A novel approach for modeling deregulated electricity markets

Ofir D. Rubin; Bruce A. Babcock

doi:10.1016/j.enpol.2011.02.040

A novel approach for modeling deregulated electricity markets

Ofir D. Rubin, Bruce A. Babcock

Research output: Contribution to journal › Article › peer-review

13 Scopus citations

Abstract

The theoretical framework developed in this study allows development of a model of deregulated electricity markets that explains two familiar empirical findings; the existence of forward premiums and price-cost markups in the spot market. This is a significant contribution because electricity forward premiums have been previously explained exclusively by the assumptions of perfect competition and risk-averse behavior while spot markups are generally the outcome of a body of literature assuming oligopolistic competition. Our theoretical framework indicates that a certain premium for forward contracting is required for efficient allocation of generation capacity. However, due to the uniqueness of electricity and the design of deregulated electricity markets this premium might be substantially higher than its optimal level.

Original language	English
Pages (from-to)	2711-2721
Number of pages	11
Journal	Energy Policy
Volume	39
Issue number	5
DOIs	https://doi.org/10.1016/j.enpol.2011.02.040
State	Published - 1 May 2011
Externally published	Yes

Keywords

Deregulated electricity markets
Electricity forward premium
Oligopoly pricing

ASJC Scopus subject areas

General Energy
Management, Monitoring, Policy and Law

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10.1016/j.enpol.2011.02.040

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AB - The theoretical framework developed in this study allows development of a model of deregulated electricity markets that explains two familiar empirical findings; the existence of forward premiums and price-cost markups in the spot market. This is a significant contribution because electricity forward premiums have been previously explained exclusively by the assumptions of perfect competition and risk-averse behavior while spot markups are generally the outcome of a body of literature assuming oligopolistic competition. Our theoretical framework indicates that a certain premium for forward contracting is required for efficient allocation of generation capacity. However, due to the uniqueness of electricity and the design of deregulated electricity markets this premium might be substantially higher than its optimal level.

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A novel approach for modeling deregulated electricity markets

Abstract

Keywords

ASJC Scopus subject areas

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