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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. Jordi Brandts & Paul Pezanis‐Christou & Arthur Schram, 2008. "Competition with forward contracts: a laboratory analysis motivated by electricity market design," Economic Journal, Royal Economic Society, vol. 118(525), pages 192-214, January.
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    Cited by:

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    2. David P. Brown & David E. M. Sappington, 2023. "Market Structure, Risk Preferences, and Forward Contracting Incentives," Journal of Industrial Economics, Wiley Blackwell, vol. 71(4), pages 1146-1202, December.

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