Hedging and Vertical Integration in Electricity Markets

Gilles Chemla, Nizar Touzi, Aïd, René and Arnaud Porchet

No 8313, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyzes the interactions between competitive (wholesale) spot, retail, and forward markets and vertical integration in electricity markets. We develop an equilibrium model with producers, retailers, and traders to study and quantify the impact of forward markets and vertical integration on prices, risk premia and retail market shares. We point out that forward hedging and vertical integration are two separate mechanisms for demand and spot price risk diversification that both reduce the retail price and increase retail market shares. We show that they differ in their impact on prices and firms' utility due to the asymmetry between production and retail segments. Vertical integration restores the symmetry between producers' and retailers' exposure to demand risk while linear forward contracts do not. Vertical integration is superior to forward hedging when retailers are highly risk averse. We illustrate our analysis with data from the French electricity market.

Keywords: Electricity markets; Forward; Hedging; Producers; Retailers; Spot; Vertical integration (search for similar items in EconPapers)
JEL-codes: D21 G13 G32 G34 I11 (search for similar items in EconPapers)
Date: 2011-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

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