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Contract market power and its impact on the efficiency of the electricity sector

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  • Serra, Pablo

Abstract

This paper analyzes the pro-competitive effects of financial long-term contracts in oligopolistic electricity markets. This is done in a model that incorporates the main features of the industry: non-storable production, time-varying price-elastic demand, and sequential investment and production decisions. The paper considers contracts for difference that have as reference price the average spot price. Assuming that the spot market coordinator sets competitive prices, the paper shows that installed capacity increases with the quantity of energy contracted, reaching the welfare-maximizing capacity when energy contracted equals this same level. Next, the paper studies the case where the quantity of energy contracted is endogenous and contracts are traded before capacity decisions are taken. Regarding purchasers of contracts, two polar cases are considered: either they are price-taker speculators or they are an aggregation of consumers that auctions a long (buy) contract for a given energy quantity. In the former case the strike price equals the reference price, i.e., arbitrage is perfect, and the quantity of energy contracted falls short of the efficient level. In turn, in the latter case, the strike price equals the average efficient spot price. Moreover, an aggregation of all consumers would choose to auction the social optimum quantity.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:enepol:v:61:y:2013:i:c:p:653-662
    DOI: 10.1016/j.enpol.2013.06.058
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    Cited by:

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    2. Daglish, Toby & de Braganca, Gabriel & Owen, Sally & Romano, Teresa, 2015. "Electricity Market Operation: Transitioning from a Free Market to a Single Buyer structure: An econometric analysis of the Brazilian case using a Two-State Markov Switching Model," Working Paper Series 4181, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    3. Locatelli, Giorgio & Mancini, Mauro & Lotti, Giovanni, 2020. "A simple-to-implement real options method for the energy sector," Energy, Elsevier, vol. 197(C).
    4. Heidarizadeh, Mohammad & Ahmadian, Mohammad, 2019. "Capacity certificate mechanism: A step forward toward a market based generation capacity incentive," Energy, Elsevier, vol. 172(C), pages 45-56.
    5. repec:vuw:vuwscr:19257 is not listed on IDEAS

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