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Retailers' risk management and vertical arrangements in electricity markets

Listed author(s):
  • Boroumand, Raphaël Homayoun
  • Zachmann, Georg

The failure of the asset-light retailer's organizational model is indicative of the incapacity of this organizational structure to manage efficiently the combination of sourcing and market risks in the current market environment. Because of the structural dimensions of electricity's market risks, a retailer's level of risk exposure is unknown ex ante and will only be revealed ex post when consumption is known. In contrast to the “textbook model” of electricity reforms, the paper demonstrates through numerical simulations that in the current market context pure portfolios of contracts are incomplete risk management instruments compared to physical hedging. The latter is critical to overcome the asset-light retailer's curse.

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File URL: http://www.sciencedirect.com/science/article/pii/S0301421511008251
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Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 40 (2012)
Issue (Month): C ()
Pages: 465-472

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Handle: RePEc:eee:enepol:v:40:y:2012:i:c:p:465-472
DOI: 10.1016/j.enpol.2011.10.041
Contact details of provider: Web page: http://www.elsevier.com/locate/enpol

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  1. Littlechild Stephen C., 2002. "Competition in Retail Electricity Supply," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 12(2), pages 1-26, June.
  2. Littlechild, S.C., 2000. "Why We Need Electricity Retailers: A Reply to Joskow on Wholesale Spot Price pass-through," Cambridge Working Papers in Economics 0008, Faculty of Economics, University of Cambridge.
  3. Anderson, Edward J. & Hu, Xinin & Winchester, Donald, 2007. "Forward contracts in electricity markets: The Australian experience," Energy Policy, Elsevier, vol. 35(5), pages 3089-3103, May.
  4. Joskow, Paul L, 1985. "Vertical Integration and Long-term Contracts: The Case of Coal-burning Electric Generating Plants," Journal of Law, Economics, and Organization, Oxford University Press, vol. 1(1), pages 33-80, Spring.
  5. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  6. Shelanski, Howard A & Klein, Peter G, 1995. "Empirical Research in Transaction Cost Economics: A Review and Assessment," Journal of Law, Economics, and Organization, Oxford University Press, vol. 11(2), pages 335-361, October.
  7. Gehrig, Thomas, 1993. "Intermediation in Search Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(1), pages 97-120, Spring.
  8. Benjamin Klein, 2000. "The Role of Incomplete Contracts in Self-Enforcing Relationships," Revue d'Économie Industrielle, Programme National Persée, vol. 92(1), pages 67-80.
  9. Thomas, Steve, 2006. "The British Model in Britain: Failing slowly," Energy Policy, Elsevier, vol. 34(5), pages 583-600, March.
  10. Helyette Geman, 2005. "Commodities and Commodity Derivatives. Modeling and Pricing for Agriculturals, Metals and Energy," Post-Print halshs-00144182, HAL.
  11. Hackett, Steven C., 1992. "A comparative analysis of merchant and broker intermediation," Journal of Economic Behavior & Organization, Elsevier, vol. 18(3), pages 299-315, August.
  12. Michael D. Whinston, 2003. "On the Transaction Cost Determinants of Vertical Integration," Journal of Law, Economics, and Organization, Oxford University Press, vol. 19(1), pages 1-23, April.
  13. Ilya Segal & Michael D. Whinston, 2003. "Robust Predictions for Bilateral Contracting with Externalities," Econometrica, Econometric Society, vol. 71(3), pages 757-791, May.
  14. repec:dau:papers:123456789/607 is not listed on IDEAS
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