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Vertical Structure and Forward Contract in Electricity Market

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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' proffts could give rise to generators exercising market power in electricity spot market.

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Bibliographic Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-117.

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Length: 28 pages
Date of creation: 25 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-117

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  1. Powell, Andrew, 1993. "Trading Forward in an Imperfect Market: The Case of Electricity in Britain," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 103(417), pages 444-53, March.
  2. Frank A. Wolak, 2007. "Quantifying the supply-side benefits from forward contracting in wholesale electricity markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 22(7), pages 1179-1209.
  3. Littlechild Stephen C., 2002. "Competition in Retail Electricity Supply," Journal des Economistes et des Etudes Humaines, De Gruyter, De Gruyter, vol. 12(2), pages 1-26, June.
  4. Green, Richard & Newbery, David M G, 1991. "Competition in the British Electricity Spot Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 557, C.E.P.R. Discussion Papers.
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Cited by:
  1. Mohamed El Hedi Arouri & Adel Ben Youssef & Hatem M’Henni & Christophe Rault, 2014. "Energy Use and Economic Growth in Africa: A Panel Granger-Causality Investigation," Working Papers, Department of Research, Ipag Business School 2014-481, Department of Research, Ipag Business School.
  2. Jamal BOUOIYOUR & Refk SELMI & Muhammad SHAHBAZ, 2014. "The Electricity Consumption in a Rentier State: Do Institutions Matter?," Working Papers 2013-2014_12, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Apr 2014.
  3. Besma Talbi & Duc Khuong Nguyen, 2014. "An empirical analysis of energy demand in Tunisia," Working Papers, Department of Research, Ipag Business School 2014-495, Department of Research, Ipag Business School.
  4. Muhammad Shahbaz & Rashid Sbia & Helmi Hamdi & Ijaz Ur Rehman, 2014. "The Role of Information Communication Technologyand Economic Growth in Recent Electricity Demand: Fresh Evidence from Combine Cointegration Approachin UAE," Working Papers, Department of Research, Ipag Business School 2014-523, Department of Research, Ipag Business School.
  5. Zied Ftiti & Aviral Tiwari & Amél Belanès & Khaled Guesmi, 2014. "Tests of Financial Market Contagion: Evolutionary Cospectral Analysis V.S. Wavelet Analysis," Working Papers, Department of Research, Ipag Business School 2014-577, Department of Research, Ipag Business School.
  6. Atil, Ahmed & Lahiani, Amine & Nguyen, Duc Khuong, 2014. "Asymmetric and nonlinear pass-through of crude oil prices to gasoline and natural gas prices," Energy Policy, Elsevier, Elsevier, vol. 65(C), pages 567-573.
  7. Omri, Anis & Nguyen, Duc Khuong, 2014. "On the determinants of renewable energy consumption: International evidence," Energy, Elsevier, Elsevier, vol. 72(C), pages 554-560.
  8. Walid Chkili & Chaker Aloui & Duc Khuong Nguyen, 2014. "Instabilities in the relationships and hedging strategies between crude oil and US stock markets: do long memory and asymmetry matter?," Working Papers, Department of Research, Ipag Business School 2014-549, Department of Research, Ipag Business School.
  9. Lanouar Charfeddine & Rafik Jbir & Jihane Karboul, 2014. "Price convergence and integration in the Germany, France and Italy electricity markets," Working Papers, Department of Research, Ipag Business School 2014-502, Department of Research, Ipag Business School.
  10. Suleiman, Sa’ad & Muhammad, Shahbaz, 2012. "Price and Income Elasticities of Demand for Oil Products in African Member Countries of OPEC: A Cointegration Analysis," MPRA Paper 37390, University Library of Munich, Germany, revised 28 Feb 2012.
  11. Sofiane Aboura & Julien Chevallier, 2014. "Cross-Market Spillovers with Volatility Surprise," Working Papers, Department of Research, Ipag Business School 2014-469, Department of Research, Ipag Business School.
  12. Ihtisham Abdul Malik & Ghamz-e-Ali Siyal & Alias Bin Abdullah & Arif Alam & Khalid Zaman, 2014. "Turn on the Lights: Macroeconomic Factors Affecting Renewable in Pakistan," Working Papers, Department of Research, Ipag Business School 2014-518, Department of Research, Ipag Business School.

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