Market Structure, Risk Preferences, and Forward Contracting Incentives

David Brown and David Sappington

No 2021-12, Working Papers from University of Alberta, Department of Economics

Abstract: We examine the distinct impacts of forward contracting on generators and buyers of electricity. Increased forward contracting systematically reduces the variance of a generator's profit but can increase the variance of a buyer's profit. Consequently, increased risk aversion or market uncertainty can lead buyers, but not generators, to prefer reduced levels of forward contracting. We examine how the extent of equilibrium forward contracting varies with industry conditions, including the number of generators, the number of buyers, their aversion to profit variation, and the structure of retail electricity prices.

Keywords: forward contracting; risk aversion; electricity sector (search for similar items in EconPapers)
JEL-codes: L51 L94 Q28 Q40 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2021-12-31
New Economics Papers: this item is included in nep-com, nep-cta, nep-cwa, nep-ene, nep-reg and nep-upt
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Journal Article: Market Structure, Risk Preferences, and Forward Contracting Incentives (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2021_012

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