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Quantifying the supply-side benefits from forward contracting in wholesale electricity markets

  • Frank A. Wolak

    (Department of Economics, Stanford University, Stanford, California, USA)

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    The assumption of expected profit-maximizing bidding behavior in a multi-unit, multi-period auction with step-function supply curves is used to estimate cost functions for electricity generation units and derive tests of expected profit-maximizing behavior. Applying these techniques to data from the National Electricity Market in Australia reveals statistically significant evidence of output-dependent marginal costs within and across half-hours of the day, but no evidence against the hypothesis of expected profit-maximizing behavior. These cost function estimates quantify the economic significance of output-varying costs and how forward financial contract obligations impact the amount of these costs the generation unit owner incurs. This supplier's existing obligations imply average daily production costs that are 8% lower than the profit-maximizing pattern of output with no forward contract obligations. Copyright © 2007 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/jae.989
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    File URL: http://qed.econ.queensu.ca:80/jae/2007-v22.7/
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    Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

    Volume (Year): 22 (2007)
    Issue (Month): 7 ()
    Pages: 1179-1209

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    Handle: RePEc:jae:japmet:v:22:y:2007:i:7:p:1179-1209
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    1. Bushnell, James & Wolfram, Catherine, 2008. "Electricity Markets," Staff General Research Papers 31547, Iowa State University, Department of Economics.
    2. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
    3. Hall, Alastair R., 2004. "Generalized Method of Moments," OUP Catalogue, Oxford University Press, number 9780198775201.
    4. Horowitz, Joel L, 1992. "A Smoothed Maximum Score Estimator for the Binary Response Model," Econometrica, Econometric Society, vol. 60(3), pages 505-31, May.
    5. Erin T. Mansur, 2003. "Vertical Integration in Restructured Electricity Markets: Measuring Market Efficiency and Firm Conduct," Yale School of Management Working Papers ysm430, Yale School of Management.
    6. Wolak, Frank A., 1989. "Local and Global Testing of Linear and Nonlinear Inequality Constraints in Nonlinear Econometric Models," Econometric Theory, Cambridge University Press, vol. 5(01), pages 1-35, April.
    7. Frank Wolak, 2000. "An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market," International Economic Journal, Taylor & Francis Journals, vol. 14(2), pages 1-39.
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