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Quantifying the supply-side benefits from forward contracting in wholesale electricity markets

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Author Info
Frank A. Wolak (Department of Economics, Stanford University, Stanford, California, USA)
Abstract

The assumption of expected profit-maximizing bidding behavior in a multi-unit, multi-period auction with step-function supply curves is used to estimate cost functions for electricity generation units and derive tests of expected profit-maximizing behavior. Applying these techniques to data from the National Electricity Market in Australia reveals statistically significant evidence of output-dependent marginal costs within and across half-hours of the day, but no evidence against the hypothesis of expected profit-maximizing behavior. These cost function estimates quantify the economic significance of output-varying costs and how forward financial contract obligations impact the amount of these costs the generation unit owner incurs. This supplier's existing obligations imply average daily production costs that are 8% lower than the profit-maximizing pattern of output with no forward contract obligations. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.989
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File URL: http://qed.econ.queensu.ca:80/jae/2007-v22.7/
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 22 (2007)
Issue (Month): 7 ()
Pages: 1179-1209
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Handle: RePEc:jae:japmet:v:22:y:2007:i:7:p:1179-1209

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Frank A. Wolak, 2000. "An Empirical Analysis Of The Impact Of Hedge Contracts On Bidding Behavior In A Competitive Electricity Market ," International Economic Journal, Korean International Economic Association, vol. 14(2), pages 1-39, June. [Downloadable!] (restricted)
  2. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  3. Horowitz, Joel L, 1992. "A Smoothed Maximum Score Estimator for the Binary Response Model," Econometrica, Econometric Society, vol. 60(3), pages 505-31, May. [Downloadable!] (restricted)
  4. Erin T. Mansur, 2003. "Vertical Integration in Restructured Electricity Markets: Measuring Market Efficiency and Firm Conduct," Yale School of Management Working Papers ysm430, Yale School of Management. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. de Frutos, Maria-Angeles & Fabra, Natalia, 2008. "On the Impact of Forward Contract Obligations in Multi-Unit Auctions," CEPR Discussion Papers 6756, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Le-Yu Chen & Jerzy Szroeter, 2009. "Hypothesis testing of multiple inequalities: the method of constraint chaining," CeMMAP working papers CWP13/09, Centre for Microdata Methods and Practice, Institute for Fiscal Studies. [Downloadable!]
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