From Forward to Spot Prices: Producers, Retailers and Loss Averse Consumers in Electricity Markets

23 Pages Posted: 10 Jan 2019

See all articles by Valeria Di Cosmo

Valeria Di Cosmo

Economic and Social Research Institute (ESRI); Fondazione Eni Enrico Mattei (FEEM)

Elisa Trujillo-Baute

University of Warwick

Multiple version iconThere are 2 versions of this paper

Date Written: January 10, 2019

Abstract

The benefits of smoothing demand peaks in the electricity market has been widely recognised. European countries such Spain and some of the Scandinavian countries have recently given to the consumers the possibility to face the spot prices instead of having a fixed tariffs determined by retailers. This paper develops a theoretical model to study the relations between risk averse consumers, retailers and producers, both in the spot and in the forward markets when consumers are able to choose between fixed tariffs and the wholesale prices. The model is calibrated on a real market case - Spain - where since 2014 spot tariffs were introduced beside the flat tariffs for household consumers. Finally, simulations of agents behavior and markets performance, depending on consumers risk aversion and the number of producers, are used to analyse the implications from the model.

Our results show that the quantities the retailers and the producers trade in the forward market are positively related with the loss aversion of consumers. The quantities bought by the retailers in the forward market are negatively related with the skewness of the spot prices. On the contrary, quantity sold forward by producers are positively related with the skewness of the spot prices (high probability of getting high prices increase the forward sale) and with the total market demand. In the spot market, the degree of loss aversion of consumers determine the quantity the retailers buy in the spot market but does not have a direct effect on the spot prices.

Keywords: Electricity Spot Market, Electricity Forward Market, Risk Aversion

JEL Classification: D40, L11, Q41

Suggested Citation

Di Cosmo, Valeria and Trujillo-Baute, Elisa, From Forward to Spot Prices: Producers, Retailers and Loss Averse Consumers in Electricity Markets (January 10, 2019). FEEM Working Paper No. 31.2018. Available at SSRN: https://ssrn.com/abstract=3313334 or http://dx.doi.org/10.2139/ssrn.3313334

Valeria Di Cosmo (Contact Author)

Economic and Social Research Institute (ESRI) ( email )

Whitaker square Sir john Rogerson's Quay
Dublin 2
Dublin
Ireland

Fondazione Eni Enrico Mattei (FEEM) ( email )

C.so Magenta 63
Milano, 20123
Italy

Elisa Trujillo-Baute

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

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