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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.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 3 ()
Pages: 451-469

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:3:p:451-469

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Forward contracts; Discrete supply functions; Electricity markets; Antitrust remedies; Simulations;

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References

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Citations

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Cited by:
  1. Serra, Pablo, 2013. "Contract market power and its impact on the efficiency of the electricity sector," Energy Policy, Elsevier, vol. 61(C), pages 653-662.
  2. Holmberg, P. & Willems, B., 2012. "Relaxing competition through speculation: Committing to a negative supply slope," Cambridge Working Papers in Economics 1252, Faculty of Economics, University of Cambridge.
  3. Grossi, Luigi & Heim, Sven & Waterson, Michael, 2014. "A vision of the European energy future? The impact of the German response to the Fukushima earthquake," The Warwick Economics Research Paper Series (TWERPS) 1047, University of Warwick, Department of Economics.
  4. Federico, Giulio & López, Ángel L., 2013. "Optimal asset divestments with homogeneous products," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 12-25.
  5. Grossi, Luigi & Heim, Sven & Waterson, Michael, 2014. "A vision of the European energy future? The impact of the German response to the Fukushima earthquake," ZEW Discussion Papers 14-051, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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