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Electricity market competition when forward contracts are pairwise efficient

Van Moer, Geert (2019): Electricity market competition when forward contracts are pairwise efficient.

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Abstract

This paper investigates competition in electricity markets when each pair of strategic firms exchanges forward obligations pairwise-efficiently. The gains from pairwise trade are specific to the counterparty, which can be horizontally- or vertically-related depending on whether it has access to flexibility in the spot market. The analysis shows that pairwise efficient forward trade rules out a bilateral oligopoly spot market where net buyers and net sellers strategically interact. Firms without flexibility close their position entirely in the forward market. Forward markets serve to absorb renewable energy shocks, even if forward contracts are unobservable and firms are risk-neutral.

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