Strategic forward contracting in electricity markets: modelling and analysis by equilibrium method

Contractual arrangement plays an important role in mitigating market power in electricity markets. The issue of whether rational generators would voluntarily enter contract markets through a strategic incentive is examined, and the factors which could affect this strategic contracting behaviour. A two-stage game model is presented to formulate the competition of generators in bid-based pool spot markets and contract markets, as well as the interaction between these two markets. The affine supply function equilibrium (SFE) method is used to model competitive bidding for the spot market, while the contract market is modelled with the general conjectural variation method. The proposed methodology allows asymmetric, multiple strategic generators having capacity constraints and affine marginal costs with non-zero intercepts to be taken into account. It is shown that the presence of forward contract markets will complicate the solution to the affine SFE, and a new methodology is developed in this regard. Strategic contracting behaviours are analysed in the context of asymmetric, multiple strategic generators. A numerical example is used to verify theoretical results. It is shown that the observability of contract markets plays an important role in fostering generators´ strategic contracting incentive, and that this contracting behaviour could also be affected by generators´ cost parameters and demand elasticity.