Strategic Forward Contracting in the Wholesale Electricity Market
This paper analyses a wholesale electricity market with supply function competition. Trade in the forward and spot markets is represented by a two-stage game, and its subgame perfect Nash equilibrium (SPNE) is characterized. It is verified that increased forward sales of a producer constitute a credible commitment to aggressive spot market bidding. The paper identifies market situations when this pro-competitive commitment is unilaterally profitable for the producer. It is also proven that a producer has incentives to sell in the forward market in order to reduce competitors' forward sales, which softens their spot market offers.
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Volume (Year): Volume 32 (2011)
Issue (Month): Number 1 ()
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References listed on IDEAS
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- Newbery, D, 2008. "Analytic Solutions for Supply Function Equilibria: Uniqueness and Stability," Cambridge Working Papers in Economics 0848, Faculty of Economics, University of Cambridge.
- Kristiansen, Tarjei, 2007. "Pricing of monthly forward contracts in the Nord Pool market," Energy Policy, Elsevier, vol. 35(1), pages 307-316, January.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
- Bolle, Friedel, 1992. "Supply function equilibria and the danger of tacit collusion : The case of spot markets for electricity," Energy Economics, Elsevier, vol. 14(2), pages 94-102, April.
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