Participation of Variable Renewable Generators in Forward Markets: A Game-Theoretic Analysis

This paper addresses the pressing question of whether renewable generators (RGs) should participate in forward markets, traditionally used by conventional generators (CGs) to hedge against spot market risks. We develop a stylized game-theoretical model that captures hybrid generation technologies, demand and supply uncertainties, and increasing demand-side engagement in today’s electricity markets. Our analysis reveals that the forward participation of prioritized RGs intensifies competition in the forward markets but inadvertently bolsters CGs’ market power in the spot markets. This dynamic may create a “one wins, many lose†outcome, where RGs benefit at the expense of consumer surplus, social welfare, and other stakeholders. Additionally, priority dispatch incentivizes RGs to contract more aggressively than CGs. Although allowing RGs to withhold output can mitigate these adverse effects, numerical results indicate that priority dispatch ultimately yields greater social benefits. Sensitivity analysis further shows that RGs’ forward participation can reshape how market factors influence market equilibrium. JEL Classification: C72 - Noncooperative Games; D43 - Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection; Q41 - Energy: Demand and Supply; Prices; Q48 - Energy: Government Policy