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Strategic Forward Contracting in the Wholesale Electricity Market

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  • P�r Holmberg

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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Bibliographic Info

Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 32 (2011)
Issue (Month): Number 1 ()
Pages: 169-202

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Handle: RePEc:aen:journl:2011v32-01-a07

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Cited by:
  1. Holmberg, Pär & Willems, Bert, 2012. "Relaxing Competition through Speculation: Committing to a Negative Supply Slope," Working Paper Series, Research Institute of Industrial Economics 937, Research Institute of Industrial Economics.
  2. de Frutos, María-Ángeles & Fabra, Natalia, 2012. "How to allocate forward contracts: The case of electricity markets," European Economic Review, Elsevier, vol. 56(3), pages 451-469.
  3. Henze, B. & Noussair, C.N. & Willems, Bert, 2011. "Regulation of Network Infrastructure Investments: An Experimental Evaluation," Discussion Paper, Tilburg University, Center for Economic Research 2011-035, Tilburg University, Center for Economic Research.
  4. Tangerås, Thomas P. & Mauritzen, Johannes, 2014. "Real-time versus day-ahead market power in a hydro-based electricity market," Discussion Papers 2014/6, Department of Business and Management Science, Norwegian School of Economics.

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