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Two-settlement Systems for Electricity Markets under Network Uncertainty and Market Power

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  • Rajnish Kamat

    ()

  • Shmuel Oren

    ()

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    Abstract

    We analyze welfare and distributional properties of a two-settlement system consisting of a spot market over a two-node network and a single energy forward contract. We formulate and analyze several models which simulate joint dispatch of energy and transmission resources coordinated by a system operator. The spot market is subject to network uncertainty, which we model as a random capacity derating of an important transmission line. Using a duopoly model, we show that even for small probabilities of congestion (derating), forward trading may be substantially reduced, and the market power mitigating effect of forward markets (as shown in Allaz and Vila 1993) may be nullified to a great extent. There is a spot transmission charge reflecting transportation costs from location of generation to a designated hub whose price is the underlying for the forward contract. This alleviates some of the incentive problems associated with the forward market in which spot-market trading is residual. We find that the reduction in forward trading is due to the segregation of the markets in the constrained state, and the absence of natural incentives for generators to commit to more aggressive behavior in the spot market (the “strategic substitutes” effect). In our analysis, we find that the standard assumption of “no-arbitrage” across forward and spot markets leads to very little contract coverage, even for the case with no congestion. We present an alternative view of the market where limited intertemporal arbitrage enables temporal price discrimination by competing duopolists. In this framework, we assume that all of the demand shows up in the forward market (or that the market is cleared against an accurate forecast of the demand), and the forward price is determined using a “market clearing” condition. Copyright Kluwer Academic Publishers 2004

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    Bibliographic Info

    Article provided by Springer in its journal Journal of Regulatory Economics.

    Volume (Year): 25 (2004)
    Issue (Month): 1 (January)
    Pages: 5-37

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    Handle: RePEc:kap:regeco:v:25:y:2004:i:1:p:5-37

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    Web page: http://www.springerlink.com/link.asp?id=100298

    Related research

    Keywords: electric power industry; restructuring; market power; forward markets; spot markets; electric power transmission; network congestion;

    References

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    Citations

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    Cited by:
    1. Federico Boffa & Viswanath Pingali & Davide Vannoni, 2009. "Increasing Market Interconnection: An analysis of the Italian Electricity Spot Market," Working papers 4, Former Department of Economics and Public Finance "G. Prato", University of Torino.
    2. Silvester Van Koten & Andreas Ortmann, 2011. "Structural versus Behavioral Remedies in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns," CERGE-EI Working Papers wp437, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
    3. Le Coq, Chloe & Orzen, Henrik, 2006. "Do forward markets enhance competition?: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 415-431, November.
    4. Haikel Khalfallah & Vincent Rious, 2013. "A game theoretical analysis of the design options of the real-time electricity market," Post-Print halshs-00816355, HAL.
    5. Miguel Vazquez & Michelle Hallac, 2014. "Analysis Of The Strategic Use Of Forward Contracting In Electricity Markets," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 129, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    6. MURPHY, Frederic & SMEERS, Yves, 2005. "Forward markets may not decrease market power when capacities are endogenous," CORE Discussion Papers 2005028, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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