Facebook LinkedIn Twitter
Shop

IAEE Members and subscribers to The Energy Journal: Please log in to access the full text article or receive discounted pricing for this article.

Strategic Forward Contracting in the Wholesale Electricity Market

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.

Purchase ( $25 )

Energy Specializations: Energy Investment and Finance – Public and Private Risks, Risk Management; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
D81 - Criteria for Decision-Making under Risk and Uncertainty
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: supply function equilibrium, forward market, strategic contracting, strategic substitutes, oligopoly, wholesale electricity market

DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No1-7

References: Reference information is available for this article. Join IAEE, log in, or purchase the article to view reference data.


Published in Volume 32, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.