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Can Forward Commodity Markets Improve Spot Market Performance? Evidence from Wholesale Electricity

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  • Akshaya Jha
  • Frank A. Wolak

Abstract

Forward markets are believed to aggregate information about future spot prices and reduce the cost of producing the commodity. We develop a measure of the extent to which forward and spot prices agree in markets with transaction costs. Using this measure, we show that day-ahead prices better reflect real-time prices at all locations in California's electricity market after the introduction of financial trading. We then present evidence suggesting that operating costs and input fuel use fell after the introduction of financial trading on days when the nonconvexities inherent to the production and transmission of electricity are especially relevant.

Suggested Citation

  • 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.
    • Handle: RePEc:aea:aejpol:v:15:y:2023:i:2:p:292-330
    DOI: 10.1257/pol.20200234
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    Citations

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    Cited by:

    1. Katzen, Matthew & Leslie, Gordon W., 2024. "Siting and operating incentives in electrical networks: A study of mispricing in zonal markets," International Journal of Industrial Organization, Elsevier, vol. 94(C).
    2. Blake Shaffer & Frank A. Wolak, 2024. "Market Design for the 21st Century: Recommendations for Alberta’s Power Market," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 17(02), February.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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