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Vertical Structure and Forward Contract in Electricity Markets

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  • Yuanjing LI

Abstract

The pro-competitive effects of forward contracts in electricity market can- not be regarded alone without examining the market structure. In this paper, we show that under retail competition, spot market demand uncertainty and risk aversion, partially or fully integrated electricity generators and retailers have less incentives to be involved in trading electricity under forward con- tracts. Therefore, the effect of market power mitigation of forward contracts is countered by this vertical relationship between retailers and generators since it provides a natural hedging device as a substitute of forward contracts to the retailers. Both analytic framework and numerical simulation suggest that the optimal quantity of forward sales decreases and spot price increases with the degree of vertical control of retailers over generators' assets. We thus conclude that the retailers' ownership over generators' profits could give rise to generators exercising market power in electricity spot market.

Suggested Citation

  • Yuanjing LI, 2013. "Vertical Structure and Forward Contract in Electricity Markets," Working Papers 2013-18, Department of Research, Ipag Business School.
    • Handle: RePEc:ipg:wpaper:2013-18
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    References listed on IDEAS

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    1. James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2008. "Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets," American Economic Review, American Economic Association, vol. 98(1), pages 237-266, March.
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