How to allocate forward contracts: The case of electricity markets

Several regulatory authorities worldwide have imposed forward contract commitments on electricity producers as a way 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 are asymmetric, 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.

► We examine the impact of forward contract commitments held by electricity producers on equilibrium outcomes. ► When firms are asymmetric, the distribution of contracts among firms matters. ► Allocating contracts to a single dominant firm is pro-competitive. ► When asymmetries are less extreme, certain contract allocations might yield anti-competitive outcomes. ► Forward contracts should be allocated so as to (virtually) reduce asymmetries across firms.