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Strategic Forward Contracting in the Wholesale Electricity Market

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  • Par Holmberg

Abstract

This paper analyses a wholesale electricity market with supply function competition. Trade in the forward and spot markets is represented by a two-stage game, and its subgame perfect Nash equilibrium (SPNE) is characterized. It is verified that increased forward sales of a producer constitute a credible commitment to aggressive spot market bidding. The paper identifies market situations when this pro-competitive commitment is unilaterally profitable for the producer. It is also proven that a producer has incentives to sell in the forward market in order to reduce competitors’ forward sales, which softens their spot market offers.

Suggested Citation

  • Par Holmberg, 2011. "Strategic Forward Contracting in the Wholesale Electricity Market," The Energy Journal, , vol. 32(1), pages 169-202, January.
  • Handle: RePEc:sae:enejou:v:32:y:2011:i:1:p:169-202
    DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No1-7
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    References listed on IDEAS

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    1. E. J. Anderson & H. Xu, 2005. "Supply Function Equilibrium in Electricity Spot Markets with Contracts and Price Caps," Journal of Optimization Theory and Applications, Springer, vol. 124(2), pages 257-283, February.
    2. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    3. David Newbery, 2008. "Analytic Solutions for Supply Function Equilibria: Uniqueness and Stability," Working Papers EPRG 0824, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    4. Frank Wolak, 2000. "An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market," International Economic Journal, Taylor & Francis Journals, vol. 14(2), pages 1-39.
    5. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
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