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Contracts and Electricity Pool Prices

Author

Listed:
  • Joshua S. Gans

    (Melbourne Business School, The University of Melbourne, 200 Leicester Street, Carlton VIC 3053; E†mail: j.gans@mbs.unimelb.edu.au)

  • Danny Price

    (London Economics Australia Pty, 454 Collins Street, Melbourne VIC 3000.)

  • Kim Woods

    (London Economics Australia Pty, 454 Collins Street, Melbourne VIC 3000.)

Abstract

This paper provides a simple discussion of the interaction between forward contracts for electricity and electricity spot markets. Using a Cournot model of electricity pools, it is demonstrated that generators have a purely strategic incentive to sign forward contracts so as to raise their market share, by lowering price over the elastic portion of their individual demand curves. This, in turn, implies that the existence of the contract market lowers prices in pool markets and hence, over the industry. By mutually committing not to sign contracts, generator profits would be higher. But the existence of the contract market precludes such pre†commitment. We demonstrate that when there are asymmetries between generators, contracting also allows efficient plants to operate relatively more, lowering the cost structure of the industry. Finally, we consider the effect of contracts on entry and find that it is possible that the existence of a contract market could deter otherwise efficient entry.

Suggested Citation

  • Joshua S. Gans & Danny Price & Kim Woods, 1998. "Contracts and Electricity Pool Prices," Australian Journal of Management, Australian School of Business, vol. 23(1), pages 83-96, June.
    • Handle: RePEc:sae:ausman:v:23:y:1998:i:1:p:83-96
    DOI: 10.1177/031289629802300105
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Javad Khazaei & Golbon Zakeri & Shmuel S. Oren, 2017. "Single and Multisettlement Approaches to Market Clearing Under Demand Uncertainty," Operations Research, INFORMS, vol. 65(5), pages 1147-1164, October.
    3. Termini, Valeria & Cavallo, Laura, 2007. "Spot, Bilateral and Futures Trading in Electricity Markets. Implications for Stability," International Energy Markets Working Papers 10265, Fondazione Eni Enrico Mattei (FEEM).
    4. Rassenti, Stephen, 2009. "The strategic motive to sell forward: experimental evidence," UC3M Working papers. Economics we092616, Universidad Carlos III de Madrid. Departamento de Economía.
    5. Edward Anderson & Huifu Xu, 2006. "Optimal Supply Functions in Electricity Markets with Option Contracts and Non-smooth Costs," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 63(3), pages 387-411, July.
    6. Kaushal Kishore, 2011. "The Effect of UI Regulation on the Electricity Market," Journal of Infrastructure Development, India Development Foundation, vol. 3(1), pages 91-96, June.
    7. Desmond Cai & Anish Agarwal & Adam Wierman, 2020. "On the Inefficiency of Forward Markets in Leader–Follower Competition," Operations Research, INFORMS, vol. 68(1), pages 35-52, January.
    8. Spear, Stephen E., 2003. "The electricity market game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 300-323, April.
    9. Huifu Xu & Dali Zhang, 2013. "Stochastic Nash equilibrium problems: sample average approximation and applications," Computational Optimization and Applications, Springer, vol. 55(3), pages 597-645, July.
    10. Dali Zhang & Huifu Xu & Yue Wu, 2010. "A two stage stochastic equilibrium model for electricity markets with two way contracts," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 71(1), pages 1-45, February.
    11. Pasaoglu Kilanc, Guzay & Or, Ilhan, 2008. "A decision support tool for the analysis of pricing, investment and regulatory processes in a decentralized electricity market," Energy Policy, Elsevier, vol. 36(8), pages 3026-3034, August.
    12. Valeria Termini & Laura Cavallo, 2007. "“Spot, Bilateral and Futures Trading in Electricity Markets. Implications for Stability”," Working Papers 2007.19, Fondazione Eni Enrico Mattei.
    13. Guy Meunier, 2011. "Imperfect Competition and Long-term Contracts in Electricity Markets: Some Lessons from Theoretical Models," Chapters, in: Jean-Michel Glachant & Dominique Finon & Adrien de Hauteclocque (ed.), Competition, Contracts and Electricity Markets, chapter 6, Edward Elgar Publishing.
    14. Frederic Murphy & Yves Smeers, 2010. "On the Impact of Forward Markets on Investments in Oligopolistic Markets with Reference to Electricity," Operations Research, INFORMS, vol. 58(3), pages 515-528, June.

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