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Trading Forward in an Imperfect Market: The Case of Electricity in Britain

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Author Info
Powell, Andrew

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Abstract

The thrust of government policy in the British electricity industry has been to create a competitive and transparen t commodity market. To this end there has been a separation of supply from distribution and an independent company operates a transparent spot market, known as the pool. However, there is also a set of futu res and options-style contracts which lie over the pool that are not transparent. This paper considers the effects of the contract market on the pool. The model is an application of the theory of futures-style trading when the spot market is imperfect. However, the model is somewhat non-standard as there is no secondary trading in the contra cts and the generators may capture rents in the contract market. The results suggest several externalities due to the strategic use of th ese contracts by both the generators and the RECs which may limit the number of contracts traded. It is argued that the Office for Electricity Regulation (Offer) should intervene to help the creation of a transparent and standardized contract market. This may ensure the success of the contract market, ease entry to generation and foster competition. Copyright 1993 by Royal Economic Society.

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Publisher Info
Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 103 (1993)
Issue (Month): 417 (March)
Pages: 444-53
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Handle: RePEc:ecj:econjl:v:103:y:1993:i:417:p:444-53

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  1. Soledad Arellano, 2004. "Reformando el sector eléctrico chileno: Diga NO a la liberalización del mercado spot (Reforming the Chilean electricity sector: Just say NO to the Liberation of the spot market)," Documentos de Trabajo 197, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
  2. Sandro Sapio, 2008. "Volatility-price relationships in power exchanges: A demand-supply analysis," LEM Papers Series 2008/07, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy. [Downloadable!]
  3. Valeria Termini & Laura Cavallo, 2007. "“Spot, Bilateral and Futures Trading in Electricity Markets. Implications for Stability”," Working Papers 2007.19, Fondazione Eni Enrico Mattei. [Downloadable!]
  4. Melisso Boschi & Luca Pieroni, 2008. "Aluminium market and the macroeconomy," Quaderni del Dipartimento di Economia, Finanza e Statistica 9602, Università di Perugia, Dipartimento Economia, Finanza e Statistica. [Downloadable!]
  5. Aitor Ciarreta & Carlos Gutierrez-Hita, 2005. "Strategic Behavior and Collusion: An Application to the Spanish Electricity Market," DFAEII Working Papers 200502, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
  6. Termini Valeria & Cavallo Laura, 2003. "Electricity Derivatives and the Spot Market in Italy. Mitigating Market Power in the Electricity Market," Departmental Working Papers 190, Tor Vergata University, CEIS. [Downloadable!]
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