How to Allocate Forward Contracts: The case of electricity markets

Abstract

Several regulatory authorities worldwide have imposed forward contract commitments on electricity producers as a way to mitigate their market power. In order to understand the e¤ects of such commitments, we introduce forward contracting in a uniform-price auction model with complete information and discrete bids. The model predicts that forward contracts are generally pro-competitive, but might have anti-competitive e¤ects whenever awarded to rms with little but yet some market power. Furthermore, an increase in contract volume may not always be pro- competitive. Our analysis suggests that forward contracts should be allocated so as to (virtually) reduce asymmetries across rms.