Hedging and Vertical Integration in Electricity Markets
AbstractThis paper analyzes the interactions between competitive (wholesale) spot, retail, and forward markets and vertical integration in electricity markets. We develop an equilibrium model with producers, retailers, and traders to study and quantify the impact of forward markets and vertical integration on prices, risk premia and retail market shares. We point out that forward hedging and vertical integration are two separate mechanisms for demand and spot price risk diversification that both reduce the retail price and increase retail market shares. We show that they differ in their impact on prices and firms' utility due to the asymmetry between production and retail segments. Vertical integration restores the symmetry between producers' and retailers' exposure to demand risk while linear forward contracts do not. Vertical integration is superior to forward hedging when retailers are highly risk averse. We illustrate our analysis with data from the French electricity market.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8313.
Date of creation: Apr 2011
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
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.:
- Nils-Henrik M. Von Der Fehr & Petter Vegard Hansen, 2009.
"Electricity Retailing in Norway,"
RSCAS Working Papers
2009/04, European University Institute.
- Nils-Henrik M. Von Der Fehr & Petter Vegard Hansen, 2009. "Electricity Retailing in Norway," EUI-RSCAS Working Papers 4, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
- von der Fehr, Nils-Henrik M. & Hansen, Petter Vegard, 2008. "Electricity Retailing in Norway," Memorandum 02/2009, Oslo University, Department of Economics.
- Mansur, Erin T, 2007. "Upstream Competition and Vertical Integration in Electricity Markets," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 125-56, February.
- G. Chemla, 1999.
"Downstream competition, foreclosure, and vertical integration,"
THEMA Working Papers
99-18, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- Chemla, G., 1999. "Downstream Competition, Foreclosure, and Vertical Integration," Papers 99-18, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
- Emons, W., 1990.
"Good times, bad times, and vertical upstream integration,"
1990-23, Tilburg University, Center for Economic Research.
- Emons, Winand, 1996. "Good times, bad times, and vertical upstream integration," International Journal of Industrial Organization, Elsevier, vol. 14(4), pages 465-484, June.
- Winand Emons, 1993. "Good Times, Bad Times, and Vertical Upstream Integration," Diskussionsschriften dp9308, Universitaet Bern, Departement Volkswirtschaft.
- Emons, W., 1990. "Good Times, Bad Times, And Vertical Upstream Integration," Papers 9023, Tilburg - Center for Economic Research.
- Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249.
- Chemla, Gilles, 2003. "Downstream Competition, Foreclosure, and Vertical Integration," Economics Papers from University Paris Dauphine 123456789/6313, Paris Dauphine University.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716.
- Evens SALIES & Catherine WADDAMS, 2004. "Charges, costs and market power in the deregulated UK electricity retail market," Industrial Organization 0406003, EconWPA.
- Alfred D. Chandler, 1969. "Strategy and Structure: Chapters in the History of the American Industrial Enterprise," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262530090.
- Khalid Sekkat, 2006. "Vertical relationships and the firm in the global economy," ULB Institutional Repository 2013/7312, ULB -- Universite Libre de Bruxelles.
- Füss, Roland & Mahringer, Steffen & Prokopczuk, Marcel, 2013. "Electricity Derivatives Pricing with Forward-Looking Information," Working Papers on Finance 1317, University of St. Gallen, School of Finance.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.