Contract design and supply chain coordination in the electricity industry

In this article we propose a model of the supply chain in electricity markets with multiple generators and retailers and considering several market structures. We analyze how market design interacts with the different types of contract and market structure to affect the coordination between the different firms and the performance of the supply chain as a whole. We compare the implications on supply chain coordination and on the players’ profitability of two different market structures: a pool based market vs. bilateral contracts, taking into consideration the relationship between futures and spot markets. Furthermore, we analyze the use of contracts for differences and two-part-tariffs as tools for supply chain coordination. We have concluded that there are multiple equilibria in the supply chain contracts and structure and that the two-part tariff is the best contract to reduce double marginalization and increase efficiency in the management of the supply chain.

► Futures markets decrease double-marginalization, improving market efficiency.
► The contract for differences has a significant impact on the level of trading in the spot market.
► The two-part tariff contract is the best contract for improving coordination and reducing double-marginalization.
► In general, the supply chain models for electricity markets do not have unique equilibria.