IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2508.11979.html
   My bibliography  Save this paper

Virtual Trading in Multi-Settlement Electricity Markets

Author

Listed:
  • Agostino Capponi
  • Garud Iyengar
  • Bo Yang
  • Daniel Bienstock

Abstract

In the Day-Ahead (DA) market, suppliers sell and load-serving entities (LSEs) purchase energy commitments, with both sides adjusting for imbalances between contracted and actual deliveries in the Real-Time (RT) market. We develop a supply function equilibrium model to study how virtual trading-speculating on DA-RT price spreads without physical delivery-affects market efficiency. Without virtual trading, LSEs underbid relative to actual demand in the DA market, pushing DA prices below expected RT prices. Virtual trading narrows, and in the limit of large number traders can eliminates, this price gap. However, it does not induce quantity alignment: DA-cleared demand remains below true expected demand, as price alignment makes the LSE indifferent between markets and prompts it to reduce DA bids to avoid over-purchasing. Renewable energy suppliers cannot offset these strategic distortions. We provide empirical support to our main model implications using data from the California and New York Independent System Operators.

Suggested Citation

  • Agostino Capponi & Garud Iyengar & Bo Yang & Daniel Bienstock, 2025. "Virtual Trading in Multi-Settlement Electricity Markets," Papers 2508.11979, arXiv.org.
    • Handle: RePEc:arx:papers:2508.11979
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2508.11979
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Majid Al-Gwaiz & Xiuli Chao & Owen Q. Wu, 2017. "Understanding How Generation Flexibility and Renewable Energy Affect Power Market Competition," Manufacturing & Service Operations Management, INFORMS, vol. 19(1), pages 114-131, February.
    2. E. J. Anderson & A. B. Philpott, 2002. "Using Supply Functions for Offering Generation into an Electricity Market," Operations Research, INFORMS, vol. 50(3), pages 477-489, June.
    3. Ruoyang Li & Alva Svoboda & Shmuel Oren, 2015. "Efficiency impact of convergence bidding in the california electricity market," Journal of Regulatory Economics, Springer, vol. 48(3), pages 245-284, December.
    4. Heikki Peura & Derek W. Bunn, 2021. "Renewable Power and Electricity Prices: The Impact of Forward Markets," Management Science, INFORMS, vol. 67(8), pages 4772-4788, August.
    5. Holmberg, Pär & Newbery, David, 2010. "The supply function equilibrium and its policy implications for wholesale electricity auctions," Utilities Policy, Elsevier, vol. 18(4), pages 209-226, December.
    6. Akshaya Jha & Frank A. Wolak, 2023. "Can Forward Commodity Markets Improve Spot Market Performance? Evidence from Wholesale Electricity," American Economic Journal: Economic Policy, American Economic Association, vol. 15(2), pages 292-330, May.
    7. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-953, October.
    8. Birge, John R. & Hortaçsu, Ali & Mercadal, Ignacia & Pavlin, J. Michael, 2018. "Limits to arbitrage in electricity markets: A case study of MISO," Energy Economics, Elsevier, vol. 75(C), pages 518-533.
    9. Holmberg, Pär, 2009. "Numerical calculation of an asymmetric supply function equilibrium with capacity constraints," European Journal of Operational Research, Elsevier, vol. 199(1), pages 285-295, November.
    10. Ramesh Johari & John N. Tsitsiklis, 2011. "Parameterized Supply Function Bidding: Equilibrium and Efficiency," Operations Research, INFORMS, vol. 59(5), pages 1079-1089, October.
    11. Holmberg, Par, 2008. "Unique supply function equilibrium with capacity constraints," Energy Economics, Elsevier, vol. 30(1), pages 148-172, January.
    12. Csereklyei, Zsuzsanna, 2020. "Price and income elasticities of residential and industrial electricity demand in the European Union," Energy Policy, Elsevier, vol. 137(C).
    13. Lingxiu Dong & Hong Liu, 2007. "Equilibrium Forward Contracts on Nonstorable Commodities in the Presence of Market Power," Operations Research, INFORMS, vol. 55(1), pages 128-145, February.
    14. Green, Richard J, 1996. "Increasing Competition in the British Electricity Spot Market," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 205-216, June.
    15. Pamela Pen-Erh Pei & David Simchi-Levi & Tunay I. Tunca, 2011. "Sourcing Flexibility, Spot Trading, and Procurement Contract Structure," Operations Research, INFORMS, vol. 59(3), pages 578-601, June.
    16. D. J. Wu & Paul R. Kleindorfer, 2005. "Competitive Options, Supply Contracting, and Electronic Markets," Management Science, INFORMS, vol. 51(3), pages 452-466, March.
    17. Par Holmberg, 2007. "Supply Function Equilibrium with Asymmetric Capacities and Constant Marginal Costs," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 55-82.
    18. Alessio Trivella & Danial Mohseni-Taheri & Selvaprabu Nadarajah, 2023. "Meeting Corporate Renewable Power Targets," Management Science, INFORMS, vol. 69(1), pages 491-512, January.
    19. Nur Sunar & Jayashankar M. Swaminathan, 2021. "Net-Metered Distributed Renewable Energy: A Peril for Utilities?," Management Science, INFORMS, vol. 67(11), pages 6716-6733, November.
    20. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    21. Nicola Secomandi & Sunder Kekre, 2014. "Optimal Energy Procurement in Spot and Forward Markets," Manufacturing & Service Operations Management, INFORMS, vol. 16(2), pages 270-282, May.
