How to allocate forward contracts: the case of electricity markets Articles uri icon

publication date

  • April 2012

start page

  • 451

end page

  • 469

issue

  • 3

volume

  • 56

international standard serial number (ISSN)

  • 0014-2921

electronic international standard serial number (EISSN)

  • 1873-572X

abstract

  • Several regulatory authorities worldwide have imposed forward contract commitments on electricity producers as a way to mitigate their market power. In this paper we analyze the impact of such commitments on equilibrium outcomes in a model that reflects important institutional and structural features of electricity markets. We show that, when firms are asymmetric, the distribution of contracts among firms matters. In the case of a single dominant firm, the regulator can be confident that allocating contracts to that firm will be pro-competitive. However, when asymmetries are less extreme, certain contract allocations might yield anti-competitive outcomes by eliminating more competitive equilibria. Our analysis thus suggests that forward contracts should be allocated so as to (virtually) reduce asymmetries across firms

keywords

  • forward contracts; discrete supply functions; electricity markets; antitrust remedies; simulations