A Novel Approach for Modeling Deregulated Electricity

Ofir Rubin and Bruce Babcock

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: The theoretical framework developed in this study allows development of a model of deregulated electricity markets that explains two familiar empirical findings; the existence of forward premiums and price-cost markups in the spot market. This is a significant contribution because electricity forward premiums have been previously explained exclusively by the assumptions of perfect competition and risk-averse behavior while spot markups are generally the outcome of a body of literature assuming oligopolistic competition. Our theoretical framework indicates that a certain premium for forward contracting is required for efficient allocation of generation capacity. However, due to the uniqueness of electricity and the design of deregulated electricity markets this premium might be substantially higher than its optimal level.

Keywords: Deregulated electricity markets; Electricity forward premium; Oligopoly pricing (search for similar items in EconPapers)
Date: 2011-02-04
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Citations: View citations in EconPapers (5)

Published in Energy Policy 2011, vol. 39 no. 5, pp. 2711-2721

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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:32440

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