Supply Flexibility and risk transfer in electricity markets

Claude Crampes and Jérôme Renault

No 22-1350, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: The producers of electricity using dispatchable plants rely on partially flexible technologies to match the variability of both production from renewables and final demand. We analyse upward and downward flexibility in a two-stage decision process where firms compete at low cost in quantities planned before knowing the demand function and adjust the output at high cost when the true state of demand is revealed. We first compute the first best and competitive outcomes. Then we consider the outcome of imperfect competition. We begin with an analysis of the monopoly case, then we determine the duopoly subgame perfect equilibria corresponding to two market designs: one where all trade occurs in an intra-day market with known demand, the other where a dayahead market with random demand is added to the intra-day market. We show that being inflexible can be more profitable than being flexible. We also show that adding a day-ahead market to the intra-day market increases welfare but transfers risks from firms to consumers. The transfer is all the more important as technologies are not very flexible.

Keywords: flexibility; electricity; market design; intra-day market; day-ahead market; risk transfer (search for similar items in EconPapers)
JEL-codes: C72 D24 D47 L23 L94 (search for similar items in EconPapers)
Date: 2022-07-28, Revised 2023-09
New Economics Papers: this item is included in nep-com, nep-ene, nep-gth, nep-ind and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:127219

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