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Strategic Forward Contracting in the Wholesale Electricity Market

Pär Holmberg

Year: 2011
Volume: Volume 32
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No1-7
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Abstract:
This paper analyses a wholesale electricity market with supply function competition. Trade in the forward and spot markets is represented by a two-stage game, and its subgame perfect Nash equilibrium (SPNE) is characterized. It is verified that increased forward sales of a producer constitute a credible commitment to aggressive spot market bidding. The paper identifies market situations when this pro-competitive commitment is unilaterally profitable for the producer. It is also proven that a producer has incentives to sell in the forward market in order to reduce competitors' forward sales, which softens their spot market offers.





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