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Retail Competition and Electricity Contracts


  • Green, R.


Long-term contracts for electricity can counter market power and reduce prices in short-term markets. If electricity retailers face competition, however, companies signing long-term contracts are exposed to the risk that a fall in short-term prices would allow rivals to buy on the spot market and undercut them. Could this lead to less contracting and higher prices? This paper combines a model of electricity retailing and a Cournot model of competition in the wholesale markets to estimate the size of this effect, and finds that it could raise wholesale prices by two or three percent.

Suggested Citation

  • Green, R., 2004. "Retail Competition and Electricity Contracts," Cambridge Working Papers in Economics 0406, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0406
    Note: CMI33, IO

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    2. Muñoz, José Ignacio & Sánchez de la Nieta, Agustín A. & Contreras, Javier & Bernal-Agustín, José L., 2009. "Optimal investment portfolio in renewable energy: The Spanish case," Energy Policy, Elsevier, vol. 37(12), pages 5273-5284, December.
    3. Roques, Fabien & Finon, Dominique, 2017. "Adapting electricity markets to decarbonisation and security of supply objectives: Toward a hybrid regime?," Energy Policy, Elsevier, vol. 105(C), pages 584-596.
    4. SMEERS, Yves, 2005. "How well can one measure market power in restructured electricity systems ?," CORE Discussion Papers 2005050, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Dominique Finon, 2011. "Investment and Competition in Decentralized Electricity Markets: How to Overcome Market Failure by Market Imperfections?," Chapters,in: Competition, Contracts and Electricity Markets, chapter 3 Edward Elgar Publishing.
    6. Roques, F. & Newbery, D.M. & Nuttall, W.J., 2004. "Generation Adequacy and Investment Incentives in Britain: from the Pool to NETA," Cambridge Working Papers in Economics 0459, Faculty of Economics, University of Cambridge.
    7. Jano-Ito, Marco A. & Crawford-Brown, Douglas, 2017. "Investment decisions considering economic, environmental and social factors: An actors' perspective for the electricity sector of Mexico," Energy, Elsevier, vol. 121(C), pages 92-106.
    8. Machiel Mulder & Victoria Shestalova & Mark Lijesen, 2005. "Vertical separation of the energy-distribution industry; an assessment of several options for unbundling," CPB Document 84, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Roques, Fabien A. & Newbery, David M. & Nuttall, William J., 2008. "Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach," Energy Economics, Elsevier, vol. 30(4), pages 1831-1849, July.
    10. Neuhoff, Karsten & De Vries, Laurens, 2004. "Insufficient incentives for investment in electricity generations," Utilities Policy, Elsevier, vol. 12(4), pages 253-267, December.
    11. Petrella, Andrea & Sapio, Alessandro, 2012. "Assessing the impact of forward trading, retail liberalization, and white certificates on the Italian wholesale electricity prices," Energy Policy, Elsevier, vol. 40(C), pages 307-317.
    12. Scholz, Sebastian, 2010. "Derivatives and Default Risk," Discussion Papers in Economics 11317, University of Munich, Department of Economics.
    13. Christian Huveneers, 2005. "Working Paper 09-05 - Réforme du marché de l’électricité en Belgique. Leçons de l’Espagne, de l’Allemagne et de la Grande-Bretagne," Working Papers 0509, Federal Planning Bureau, Belgium.

    More about this item


    Electricity; contract markets; retail competition;

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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