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Can market power in the electricity spot market translate into market power in the hedge market?

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  • Fiuza de Bragança, Gabriel Godofredo
  • Daglish, Toby

Abstract

Electricity is a non-storable commodity frequently traded in complex markets characterized by oligopolistic structures and uniform-price auctions. Electricity prices have idiosyncratic patterns not addressed by the usual commodity pricing literature. This paper develops an electricity market model that allows for oligopoly, vertical integration, and a uniform-price auction mechanism. It derives a linear equilibrium relationship between spot prices and state variables affecting firms' costs and demand. It then applies a two-factor forward pricing model over the equilibrium spot price process, and shows that forward prices can be positively affected by spot market power. An empirical estimation of the model follows, using NZEM data.

Suggested Citation

  • Fiuza de Bragança, Gabriel Godofredo & Daglish, Toby, 2016. "Can market power in the electricity spot market translate into market power in the hedge market?," Energy Economics, Elsevier, vol. 58(C), pages 11-26.
  • Handle: RePEc:eee:eneeco:v:58:y:2016:i:c:p:11-26
    DOI: 10.1016/j.eneco.2016.05.010
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    References listed on IDEAS

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    Cited by:

    1. Michele Fioretti & Jorge Tamayo, 2021. "Saving for a Dry Day: Coal, Dams, and the Energy Transition," Sciences Po publications 2021-07, Sciences Po.
    2. David P. Brown & Andrew Eckert, 2017. "Electricity market mergers with endogenous forward contracting," Journal of Regulatory Economics, Springer, vol. 51(3), pages 269-310, June.
    3. de Bragança, Gabriel Godofredo Fiuza & Daglish, Toby, 2017. "Investing in vertical integration: electricity retail market participation," Energy Economics, Elsevier, vol. 67(C), pages 355-365.
    4. Daglish, Toby & de Bragança, Gabriel Godofredo Fiuza & Owen, Sally & Romano, Teresa, 2021. "Pricing effects of the electricity market reform in Brazil," Energy Economics, Elsevier, vol. 97(C).
    5. Michele Fioretti & Jorge Tamayo, 2021. "Saving for a Dry Day: Coal, Dams, and the Energy Transition," Working Papers hal-03389152, HAL.
    6. Bevin-McCrimmon, Fergus & Diaz-Rainey, Ivan & McCarten, Matthew & Sise, Greg, 2018. "Liquidity and risk premia in electricity futures," Energy Economics, Elsevier, vol. 75(C), pages 503-517.
    7. Michele Fioretti & Jorge Tamayo, 2021. "Saving for a Dry Day: Coal, Dams, and the Energy Transition," Sciences Po Economics Discussion Papers 2021-07, Sciences Po Departement of Economics.

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    More about this item

    Keywords

    Electricity; Market structure; Hybrid models; Wholesale markets; Forward contracts; Commodity pricing;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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