Working Paper No. 756

Game-theoretical, Strategic Forward Contracting in the Electricity Market

Published: June 24, 2008Pages: 27Keywords: Supply Function Equilibrium; Forward Market; Strategic Contracting; Arbitrage; Strategic Substitutes; Oligopoly; Electricity MarketJEL-codes: C72; D43; D44; G13; L13; L94

Game-theoretical, Strategic Forward Contracting in the Electricity Market Pär Holmberg


Forward sales is a credible commitment to aggressive spot market bidding, and it mitigates producers’ market power in electricity markets. Still it can be profitable for a producer to make such a commitment if it results in a soft response from competitors in the spot market (strategies are substitutes). The optimal contracting level of a risk-neutral producer is determined by the extent to which strategies are substitutes and the slope of the residual demand in the forward market. Conditions under which strategies are substitutes are identified for a two-stage game with supply function competition and capacity constrained producers.

 

Pär Holmberg

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Interdisciplinary European Studies

The European Union and the Return of the Nation State

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This book explores the complex and ever-changing relationship between the European Union and its member states. The recent surge in tension in this relationship has been prompted by the actions of some member state governments as they question fundamental EU values and principles and refuse to implement common decisions seemingly on the basis of narrowly defined national interests.

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