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An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market*

An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive... A major concern in the design of wholesale electricity markets is the potential for the exercise of market power by generating unit owners. To better understand the determinants of generating unit owner market power and how it is exercised, this paper derives a model of bidding behavior in a competitive electricity market which incorporates various sources of uncertainty and the impact of the electricity generator's position in the financial hedge contract market on its expected profit-maximizing bidding behavior. The model is first used to characterize the profit-maximizing market price that a generator would like set by its bidding strategy for several hedge contract and spot sales combinations. This model is applied to bid and contract data obtained from the first three months of operation of the National Electricity Market (NEM1) in Australia. This analysis illustrates the sensitivity of expected profit-maximizing bidding strategies to the amount of financial hedge contracts held by the generating unit owner. It also provides strong evidence for the effectiveness of financial hedge contracts as a means to mitigate market power during the initial stages of operation of a wholesale electricity market. [L 94] http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Economic Journal Taylor & Francis

An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market*

International Economic Journal , Volume 14 (2): 39 – Jun 1, 2000
39 pages

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References (4)

Publisher
Taylor & Francis
Copyright
Copyright Taylor & Francis Group, LLC
ISSN
1743-517X
eISSN
1016-8737
DOI
10.1080/10168730000000017
Publisher site
See Article on Publisher Site

Abstract

A major concern in the design of wholesale electricity markets is the potential for the exercise of market power by generating unit owners. To better understand the determinants of generating unit owner market power and how it is exercised, this paper derives a model of bidding behavior in a competitive electricity market which incorporates various sources of uncertainty and the impact of the electricity generator's position in the financial hedge contract market on its expected profit-maximizing bidding behavior. The model is first used to characterize the profit-maximizing market price that a generator would like set by its bidding strategy for several hedge contract and spot sales combinations. This model is applied to bid and contract data obtained from the first three months of operation of the National Electricity Market (NEM1) in Australia. This analysis illustrates the sensitivity of expected profit-maximizing bidding strategies to the amount of financial hedge contracts held by the generating unit owner. It also provides strong evidence for the effectiveness of financial hedge contracts as a means to mitigate market power during the initial stages of operation of a wholesale electricity market. [L 94]

Journal

International Economic JournalTaylor & Francis

Published: Jun 1, 2000

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