Strategic forward contracting in electricity markets: modelling and analysis by equilibrium method

The traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship.

To promote the reformation of the electricity market in China, a market mechanism that can support collaboration between the contract market and the upcoming spot market was designed in this paper. The focus of this paper was to develop a mechanism to institutionally stabilize the market by way of disciplining market power abuse through limiting arbitrage opportunities generated from multi-markets. To quantitatively describe the arbitrage opportunity, the arbitrage opportunity function (AOF) was defined. Based on inferences of the no-arbitrage principle and the AOF, a cost-based decomposition algorithm for contracts that could improve contract coverage was proposed. The incentive compatible settlement rule for the uncovered generation on the spot market was designed to properly manipulate the arbitrage opportunity. The decomposition algorithm and the settlement rule constituted the designed market mechanism. To verify the applicability and effectiveness of the proposed mechanism, the principles of incentive compatibility, individual rationality, and payment cost minimization were employed to test the designed market mechanism based on the concept of dominant policy equilibrium. This test was conducted on a fictitious case based on the IEEE-14 system. The analysis and results may provide valuable insights on market design in China based on the functional correlation between the contract market and the spot market.

A model is presented in which spot and contract market exchange co-exist. A contract consists of a delivery requirement between an upstream and a downstream party. Contract formation determines to a certain extent the probability distribution of the spot market price. This contract formation externality entails the removal of high reservation price buyers and various sellers from the spot market. The first effect decreases the expected spot market price when the number of contracts is small, whereas the decrease in the number of sellers and additional residual contract demand increase the expected spot market price beyond a certain number of contracts. It implies an endogenous upper bound on the number of contracts. Contract prices are positively related to the number of contracts. Finally, additional contracts reduce the variance of the spot market price when the number of contracts is sufficiently large.

This paper investigates a two stage equilibrium model for generators' strategic behaviors in contract signing in the forward market and electricity bidding in the electricity spot market. We propose a linear asymmetric supply function equilibrium model to develop generators' optimal bidding strategies considering a forward market equilibrium in the second stage, and show the existence and uniqueness of the two stage stochastic equilibrium. In the numerical test, we present some stability analysis on the impacts of a set of factors on the market clearing price in the spot market and strike price in the forward market.

Discriminatory Versus Uniform-Price Electricity Auctions with Supply Function Equilibrium

Strategic and economic implications of forward contracting in the presence of capacity expansion

Electricity and Market Power: Current Issues for Restructuring Markets (A Survey)

In electricity markets, bilateral contracts (BC) are used to hedge against price volatility in the spot market. Pricing these contracts requires scheduling from either the buyer or the seller aiming to achieve the highest profit possible. Since this problem includes different players, a Generation Company (GC) and an Electricity Supplier Company (ESC) are considered. The approaches to solve this problem include the Nash Bargaining Solution (NBS) equilibrium and the Raiffa–Kalai–Smorodinsky (RKS) bargaining solution. The innovation of this work is the implementation of an algorithm based on the RKS equilibrium to find a compromise strategy when determining the concessions to be made by the parties. The results are promising and show that the RKS approach can obtain better results compared to the Nash equilibrium method applied to a case study.

The energy sales activities development processes in the electric power industry have been studied. The factors determining the infrastructural nature of activity in the modern market, aimed at supporting opportunities for implementing competitive transactions of electric power purchase and sale, have been formulated. The process of planning to implement in 2005–2008 a “resale” scheme for organizing energy sales activities in the course of developing a new market model has been assessed. The choice of such a scheme is not simple and not the best of possible solutions. The problems arising for economic entities in the modern Russian electric power market under the conditions of the “resale” scheme for organizing energy sales activities have been characterized. Mechanisms and procedures of the market do not provide its subjects with acceptable competition conditions. This is largely due to the fact that energy sales companies, seeking to preserve and expand the monopoly sale of electricity, suppress the possibility of competitive choice of its suppliers and consumers, creating conditions of entrepreneurship low efficiency in the market. The article proposes approaches to improving energy sales activities based on the implementing the “agency” scheme within the framework of the electric power market digital model with the solution of tasks to provide its subjects with opportunities for competitive choice, ensuring fair competition conditions for detecting and implementing opportunities to obtain entrepreneurial benefits.

