“Spot, Bilateral and Futures Trading in Electricity Markets. Implications for Stability”
AbstractThe design of wholesale electricity markets in the transition towards liberalization presents significant differences from country to country. Some spot markets have imposed the concentration of transactions to ensure market liquidity. Other markets are based on bilateral trading. The debate about the optimal trading mechanism mainly concentrates on how to deal with the trade off between the liquidity of the market and the stability of the system. The solution chosen by some market is a mandatory pool with a regulated market for electricity derivatives, that allows to hedge price volatility and to mitigate market power. This paper investigates whether, in the presence of a futures market, spot and bilateral trading can operate together and what are possible outcomes in terms of liquidity of the spot market and stability of the system. The paper extends existing literature on the role of futures market on the behavior of spot market prices, developing a multi-period model in which electricity consumers can choose whether to trade on the spot market or negotiate bilateral contracts. Results suggest that a spot market with futures contracts and a market for bilateral contracts are not necessarily alternative ways to manage stability problems, but may co-exist with positive and synergic outcomes on price behaviors and market power.
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Bibliographic InfoPaper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2007.19.
Date of creation: Feb 2007
Date of revision:
Derivatives; Electricity; Market power; Hedging;
Find related papers by JEL classification:
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
- Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
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- Powell, Andrew, 1993. "Trading Forward in an Imperfect Market: The Case of Electricity in Britain," Economic Journal, Royal Economic Society, vol. 103(417), pages 444-53, March.
- Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
- David M. Newbery, 2002. "Privatization, Restructuring, and Regulation of Network Utilities," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640481, June.
- Frank 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.
- David M. Newbery, 1995. "Power Markets and Market Power," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 39-66.
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