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How to allocate forward contracts: The case of electricity markets

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  • de Frutos, María-Ángeles
  • Fabra, Natalia

Abstract

Several regulatory authorities worldwide have imposed forward contract commitments on electricity producers as a way to mitigate their market power. In this paper we analyze the impact of such commitments on equilibrium outcomes in a model that reflects important institutional and structural features of electricity markets. We show that, when firms are asymmetric, the distribution of contracts among firms matters. In the case of a single dominant firm, the regulator can be confident that allocating contracts to that firm will be pro-competitive. However, when asymmetries are less extreme, certain contract allocations might yield anti-competitive outcomes by eliminating more competitive equilibria. Our analysis thus suggests that forward contracts should be allocated so as to (virtually) reduce asymmetries across firms.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:eecrev:v:56:y:2012:i:3:p:451-469
    DOI: 10.1016/j.euroecorev.2011.11.005
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    More about this item

    Keywords

    Forward contracts; Discrete supply functions; Electricity markets; Antitrust remedies; Simulations;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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