Executive Summary. This study analyzes the lead-lag relationship between the spot and forward returns on direct real estate investments. Based on the forward price index (for which the term to maturity is zero) and the ex-post spot price index of residential property in Hong Kong, changes in information flow between the spot and forward markets are tested to see how they affect the lead-lag relationship. The findings suggest that (1) during periods of low-volume ratios (i.e., the forward market is relatively less active than the spot market), the spot return Granger causes the returns of forward contracts; and (2) during periods of higher-volume ratios, there are feedback relationships between the two markets.

An interval-based stochastic dominance approach for decision making in forward contracts of electricity market

Under a market environments, there are a lot of uncertainties, such as fluctuation of power prices, shortage of fuel supply and rising of fuel prices, which make generators encounter serious profits loss risk. For stabilizing profits, it is necessary for generators to establish an efficient and optimal risk management technique mix. By adopting the real option, this paper establishes a real option model in which contract electricity is taken into consideration. The optimal output of generator unit in contract market and spot market is obtained after the simulation, and then generators' profits may be maximized. Besides, by using profits loss insurance included in property insurance for reference, this paper proposes an independent profits loss insurance which is suitable for generating enterprises, and then it is combined with the real option to transfer generators' profits loss risk.

Grid-connected photovoltaic generation is developing rapidly throughout the world and photovoltaic suppliers have begun to participate in electricity market in some developed countries. This paper presents a bilateral contract model for photovoltaic power and provides trading strategy for photovoltaic suppliers to allocate electricity between contract market and spot market. Autoregressive moving average model and autoregressive model are used to simulate photovoltaic output and spot price series. Using the risk management theory in financial research field for reference, a mean — variance optimal trading portfolio model for photovoltaic suppliers is built. Based on the proposed model, optimal electricity allocation ratio is calculated. The results of a case study show that the purposed model and trading strategy can help photovoltaic suppliers manage their financial risk and obtain maximum profit utility in electricity market.

We examine how different characteristics of product demand and market impact the relative sales volume in the forward and spot markets for a commodity whose aggregate demand is uncertain. In a setting where either the forward contracts are binding quantity commitments between buyers and suppliers or the forward production takes place before the uncertainty in demand is resolved, we find that a combination of factors that include market concentration, demand risk, and price elasticity of demand will determine whether a commodity will be sold mainly through forward contracts or in the spot market. Previous findings in the literature show that when participants are risk neutral, the ratio of forward sales to spot sales is a function of market concentration alone; also, the lower the concentration, the higher this ratio. These findings hold under the assumption that demand is either deterministic or, if demand is uncertain, all production takes place after uncertainty is fully resolved and production plans can be altered instantaneously and costlessly. In our setting, however, we find that even a low level of demand risk can reverse the nature of supply in a highly competitive (low concentration) market, by shifting it from predominantly forward-driven to predominantly spot-driven supply. In markets with high concentration, the price elasticity of demand will determine whether the supply will be predominantly spot-driven or forward-driven. Our analysis suggests various new hypotheses on the structure of supply in commodity markets. This paper was accepted by Martin Lariviere, operations management.

This paper considers equilibria among multiple firms that are competing non-cooperatively against each other to sell electric power and buy resources needed to produce that power. Examples of such resources include fuels, power plant sites, and emissions allowances. The electric power market is a spatial market on a network in which flows are constrained by Kirchhoff’s current and voltage laws. Arbitragers in the power market erase spatial price differences that are non-cost based. Power producers can compete in power markets a la Cournot (game in quantities), or in a generalization of the Cournot game (termed the conjectured supply function game) in which they anticipate that rivals will respond to price changes. In input markets, producers either compete a la Bertrand (price-taking behavior) or they can conjecture that price will increase with consumption of the resource. The simultaneous competition in power and input markets presents opportunities for strategic price behavior that cannot be analyzed using models of power markets alone. Depending on whether the producers treat the arbitrager endogenously or exogenously, we derive two mixed nonlinear complementarity formulations of the oligopolistic problem. We establish the existence and uniqueness of solutions as well as connections among the solutions to the model formulations. A numerical example is provided for illustrative purposes.