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Modelling the hedging decisions of a generator with market power
KTH, School of Electrical Engineering (EES), Electric power and energy systems.
2011 (English)In: 17th Power Systems Computation Conference, PSCC 2011, Power Systems Computation Conference ( PSCC ) , 2011Conference paper (Refereed)Text
Abstract [en]

The incentive on an electricity generating firm to exercise market power depends strongly on the volume the firm has pre-sold in the forward or hedge markets. Therefore, in order to forecast the effect of mergers and other market developments on market power outcomes, it is essential to model the hedging decisions of dominant generating firms. This paper shows that a dominant firm's profit-maximizing choice of hedge level depends on the extent to which the hedge price varies with the firm's hedging decision. In the case in which the hedge price is independent of the firm's hedge level, the optimal choice of hedging is an "all or nothing" decision. In this case, there is no equilibrium level of hedging in pure strategies. This outcome may explain the observed lack of hedge market liquidity in wholesale electricity markets with substantial market power. We also model the equilibrium hedging outcome in a two-stage Cournot oligopoly and show that, even if the hedge price is independent of the hedging decisions of the firms, a rational expectations equilibrium can exist with high levels of hedging if there are enough firms in the market.

Place, publisher, year, edition, pages
Power Systems Computation Conference ( PSCC ) , 2011.
Keyword [en]
Cournot oligopoly, Liquidity, Market power, Nash Equilibrium, Strategic forward contracting, Competition, Costs, Wooden fences, Nash equilibria, Commerce
National Category
Economics
Identifiers
URN: urn:nbn:se:kth:diva-181683ScopusID: 2-s2.0-84943810990ISBN: 9789175012575OAI: oai:DiVA.org:kth-181683DiVA: diva2:900155
Conference
17th Power Systems Computation Conference, PSCC 2011, 22 August 2011 through 26 August 2011
Note

QC 20160203

Available from: 2016-02-03 Created: 2016-02-02 Last updated: 2016-02-03Bibliographically approved

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Hesamzadeh, Mohammad Reza
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