    22. Shanshan Hu & Gilvan C. Souza & Mark E. Ferguson & Wenbin Wang, 2015. "Capacity Investment in Renewable Energy Technology with Supply Intermittency: Data Granularity Matters!," Manufacturing & Service Operations Management, INFORMS, vol. 17(4), pages 480-494, October.
    23. Par Holmberg, 2007. "Supply Function Equilibrium with Asymmetric Capacities and Constant Marginal Costs," The Energy Journal, , vol. 28(2), pages 55-82, April.
    24. Karthik Murali & Michael K. Lim & Nicholas C. Petruzzi, 2015. "Municipal Groundwater Management: Optimal Allocation and Control of a Renewable Natural Resource," Production and Operations Management, Production and Operations Management Society, vol. 24(9), pages 1453-1472, September.
    25. Owen Q. Wu & Roman Kapuscinski, 2013. "Curtailing Intermittent Generation in Electrical Systems," Manufacturing & Service Operations Management, INFORMS, vol. 15(4), pages 578-595, October.
    26. Denholm, Paul & Hand, Maureen, 2011. "Grid flexibility and storage required to achieve very high penetration of variable renewable electricity," Energy Policy, Elsevier, vol. 39(3), pages 1817-1830, March.
    27. Nur Sunar & John R. Birge, 2019. "Strategic Commitment to a Production Schedule with Uncertain Supply and Demand: Renewable Energy in Day-Ahead Electricity Markets," Management Science, INFORMS, vol. 65(2), pages 714-734, February.
    28. A. Gürhan Kök & Kevin Shang & Şafak Yücel, 2018. "Impact of Electricity Pricing Policies on Renewable Energy Investments and Carbon Emissions," Management Science, INFORMS, vol. 64(1), pages 131-148, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nur Sunar & John R. Birge, 2019. "Strategic Commitment to a Production Schedule with Uncertain Supply and Demand: Renewable Energy in Day-Ahead Electricity Markets," Management Science, INFORMS, vol. 65(2), pages 714-734, February.
    2. Nur Sunar & Jayashankar M. Swaminathan, 2021. "Net-Metered Distributed Renewable Energy: A Peril for Utilities?," Management Science, INFORMS, vol. 67(11), pages 6716-6733, November.
    3. Majid Al-Gwaiz & Xiuli Chao & Owen Q. Wu, 2017. "Understanding How Generation Flexibility and Renewable Energy Affect Power Market Competition," Manufacturing & Service Operations Management, INFORMS, vol. 19(1), pages 114-131, February.
    4. 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.
    5. Heikki Peura & Derek W. Bunn, 2021. "Renewable Power and Electricity Prices: The Impact of Forward Markets," Management Science, INFORMS, vol. 67(8), pages 4772-4788, August.
    6. Holmberg, Pär & Newbery, David, 2010. "The supply function equilibrium and its policy implications for wholesale electricity auctions," Utilities Policy, Elsevier, vol. 18(4), pages 209-226, December.
    7. Holmberg, Pär, 2009. "Numerical calculation of an asymmetric supply function equilibrium with capacity constraints," European Journal of Operational Research, Elsevier, vol. 199(1), pages 285-295, November.
    8. Bolle, Friedel & Grimm, Veronika & Ockenfels, Axel & del Pozo, Xavier, 2013. "An experiment on supply function competition," European Economic Review, Elsevier, vol. 63(C), pages 170-185.
    9. Genc, Talat S. & Reynolds, Stanley S., 2011. "Supply function equilibria with capacity constraints and pivotal suppliers," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 432-442, July.
    10. Pär Holmberg, 2017. "Pro‐competitive Rationing in Multi‐unit Auctions," Economic Journal, Royal Economic Society, vol. 127(605), pages 372-395, October.
    11. Pär Holmberg & Andy Philpott, 2014. "Supply function equilibria in transportation networks," Cambridge Working Papers in Economics 1421, Faculty of Economics, University of Cambridge.
    12. Hunt Allcott, 2012. "The Smart Grid, Entry, and Imperfect Competition in Electricity Markets," NBER Working Papers 18071, National Bureau of Economic Research, Inc.
    13. Holmberg, Pär, 2005. "Comparing Supply Function Equilibria of Pay-as-Bid and Uniform-Price Auctions," Working Paper Series 2005:17, Uppsala University, Department of Economics.
    14. Anderson, Edward & Holmberg, Pär, 2018. "Price instability in multi-unit auctions," Journal of Economic Theory, Elsevier, vol. 175(C), pages 318-341.
    15. Albert Banal-Estañol & Augusto Rupérez Micola, 2010. "Are Agent-based Simulations Robust? The Wholesale Electricity Trading Case," Working Papers 443, Barcelona School of Economics.
    16. Albert Banal-Estañol & Augusto Rupérez Micola, 2009. "Composition of Electricity Generation Portfolios, Pivotal Dynamics, and Market Prices," Management Science, INFORMS, vol. 55(11), pages 1813-1831, November.
    17. Newbery, D, 2008. "Analytic Solutions for Supply Function Equilibria: Uniqueness and Stability," Cambridge Working Papers in Economics 0848, Faculty of Economics, University of Cambridge.
    18. Knittel, Christopher R & Metaxoglou, Konstantinos, 2008. "Diagnosing Unilateral Market Power in Electricity Reserves Market," Institute of Transportation Studies, Working Paper Series qt14q6c0mk, Institute of Transportation Studies, UC Davis.
    19. Cruise, James R. & Flatley, Lisa & Zachary, Stan, 2018. "Impact of storage competition on energy markets," European Journal of Operational Research, Elsevier, vol. 269(3), pages 998-1012.
    20. Kenneth Hendricks & R. Preston Mcafee, 2010. "A Theory Of Bilateral Oligopoly," Economic Inquiry, Western Economic Association International, vol. 48(2), pages 391-414, April.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2508.11979. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.