How to allocate forward contracts: The case of electricity markets

Abstract

Several regulatory authorities worldwide have imposed forward contract commitments on electricity producers as away to mitigate their market power. In this paper we analyze the impact of such commitments on equilibrium outcomes in a model that reflects important institutional and structural features of electricity markets. We show that, when firms area symmetric, the distribution of contracts among firms matters. In the case of a single dominant firm, the regulator can be confident that allocating contracts to that firm will be pro-competitive. However, when asymmetries are less extreme, certain contract allocations might yield anti-competitive outcomes by eliminating more competitive equilibria. Our analysis thus suggests that forward contracts should be allocated so as to (virtually) reduce asymmetries across firms.