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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 demand and production from renewables. We analyse upward and downward flexibility in a two-stage decision process where firms compete in quantities produced ex ante at low cost and ex post at high cost to supply a random residual demand. We first compute the first best and competitive outcomes, then we determine the subgame perfect equilibria corresponding to two market designs: one where all trade occurs in a spot market with known demand, the other where a day-ahead market with random demand is added to the ex-post market, first in a general setting, then using a quadratic specification. We show that being inflexible can be more profitable than being flexible. We also show that adding a day-ahead market to the spot market increases welfare but transfers risks from firms to consumers.

Keywords: flexibility; electricity; market design; 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 2022-11
New Economics Papers: this item is included in nep-com, nep-ene, nep-gth, nep-ind and nep-reg
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