Short-Term Forward and Spot Prices in Organized Wholesale Electricity Markets

Download or read book Short-Term Forward and Spot Prices in Organized Wholesale Electricity Markets written by Jeremy Larrieu and published by . This book was released on 2016 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: In modern organized wholesale electricity markets, power is sold competitively in a two-settlement auction comprised of a short-term forward (or "day-ahead") market with elastic demand, and a spot (or "real-time") imbalance market characterized by an inelastic residual demand curve - a construct that the literature on the subject tends to ignore. To understand the strategic behavior of firms looking maximize joint profits over both markets, I construct a two-settlement model of electricity prices in which firms compete to meet demand from consumers, first in quantities, then in prices. I show that the ensuing forward premium depends on the costliness of spot commitment relative to firms' ability to exercise market power by setting quantities in the forward market. Using hourly data from the California Independent System Operator, I find that the model helps explain price formation in the California market, and that the forward market solutions are close to the Cournot outcome due to the relative insensitivity of the spot equilibrium price to individual firm's forward commitment decisions.