Center for the Study of Energy Markets

Conventional wisdom suggests that competitive wholesale electricity markets are not feasible in most developing countries. However, systematic analyses of the feasibility of wholesale competition in a specific developing country are rare. I model a potential wholesale electricity market in Maharashtra (MH) state, India in a Cournot framework to analyze the circumstances under which it could be competitive. I model the effect of certain characteristics of the MH state electricity sector that create unique opportunities for demand response. I also analyze the effect of publicly owned generation firms on the competitiveness of the market. Further, I model the effect of policies such as the divestiture of large firms and the requirement of long-term contracts. I find that demand response and the presence of publicly owned generation firms substantially increase the competitiveness of a potential wholesale electricity market in MH state. Further, the market would be robustly competitive even in a situation with a supply shortage of up to 5 percent, when opportunities for demand response are combined with policies such as divestiture and requiring long-term contracts. However, in the absence of policies to increase market competitiveness, the MH electricity market would exhibit significant market power. Many of the characteristics of the MH state electricity sector that this analysis shows can increase market competitiveness are common to other states in India and other developing countries. If the effect of these characteristics is taken into account, competitive wholesale electricity markets will be more feasible there than currently anticipated.