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How to allocate forward contracts: The case of electricity markets

  • de Frutos, María-Ángeles
  • Fabra, Natalia

Several regulatory authorities worldwide have imposed forward contract commitments on electricity producers as a way to mitigate their market power. In this paper we analyze the impact of such commitments on equilibrium outcomes in a model that reflects important institutional and structural features of electricity markets. We show that, when firms are asymmetric, the distribution of contracts among firms matters. In the case of a single dominant firm, the regulator can be confident that allocating contracts to that firm will be pro-competitive. However, when asymmetries are less extreme, certain contract allocations might yield anti-competitive outcomes by eliminating more competitive equilibria. Our analysis thus suggests that forward contracts should be allocated so as to (virtually) reduce asymmetries across firms.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 3 ()
Pages: 451-469

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:3:p:451-469
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