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Title: |
An Empirical Analysis of the Impact of Hedge Contracts on Bidding
Behavior in a Competitive Electricity Market |
| Author: |
Wolak, Frank A. |
| Author
Affiliation: |
Stanford U |
| Source: |
International Economic Journal, Summer 2000, v. 14, no. 2, pp.1-39 |
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Publication Date: |
Summer 2000 |
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Abstract: |
A major concern in the design of wholesale
electricity markets is the potential for the exercise of market power by
generating unit owners. To better understand the determinants of
generating unit owner market power and how it is exercised, this paper
derives a model of bidding behavior in a competitive electricity market
which incorporates various sources of uncertainty and the impact of the
electricity generator's position in the financial hedge contract market
on its expected profit-maximizing bidding behavior. The model is first
used to characterize the profit-maximizing market price that a generator
would like set by its bidding strategy for several hedge contract and
spot sales combinations. This model is applied to bid and contract data
obtained from the first three months of operation of the National
Electricity Market (NEM1) in Australia. This analysis illustrates the
sensitivity of expected profit-maximizing bidding strategies to the
amount of financial hedge contracts held by the generating unit owner.
It also provides strong evidence for the effectiveness of financial
hedge contracts as a means to mitigate market power during the initial
stages of operation of a wholesale electricity market. |
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