a floating premium support system in which producers sell electricity on the market and can thus have a direct impact on prices. The results show that if prices are above premium levels, operators may reduce their production and thus increase prices as market concentration increases. This phenomenon could dampen the expected price reduction despite the increasing penetration of zero marginal cost solar capacities and threaten the country’s renewable production commitments for 2030.

For the time being, we have examined the Hungarian market with our models, but the experiences can also be useful for international players. On the one hand, because the peculiarities of Hungarian policy are instructive from the point of view of regulating another country. On the other hand, because the models can be easily implemented / extended to other markets.

In our article currently under review, we examined how the Overhead Reduction Program has affected the margins of universal service providers (USPs) and traders. The article concludes that USPs under the residential price cap regime were not able to affect traders’ margins thus horizontal profit reallocation could not be identified.  This suggests that the public intervention which was intended to focus on universal service and residential consumers, did not have an indirect horizontal effect on market dynamics based on the results.

Published articles:

• Tamás Szőke, Olivér Hortay, and Eszter Balogh. “Asymmetric Price Transmission in the Hungarian Retail Electricity Market.” Energy Policy 133 (October 2019): 110879. doi:10.1016/j.enpol.2019.110879.
• Olivér Hortay and Attila A. Víg. “Potential Effects of Market Power in Hungarian Solar Boom.” Energy 213 (December 2020): 118857. doi:10.1016/j.energy.2020.118857.

Article under review:

• Tamás Szőke, Olivér Hortay and Richárd Farkas. “Price regulation and supplier margins in the Hungarian electricity market.” Energy Economics.

[1] Ministry of Innovation and Technology 2020. National Energy Strategy 2030. Budapest.