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Market Structure, Risk Preferences, and Forward Contracting Incentives

Author

Listed:
  • Brown, David P.

    (University of Alberta, Department of Economics)

  • Sappington, David E.M.

    (University of Florida)

Abstract

We examine the distinct impacts of forward contracting on generators and buyers of electricity. Increased forward contracting systematically reduces the variance of a generator's profit but can increase the variance of a buyer's profit. Consequently, increased risk aversion or market uncertainty can lead buyers, but not generators, to prefer reduced levels of forward contracting. We examine how the extent of equilibrium forward contracting varies with industry conditions, including the number of generators, the number of buyers, their aversion to profit variation, and the structure of retail electricity prices.

Suggested Citation

  • Brown, David P. & Sappington, David E.M., 2021. "Market Structure, Risk Preferences, and Forward Contracting Incentives," Working Papers 2021-12, University of Alberta, Department of Economics.
    • Handle: RePEc:ris:albaec:2021_012
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    File URL: https://sites.ualberta.ca/~econwps/2021/wp2021-12.pdf
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    Keywords

    forward contracting; risk aversion; electricity sector;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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