Pass-through of wholesale price to the end user retail price in the Norwegian electricity market

In this paper we estimate the pass-through of wholesale electricity price to the end consumer price with variable price contracts in the Norwegian electricity market using weekly data. We find substantial asymmetry when retailers pass on the impact of price changes in the wholesale market to the retail prices as price increases are transmitted more quickly than price decreases. By examining the cumulative adjustment function of price change, we identify that some dominant retailers might be exercising market power in the retail electricity market. For an average Norwegian household with variable price contract, the cost of asymmetric price pass-through due to 2.5 Ore/kWh change in the wholesale price over the complete life of pass-through in a year reaches to a high of 2.28 NOK. This cost sums up to 3.8 million NOK for all the Norwegian households on variable price contracts for one time price change. To deal with this asymmetric price setting behavior, end consumers should switch to spot price contracts and make use of smart grid technologies. (C) 2012 Elsevier B.V. All rights reserved.