Supply flexibility and risk transfer in electricity markets

Jérôme Renault () and Claude Crampes
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Jérôme Renault: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Claude Crampes: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: Power producers using plants with controllable output rely on partially flexible technologies to adapt to the variability of production from intermittent renewable energy sources and of end demand. We analyze the adjustment of production up or down as part of a two-stage decision process, in which firms compete at low cost for planned quantities before the demand function is known, and adjust production at high cost when the actual 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 day-ahead 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: electricity; risk transfer; day-ahead market; intra-day market; market design; L94 flexibility; L23; D47; D24; C72; C72 D24 D47 L23 L94 flexibility electricity market design intra-day market day-ahead market risk transfer (search for similar items in EconPapers)
Date: 2025-08-30
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