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Supply Flexibility and risk transfer in electricity markets

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  • Crampes, Claude
  • Renault, Jérôme

Abstract

The producers of electricity using dispatchable plants rely on partially flexible technologies to match the variability of both production from renewables and final demand. We analyse upward and downward flexibility in a two-stage decision process where firms compete at low cost in quantities planned before knowing the demand function and adjust the output at high cost when the true state of demand is revealed. We first compute the first best and competitive outcomes. Then we consider the outcome of imperfect competition. We begin with an analysis of the monopoly case, then we determine the duopoly subgame perfect equilibria corresponding to two market designs: one where all trade occurs in an intra-day market with known demand, the other where a dayahead market with random demand is added to the intra-day market. We show that being inflexible can be more profitable than being flexible. We also show that adding a day-ahead market to the intra-day market increases welfare but transfers risks from firms to consumers. The transfer is all the more important as technologies are not very flexible.

Suggested Citation

  • Crampes, Claude & Renault, Jérôme, 2022. "Supply Flexibility and risk transfer in electricity markets," TSE Working Papers 22-1350, Toulouse School of Economics (TSE), revised Sep 2023.
    • Handle: RePEc:tse:wpaper:127219
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    References listed on IDEAS

    as
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    2. Crampes, Claude & Renault, Jérôme, 2019. "How many markets for wholesale electricity when supply ispartially flexible?," Energy Economics, Elsevier, vol. 81(C), pages 465-478.
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    4. Koichiro Ito & Mar Reguant, 2016. "Sequential Markets, Market Power, and Arbitrage," American Economic Review, American Economic Association, vol. 106(7), pages 1921-1957, July.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    flexibility; electricity; market design; intra-day market; day-ahead market; risk transfer;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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