Spot, Bilateral and Futures Trading in Electricity Markets - Implications for Stability

34 Pages Posted: 7 Mar 2007 Last revised: 22 Jun 2012

See all articles by Valeria termini

Valeria termini

Faculty of Economics University of RomaTre Italy; AEEG Italian Regulatory Authority for Electricity and Gas

Laura Cavallo

Prime Minister's Office - Department of Economic Affairs

Date Written: February 1, 2007

Abstract

The design of wholesale electricity markets in the transition towards liberalization presents significant differences from country to country. Some spot markets have imposed the concentration of transactions to ensure market liquidity. Other markets are based on bilateral trading. The debate about the optimal trading mechanism mainly concentrates on how to deal with the trade off between the liquidity of the market and the stability of the system. The solution chosen by some market is a mandatory pool with a regulated market for electricity derivatives, that allows to hedge price volatility and to mitigate market power. This paper investigates whether, in the presence of a futures market, spot and bilateral trading can operate together and what are possible outcomes in terms of liquidity of the spot market and stability of the system. The paper extends existing literature on the role of futures market on the behavior of spot market prices, developing a multi-period model in which electricity consumers can choose whether to trade on the spot market or negotiate bilateral contracts. Results suggest that a spot market with futures contracts and a market for bilateral contracts are not necessarily alternative ways to manage stability problems, but may co-exist with positive and synergic outcomes on price behaviors and market power.

Keywords: Derivatives, Electricity, Market power, Hedging

JEL Classification: G18, L94, Q41, Q48

Suggested Citation

Termini, Valeria A. and Cavallo, Laura, Spot, Bilateral and Futures Trading in Electricity Markets - Implications for Stability (February 1, 2007). FEEM Working Paper No. 19.2007. Available at SSRN: https://ssrn.com/abstract=965655 or http://dx.doi.org/10.2139/ssrn.965655

Valeria A. Termini (Contact Author)

Faculty of Economics University of RomaTre Italy ( email )

Via Silvio d'Amico 77
Roma
Italy
+393351449283 (Phone)

AEEG Italian Regulatory Authority for Electricity and Gas ( email )

Piazza Cavour, 5
Milano, 00187
Italy

HOME PAGE: http://www.autorita.energia.it/it/inglese/contacts/contatti.htm

Laura Cavallo

Prime Minister's Office - Department of Economic Affairs ( email )

Via della Mercede 9
00187 Rome
Italy
+39 06 67796634 (Phone)
+39 06 67796663 (Fax)

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