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Quantifying the supply-side benefits from forward contracting in wholesale electricity markets

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  • Frank A. Wolak

    (Department of Economics, Stanford University, Stanford, California, USA)

Abstract

The assumption of expected profit-maximizing bidding behavior in a multi-unit, multi-period auction with step-function supply curves is used to estimate cost functions for electricity generation units and derive tests of expected profit-maximizing behavior. Applying these techniques to data from the National Electricity Market in Australia reveals statistically significant evidence of output-dependent marginal costs within and across half-hours of the day, but no evidence against the hypothesis of expected profit-maximizing behavior. These cost function estimates quantify the economic significance of output-varying costs and how forward financial contract obligations impact the amount of these costs the generation unit owner incurs. This supplier's existing obligations imply average daily production costs that are 8% lower than the profit-maximizing pattern of output with no forward contract obligations. Copyright © 2007 John Wiley & Sons, Ltd.

Suggested Citation

  • Frank A. Wolak, 2007. "Quantifying the supply-side benefits from forward contracting in wholesale electricity markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(7), pages 1179-1209.
    • Handle: RePEc:jae:japmet:v:22:y:2007:i:7:p:1179-1209
    DOI: 10.1002/jae.989
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    References listed on IDEAS

    as
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    4. Wolak, Frank A., 1989. "Local and Global Testing of Linear and Nonlinear Inequality Constraints in Nonlinear Econometric Models," Econometric Theory, Cambridge University Press, vol. 5(1), pages 1-35, April.
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    8. Wolak, Frank A., 1989. "Testing inequality constraints in linear econometric models," Journal of Econometrics, Elsevier, vol. 41(2), pages 205-235, June.
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