Potential effects of market power in Hungarian solar boom

Abstract

The Hungarian Government intends to increase 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. This article simulates hourly volumes and price data in a Cournot equilibrium model, taking into account the technical and economic characteristics of electricity producers. The model was calibrated with Hungarian data from 2019 and then a theoretical year of 2030 was simulated at different market concentrations. 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. Below the premium level, the effect of market power does not prevail, and prices can nose-dive. In this case, renewable production targets are achieved, but the state’s premium subsidy payments are significantly increased. Sensitivity analysis shows that the amount of new photovoltaic capacities and increased electricity demand both increase the effects of market power.