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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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    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. 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.
    3. 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.
    4. Bushnell, James & Wolfram, Catherine, 2008. "Electricity Markets," Staff General Research Papers Archive 31547, Iowa State University, Department of Economics.
    5. Horowitz, Joel L, 1992. "A Smoothed Maximum Score Estimator for the Binary Response Model," Econometrica, Econometric Society, vol. 60(3), pages 505-531, May.
    6. Hall, Alastair R., 2004. "Generalized Method of Moments," OUP Catalogue, Oxford University Press, number 9780198775201.
    7. 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.
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