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Title: Strategic interactions in spot and forward electricity trading
Author: Koc, Veli
ISNI:       0000 0004 2724 3539
Awarding Body: Imperial College London
Current Institution: Imperial College London
Date of Award: 2012
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Two stylised facts in electricity markets complicate the determination of forward and spot price formation. Firstly, electricity markets are generally imperfect, so price formation is often a function of individual agent behaviour. Firms have strategic reasons to trade in the forward market because forward contracts improve firms' positions in the spot market. Theory usually takes the structural view of no arbitrage and risk neutrality in a Cournot equilibrium model between agents trading in the forward and spot market. With market players as risk neutral, the role of the forward premium in determining current spot price is not relevant. Secondly, electricity is essentially non-storable, so the cost-of-carry models for the links between forward and spot prices are not generally appropriate. Forward markets can be explained by the risk averse behaviour of the agents. With risk aversion and high volatility of the spot market, forward contracting allows agents, as price-takers, to hedge. With agents as price-takers, this theoretical analysis does not consider the role of the strategic interaction in determining spot prices. Both of these theoretical approaches lead to interesting conclusions and testable approaches. However, it is likely the assumption of risk neutrality in the former approach and the assumption of perfect competition in the latter frameworks are restrictive, since both risk aversion and market power appear to play a role in determining electricity prices. We apply a two-stage Cournot game where firms, with market power, are mean-variance optimizers. First, we model the production game and forward market equilibrium for two risk-averse firms and extend this for the ti firms case. Later we develop an empirical model to test some of the hypotheses that emerge from the theoretical analysis. We expect a repeated interaction game amongst power plants with the same economic characteristics would be expected to result in convergence of their offer prices. If offer prices do not converge, it raises interesting issues related to the sustainability of heterogeneous competitive strategies. We analyse the offer prices submitted to the UK Balancing Mechanism in 2008 by four coal-fired power stations, separately owned by British Energy (BE), EDF, E.ON and Drax to understand the forward and spot market interaction with market fundamentals.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available