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The impact of generator market power on the electricity hedge market

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  • Hesamzadeh, M.R.
  • Biggar, D.R.
  • Bunn, D.W.
  • Moiseeva, E.

Abstract

The incentive of an electricity generating firm with market power to influence the market price depends strongly on the volume the firm has pre-sold in the forward, or hedge, markets. However, the choice of hedge level may be a strategic decision in itself. In the normal case where participants in the hedge market cannot observe the hedge position of dominant generators, we show that the optimal choice of hedging for a dominant generator facing a linear demand curve is an all-or-nothing decision and there is no equilibrium level of hedging in pure strategies. This outcome may explain an observed lack of hedge market liquidity in wholesale electricity markets where individual generators have substantial market power. We perform the analysis for the monopoly and oligopoly cases and extend it for realistic cost functions and various degrees of competitiveness in the market. These results contribute to the extensive body of research on the price formation and strategic behavior in electricity forward and spot markets, as well as providing implications for transparency initiatives in market design.

Suggested Citation

  • Hesamzadeh, M.R. & Biggar, D.R. & Bunn, D.W. & Moiseeva, E., 2020. "The impact of generator market power on the electricity hedge market," Energy Economics, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:eneeco:v:86:y:2020:i:c:s0140988319304463
    DOI: 10.1016/j.eneco.2019.104649
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    Citations

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    Cited by:

    1. Biggar, Darryl R. & Hesamzadeh, Mohammad Reza, 2022. "An integrated theory of dispatch and hedging in wholesale electric power markets," Energy Economics, Elsevier, vol. 112(C).
    2. Hesamzadeh, Mohammad Reza & Biggar, Darryl R., 2021. "Generalized FTRs for hedging inter-nodal pricing risk," Energy Economics, Elsevier, vol. 94(C).
    3. Bigerna, Simona & Bollino, Carlo Andrea & D'Errico, Maria Chiara & Polinori, Paolo, 2022. "COVID-19 lockdown and market power in the Italian electricity market," Energy Policy, Elsevier, vol. 161(C).
    4. András Szeberényi & Ferenc Bakó, 2023. "Electricity Market Dynamics and Regional Interdependence in the Face of Pandemic Restrictions and the Russian–Ukrainian Conflict," Energies, MDPI, vol. 16(18), pages 1-22, September.

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    More about this item

    Keywords

    Market power; Hedge market; Liquidity;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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