How to allocate forward contracts: The case of electricity markets

Abstract

a b s t r a c tSeveral 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 elim inating more competitive equilibria. Our analysis thus suggests that forward contracts should be allocated so as to (virtually) reduce asymmetries across firms.

Carbon pricing with an output subsidy under imperfect competition: The case of Alberta's restructured electricity market

“…In addition to buying and selling in the spot market, firms can engage in transactions outside of, and in advance of, the spot market. Forward contracts can reflect retail commitments for vertically integrated utilities (Bushnell et al, 2008), regulatory requirements imposed on dominant generators (Frutos and Fabra, 2012), or competitive arrangements between generators and distribution utilities (Crew and Kleindorfer, 2002). In Alberta, forward trading reflects competitive arrangements between generation companies and distribution retailers.…”

Estimating Market Power in Homogenous Product Markets Using a Composed Error Model: Application to the California Electricity Market

“…Indeed, while the other market power levels in this period are highly consistent with our previous scores, we find a zero market power score for DST . Frutos and Fabra () show in a residual demand framework that the FOC of profit maximization in Equation (1) only holds for those firms setting the price. They also show that non price‐setters behave “as if” they were price‐takers.…”

Using Forward Contracts to Reduce Regulatory Capture

“…Several papers have analyzed forward contracting arrangements that are imposed by a regulator in the energy industry (e.g., de Frutos and Fabra [], Fabra and Toro [], or, for ‘virtual power plants', Schultz []). Also these papers' contribution is to understand the impact of such contracts on the strategic interaction in the final product market, while we investigate the contracts being used to mitigate regulatory capture.…”