Can market power in the electricity spot market translate into market power in the hedge market?

Abstract

Electricity is a non-storable commodity frequently traded in complex markets characterized by oligopolistic structures and uniform-price auctions. These particularities confer to electricity prices idiosyncratic patterns not addressed by the usual commodity pricing literature. This paper allows for oligopoly vertical integration and uniform-price auction and derives a linear equilibrium relationship between spot prices and state variables affecting firms' costs and demand under usual functional simplications. It applies a two-factor forward pricing model over the equilibrium spot price process and shows that forward prices can be positivelyaffected by spot market power. Thus hedge prices may be affected bymarket power as it appears in the spot market.