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

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  • Frank A. Wolak

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

Abstract

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.

Suggested Citation

  • Frank A. Wolak, 2007. "Quantifying the supply-side benefits from forward contracting in wholesale electricity markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(7), pages 1179-1209.
  • Handle: RePEc:jae:japmet:v:22:y:2007:i:7:p:1179-1209
    DOI: 10.1002/jae.989
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    File URL: http://qed.econ.queensu.ca:80/jae/2007-v22.7/
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. de Frutos, María-Ángeles & Fabra, Natalia, 2012. "How to allocate forward contracts: The case of electricity markets," European Economic Review, Elsevier, vol. 56(3), pages 451-469.
    2. Shaun D. MCRAE & Frank A. WOLAK, 2009. "How Do Firms Exercise Unilateral Market Power? Evidence from a Bid-Based Wholesale Electricity Market," RSCAS Working Papers 2009/36, European University Institute.
    3. Pär Holmberg, 2014. "Pro-competitive rationing in multi-unit auctions," Cambridge Working Papers in Economics 1435, Faculty of Economics, University of Cambridge.
    4. de Frutos, Maria-Angeles & Fabra, Natalia, 2008. "On the Impact of Forward Contract Obligations in Multi-Unit Auctions," CEPR Discussion Papers 6756, C.E.P.R. Discussion Papers.
    5. Werner, Dan, 2014. "Electricity Market Price Volatility: The Importance of Ramping Costs," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 169619, Agricultural and Applied Economics Association.
    6. 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.
    7. Liski, Matti & Montero, Juan-Pablo, 2014. "Forward trading in exhaustible-resource oligopoly," Resource and Energy Economics, Elsevier, vol. 37(C), pages 122-146.
    8. Holmberg, Pär & Newbery, David & Ralph, Daniel, 2013. "Supply function equilibria: Step functions and continuous representations," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1509-1551.
    9. Katrina Jessoe & David Rapson, 2015. "Commercial and Industrial Demand Response Under Mandatory Time-of-Use Electricity Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 63(3), pages 397-421, September.
    10. Jorge Balat & Juan E. Carranza & Juan D. Martin, 2015. "Dynamic and Strategic Behavior in Hydropower-Dominated Electricity Markets: Empirical Evidence for Colombia," BORRADORES DE ECONOMIA 012906, BANCO DE LA REPÚBLICA.
    11. Victor Chernozhukov & Whitney K. Newey & Andres Santos, 2015. "Constrained conditional moment restriction models," CeMMAP working papers CWP59/15, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    12. Papadimitriou, Theophilos & Gogas, Periklis & Stathakis, Efthimios, 2014. "Forecasting energy markets using support vector machines," Energy Economics, Elsevier, vol. 44(C), pages 135-142.
    13. Kenneth Hendricks & R. Preston Mcafee, 2010. "A Theory Of Bilateral Oligopoly," Economic Inquiry, Western Economic Association International, vol. 48(2), pages 391-414, April.
    14. Le-Yu Chen & Jerzy Szroeter, 2009. "Hypothesis testing of multiple inequalities: the method of constraint chaining," CeMMAP working papers CWP13/09, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    15. Brown, David P. & Eckert, Andrew & Eckert, Heather, 2018. "Carbon pricing with an output subsidy under imperfect competition: The case of Alberta's restructured electricity market," Resource and Energy Economics, Elsevier, vol. 52(C), pages 102-123.
    16. David P. Brown & Andrew Eckert, 2018. "Analyzing the Impact of Electricity Market Structure Changes and Mergers: The Importance of Forward Commitments," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 101-137, February.
    17. repec:eee:jetheo:v:175:y:2018:i:c:p:318-341 is not listed on IDEAS
    18. Nancy L. Rose, 2014. "Learning from the Past: Insights for the Regulation of Economic Activity," NBER Chapters,in: Economic Regulation and Its Reform: What Have We Learned?, pages 1-23 National Bureau of Economic Research, Inc.
    19. Wolak, Frank A., 2015. "Measuring the competitiveness benefits of a transmission investment policy: The case of the Alberta electricity market," Energy Policy, Elsevier, vol. 85(C), pages 426-444.
    20. Pär Holmberg & Andy Philpott, 2014. "Supply function equilibria in transportation networks," Cambridge Working Papers in Economics 1421, Faculty of Economics, University of Cambridge.
    21. van Eijkel, Remco & Kuper, Gerard H. & Moraga-González, José L., 2016. "Do firms sell forward for strategic reasons? An application to the wholesale market for natural gas," International Journal of Industrial Organization, Elsevier, vol. 49(C), pages 1-35.
    22. Anderson, Edward & Holmberg, Pär, 2018. "Price instability in multi-unit auctions," Journal of Economic Theory, Elsevier, vol. 175(C), pages 318-341.
    23. repec:ipg:wpaper:2013-018 is not listed on IDEAS
    24. Lamadrid, Alberto J. & Mount, Tim, 2012. "Ancillary services in systems with high penetrations of renewable energy sources, the case of ramping," Energy Economics, Elsevier, vol. 34(6), pages 1959-1971.
    25. Yuanjing Li, 2014. "Vertical Structure and Forward Contract in Electricity Market," Working Papers 2014-117, Department of Research, Ipag Business School.

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