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Using forward markets to improve electricity market design

  • Ausubel, Lawrence M.
  • Cramton, Peter

Forward markets, both medium term and long term, complement the spot market for wholesale electricity. The forward markets reduce risk, mitigate market power, and coordinate new investment. In the medium term, a forward energy market lets suppliers and demanders lock in energy prices and quantities for one to three years. In the long term, a forward reliability market assures adequate resources are available when they are needed most. The forward markets reduce risk for both sides of the market, since they reduce the quantity of energy that trades at the more volatile spot price. Spot market power is mitigated by putting suppliers and demanders in a more balanced position at the time of the spot market. The markets also reduce transaction costs and improve liquidity and transparency. Recent innovations to the Colombia market illustrate the basic elements of the forward markets and their beneficial role.

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Article provided by Elsevier in its journal Utilities Policy.

Volume (Year): 18 (2010)
Issue (Month): 4 (December)
Pages: 195-200

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Handle: RePEc:eee:juipol:v:18:y:2010:i:4:p:195-200
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30478

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  1. Peter Cramton, 2007. "Colombia’s Forward Energy Market," Papers of Peter Cramton 07fem, University of Maryland, Department of Economics - Peter Cramton, revised 2007.
  2. Peter Cramton & Steven Stoft, 2008. "Forward Reliability Markets: Less Risk, Less Market Power, More Efficiency," Papers of Peter Cramton 08frm, University of Maryland, Department of Economics - Peter Cramton, revised 2008.
  3. Lawrence M. Ausubel & Peter Cramton, 2004. "Auctioning Many Divisible Goods," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 480-493, 04/05.
  4. Peter Cramton & Steven Stoft, 2007. "Colombia Firm Energy Market," Papers of Peter Cramton 07cfem, University of Maryland, Department of Economics - Peter Cramton, revised 2007.
  5. Peter Cramton & Steven Stoft & Jeffrey West, 2006. "Simulation of the Colombian Firm Energy Market," Papers of Peter Cramton 06scfem, University of Maryland, Department of Economics - Peter Cramton, revised 2006.
  6. Peter Cramton & Steven Stoft, 2006. "The Convergence of Market Designs for Adequate Generating Capacity," Papers of Peter Cramton 06mdfra, University of Maryland, Department of Economics - Peter Cramton, revised 2006.
  7. Oren, Shmuel S., 2005. "Generation Adequacy via Call Options Obligations: Safe Passage to the Promised Land," The Electricity Journal, Elsevier, vol. 18(9), pages 28-42, November.
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