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Strategic Forward Contracting in the Wholesale Electricity Market

  • Pär Holmberg

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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Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 32 (2011)
Issue (Month): Number 1 ()
Pages: 169-202

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Handle: RePEc:aen:journl:2011v32-01-a07
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  1. 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.
  2. Ferreira, José Luis, 2001. "The role of observability in futures markets," UC3M Working papers. Economics we015316, Universidad Carlos III de Madrid. Departamento de Economía.
  3. Kristiansen, Tarjei, 2007. "Pricing of monthly forward contracts in the Nord Pool market," Energy Policy, Elsevier, vol. 35(1), pages 307-316, January.
  4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, March.
  5. Newbery, D, 2008. "Analytic Solutions for Supply Function Equilibria: Uniqueness and Stability," Cambridge Working Papers in Economics 0848, Faculty of Economics, University of Cambridge.
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