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Welfare Impact of Virtual Trading on Wholesale Electricity Markets

Author

Listed:
  • James Hyungkwan Kim
  • Juan S. Giraldo
  • Paul V. Preckel
  • Andrew L. Liu
  • Douglas Gotham

Abstract

We use welfare analysis to evaluate the efficiency impact of virtual trading by financial participants on wholesale electricity markets. We use a stylized model to determine the optimal bidding strategy under different scenarios of market outcomes for financial participants. A welfare comparison between scenarios with and without optimal bidding shows that the main impacts of virtual trading by financial participants are welfare transfers between consumers and producers, while the impact on total surplus is limited. JEL Classification: D44 – Auctions; D47 – Market Design; D61 – Allocative Efficiency; Cost-Benefit Analysis; G14 – Information and Market Efficiency; Event Studies; Insider Trading; L94 – Electric Utilities; Q48 – Energy: Government Policy.

Suggested Citation

  • James Hyungkwan Kim & Juan S. Giraldo & Paul V. Preckel & Andrew L. Liu & Douglas Gotham, 2026. "Welfare Impact of Virtual Trading on Wholesale Electricity Markets," The Energy Journal, , vol. 47(4), pages 1-23, July.
    • Handle: RePEc:sae:enejou:v:47:y:2026:i:4:p:1-23
    DOI: 10.1177/01956574261421093
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    Keywords

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    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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