The high volatility of electricity markets gives producers and retailers an incentive to hedge their exposure to electricity prices by buying and selling derivatives. This paper studies how welfare and investment incentives are affected when markets for derivatives are introduced, and to what...

Abuse of market power by dominant generation firms is a growing concern in worldwide electricity markets. This paper argues that relying only on general competition rules--as is the case in most European countries--is insufficient and that complementary ex-ante regulation is needed. In...

Large scale investments in European electricity networks are foreseen in the next decade. Pricing the network at marginal cost will not be sufficient to pay for those investments as the network is a natural monopoly. This paper derives numerically the socially optimal transmission prices for...

In this paper we show that free entry decisions may be socially inefficient, even in a perfectly competitive homogeneous goods market with non-lumpy investments. In our model, inefficient entry decisions are the result of risk-aversion of incumbent producers and consumers, combined with...

We demonstrate how suppliers can take strategic speculative positions in derivatives markets to soften competition in the spot market. In our game, suppliers first choose a portfolio of call options and then compete with supply functions. In equilibrium firms sell forward contracts and buy call...

Many commodities are traded on both a spot market and a derivative market. We show that an incumbent producer may use purely financial derivatives to extract rent from a potential entrant. It can do so by selling derivatives to a large buyer for more than his expected production level. This...

In a competitive electricity market, nodal pricing is the most efficient way to manage congestion. Counter-trading is inefficient as it gives the wrong long term signals for entry and exit of power plants. However, in a non-competitive market, additional entry will improve the competitiveness of...

This paper compares two popular models of oligopolistic electricity markets, Cournot and the Supply Function Equilibrium (SFE), and then tests which model best describes the observed market data. Using identical demand and supply specifications, both models are calibrated to the German...