Selling Wind

50 Pages Posted: 4 Jan 2019 Last revised: 5 Jun 2019

See all articles by Ali Kakhbod

Ali Kakhbod

Massachusetts Institute of Technology (MIT) - Department of Economics

Asuman E. Ozdaglar

Massachusetts Institute of Technology (MIT) - Department of Electrical Engineering and Computer Science

Ian Schneider

Massachusetts Institute of Technology (MIT)

Date Written: December 1, 2018

Abstract

We offer a parsimonious model to investigate how strategic wind producers sell energy under stochastic production constraints, where the extent of heterogeneity of wind energy availability varies according to wind farm locations. The main insight of our analysis is that increasing heterogeneity in resource availability improves social welfare, as a function of its effects both on improving diversification and on reducing withholding by firms. We show that this insight is quite robust for any concave and downward-sloping inverse demand function. The model is also used to analyze the effect of heterogeneity on firm profits and opportunities for collusion. Finally, we analyze the impacts of improving public information and weather forecasting; enhanced public forecasting increases welfare, but it is not always in the best interests of strategic producers.

Keywords: Energy finance, Commodity market, Market power, Pricing wind, Diversification, Investment, Public forecasting, Collusion

JEL Classification: D6, D62

Suggested Citation

Kakhbod, Ali and Ozdaglar, Asuman E. and Schneider, Ian, Selling Wind (December 1, 2018). Available at SSRN: https://ssrn.com/abstract=3304189 or http://dx.doi.org/10.2139/ssrn.3304189

Ali Kakhbod (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Asuman E. Ozdaglar

Massachusetts Institute of Technology (MIT) - Department of Electrical Engineering and Computer Science ( email )

50 Memorial Drive
Cambridge, MA 02139-4307
United States
617-324-0058 (Phone)

Ian Schneider

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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