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Gains from Trade under Uncertainty: The Case of Electric Power Markets

Author

Listed:
  • Hendrik Bessembinder

    (University of Utah)

  • Michael L. Lemmon

    (University of Utah)

Abstract

This article refocuses attention on the potential efficiency gains from competitive wholesale power trading, which allows the diversification of demand risk. The greatest efficiency gains obtain when power demand is least correlated across markets and when there is substantial cross-sectional variation in expected demand. Real-time power trading can reduce retail prices by conservative estimates of 3%–4% on average in the United States, and forward and real-time trading can reduce prices by a combined 6%–10% or more. Economic efficiency would be best served by policy ensuring that deregulated power markets are indeed competitive, rather than by renewed regulation.

Suggested Citation

  • Hendrik Bessembinder & Michael L. Lemmon, 2006. "Gains from Trade under Uncertainty: The Case of Electric Power Markets," The Journal of Business, University of Chicago Press, vol. 79(4), pages 1755-1782, July.
  • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:4:p:1755-1782
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    File URL: http://dx.doi.org/10.1086/503647
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    Citations

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    Cited by:

    1. Abrell, Jan & Rausch, Sebastian, 2016. "Cross-country electricity trade, renewable energy and European transmission infrastructure policy," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 87-113.
    2. Chi-Keung Woo, Ira Horowitz, Brian Horii, Ren Orans, and Jay Zarnikau, 2012. "Blowing in the Wind: Vanishing Payoffs of a Tolling Agreement for Natural-gas-fired Generation of Electricity in Texas," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    3. repec:eee:energy:v:144:y:2018:i:c:p:887-902 is not listed on IDEAS
    4. Woo, C.K. & Moore, J. & Schneiderman, B. & Ho, T. & Olson, A. & Alagappan, L. & Chawla, K. & Toyama, N. & Zarnikau, J., 2016. "Merit-order effects of renewable energy and price divergence in California’s day-ahead and real-time electricity markets," Energy Policy, Elsevier, vol. 92(C), pages 299-312.
    5. Chi-Keung Woo, Ira Horowitz, Jay Zarnikau, Jack Moore, Brendan Schneiderman, Tony Ho, and Eric Leung, 2016. "What Moves the Ex Post Variable Profit of Natural-Gas-Fired Generation in California?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    6. Hagspiel, Simeon, 2017. "Reliable Electricity: The Effects of System Integration and Cooperative Measures to Make it Work," EWI Working Papers 2017-13, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    7. Beaulieu, Marie-Claude & Dufour, Jean-Marie & Khalaf, Lynda, 2014. "Exact confidence sets and goodness-of-fit methods for stable distributions," Journal of Econometrics, Elsevier, vol. 181(1), pages 3-14.
    8. repec:eee:appene:v:204:y:2017:i:c:p:531-543 is not listed on IDEAS
    9. Spindler, Christian & Woll, Oliver & Schober, Dominik, 2018. "Sharing is not caring: Backward integration of consumers," ZEW Discussion Papers 18-006, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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