IDEAS home Printed from https://ideas.repec.org/p/tse/wpaper/127219.html
   My bibliography  Save this paper

Supply Flexibility and risk transfer in electricity markets

Author

Listed:
  • Crampes, Claude
  • Renault, Jérôme

Abstract

The producers of electricity using dispatchable plants rely on partially flexible technologies to match the variability of both production from renewables and final demand. We analyse upward and downward flexibility in a two-stage decision process where firms compete at low cost in quantities planned before knowing the demand function and adjust the output at high cost when the true state of demand is revealed. We first compute the first best and competitive outcomes. Then we consider the outcome of imperfect competition. We begin with an analysis of the monopoly case, then we determine the duopoly subgame perfect equilibria corresponding to two market designs: one where all trade occurs in an intra-day market with known demand, the other where a dayahead market with random demand is added to the intra-day market. We show that being inflexible can be more profitable than being flexible. We also show that adding a day-ahead market to the intra-day market increases welfare but transfers risks from firms to consumers. The transfer is all the more important as technologies are not very flexible.

Suggested Citation

  • Crampes, Claude & Renault, Jérôme, 2022. "Supply Flexibility and risk transfer in electricity markets," TSE Working Papers 22-1350, Toulouse School of Economics (TSE), revised Sep 2023.
    • Handle: RePEc:tse:wpaper:127219
    as

    Download full text from publisher

    File URL: https://www.tse-fr.eu/sites/default/files/TSE/documents/doc/wp/2022/wp_tse_1350.pdf
    File Function: Full Text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Paul Joskow & Jean Tirole, 2007. "Reliability and competitive electricity markets," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 60-84, March.
    2. Crampes, Claude & Renault, Jérôme, 2019. "How many markets for wholesale electricity when supply ispartially flexible?," Energy Economics, Elsevier, vol. 81(C), pages 465-478.
    3. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.
    4. Koichiro Ito & Mar Reguant, 2016. "Sequential Markets, Market Power, and Arbitrage," American Economic Review, American Economic Association, vol. 106(7), pages 1921-1957, July.
    5. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
    6. Hughes, John S. & Kao, Jennifer L., 1997. "Strategic forward contracting and observability," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 121-133, November.
    7. A. Gürhan Kök & Kevin Shang & Şafak Yücel, 2020. "Investments in Renewable and Conventional Energy: The Role of Operational Flexibility," Manufacturing & Service Operations Management, INFORMS, vol. 22(5), pages 925-941, September.
    8. Frieder Borggrefe & Karsten Neuhoff, 2011. "Balancing and Intraday Market Design: Options for Wind Integration," Discussion Papers of DIW Berlin 1162, DIW Berlin, German Institute for Economic Research.
    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. Crampes, Claude & Renault, Jérôme, 2021. "Imperfect competition in electricity markets with partially flexible technologies," TSE Working Papers 21-1198, Toulouse School of Economics (TSE).
    2. Van Moer, Geert, 2019. "Electricity market competition when forward contracts are pairwise efficient," MPRA Paper 96660, University Library of Munich, Germany.
    3. David P. Brown & Andrew Eckert, 2018. "Analyzing the Impact of Electricity Market Structure Changes and Mergers: The Importance of Forward Commitments," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 101-137, February.
    4. Dressler, Luisa, 2016. "Support schemes for renewable electricity in the European Union: Producer strategies and competition," Energy Economics, Elsevier, vol. 60(C), pages 186-196.
    5. van Koten, Silvester & Ortmann, Andreas, 2013. "Structural versus behavioral remedies in the deregulation of electricity markets: An experimental investigation motivated by policy concerns," European Economic Review, Elsevier, vol. 64(C), pages 256-265.
    6. Klaus Eisenack & Mathias Mier, 2019. "Peak-load pricing with different types of dispatchability," Journal of Regulatory Economics, Springer, vol. 56(2), pages 105-124, December.
    7. Holmberg, Pär & Willems, Bert, 2015. "Relaxing competition through speculation: Committing to a negative supply slope," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 236-266.
    8. José Luis Ferreira & Praveen Kujal & Stephen Rassenti, 2016. "Multiple Openings and Competitiveness of Forward Markets: Experimental Evidence," PLOS ONE, Public Library of Science, vol. 11(7), pages 1-16, July.
    9. Chloé Le Coq & Sebastian Schwenen, 2020. "Financial contracts as coordination device," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(2), pages 241-259, April.
    10. David P. Brown & David E. M. Sappington, 2023. "Employing gain-sharing regulation to promote forward contracting in the electricity sector," Journal of Regulatory Economics, Springer, vol. 63(1), pages 30-56, April.
    11. Daron Acemoglu, Ali Kakhbod, and Asuman Ozdaglar, 2017. "Competition in Electricity Markets with Renewable Energy Sources," The Energy Journal, International Association for Energy Economics, vol. 0(KAPSARC S).
    12. Miguel Vazquez, 2012. "Analysis of the strategic use of forward contracting in electricity markets," RSCAS Working Papers 2012/13, European University Institute.
    13. Argenton, Cédric & Willems, Bert, 2015. "Exclusion through speculation," International Journal of Industrial Organization, Elsevier, vol. 39(C), pages 1-9.
    14. David P. Brown & Andrew Eckert, 2017. "Electricity market mergers with endogenous forward contracting," Journal of Regulatory Economics, Springer, vol. 51(3), pages 269-310, June.
    15. James Bushnell, 2007. "Oligopoly equilibria in electricity contract markets," Journal of Regulatory Economics, Springer, vol. 32(3), pages 225-245, December.
    16. Rassenti, Stephen, 2009. "The strategic motive to sell forward: experimental evidence," UC3M Working papers. Economics we092616, Universidad Carlos III de Madrid. Departamento de Economía.
    17. Breitmoser, Yves, 2013. "Increasing marginal costs are strategically beneficial in forward trading," Economics Letters, Elsevier, vol. 119(2), pages 109-112.
    18. Breitmoser, Yves, 2012. "On the endogeneity of Cournot, Bertrand, and Stackelberg competition in oligopolies," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 16-29.
    19. Breitmoser, Yves, 2012. "Allaz-Vila competition with non-linear costs or demands," MPRA Paper 41772, University Library of Munich, Germany.
    20. Sirin, Selahattin Murat & Camadan, Ercument & Erten, Ibrahim Etem & Zhang, Alex Hongliang, 2023. "Market failure or politics? Understanding the motives behind regulatory actions to address surging electricity prices," Energy Policy, Elsevier, vol. 180(C).

    More about this item

    Keywords

    flexibility; electricity; market design; intra-day market; day-ahead market; risk transfer;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

    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:tse:wpaper:127219. 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: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/tsetofr.html .

    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.