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Using Forward Markets to Improve Electricity Market Design

Lawrence M. Ausubel () and Peter Cramton ()
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Lawrence M. Ausubel: Economics Department, University of Maryland, http://www.econ.umd.edu

Papers of Peter Cramton from University of Maryland, Department of Economics - Peter Cramton

Abstract: Forward markets, both medium term and long term, complement the spot market for wholesale electricity. The forward markets reduce risk, mitigate market power, and coordinate new investment. In the medium term, a forward energy market lets suppliers and demanders lock in energy prices and quantities for one to three years. In the long term, a forward reliability market assures adequate resources are available when they are needed most. The forward markets reduce risk for both sides of the market, since they reduce the quantity of energy that trades at the more volatile spot price. Spot market power is mitigated by putting suppliers and demanders in a more balanced position at the time of the spot market. The markets also reduce transaction costs and improve liquidity and transparency. Recent innovations to the Colombia market illustrate the basic elements of the forward markets and their beneficial role.

Keywords: Auctions; electricity auctions; market design; forward markets (search for similar items in EconPapers)
JEL-codes: D44 C78 L96 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2009, Revised 2009
New Economics Papers: this item is included in nep-ene and nep-mic
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Published in Utilities Policy, 18, 195-200, 2010

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