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Hedging and Vertical Integration in Electricity Markets

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Date
2011
Dewey
Economie financière
Sujet
corporate finance; industries; electric–electronic; financial institutions; markets; asset pricing
JEL code
D.D2.D21; G.G1.G13; G.G3.G32; G.G3.G34
Journal issue
Management Science
Volume
57
Number
8
Publication date
2011
Article pages
iv-1509
Publisher
Institute for Operations Research and the Management Sciences
DOI
http://dx.doi.org/10.1287/mnsc.1110.1357
URI
https://basepub.dauphine.fr/handle/123456789/19976
Collections
  • LEDa : Publications
Metadata
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Author
Aïd, René
163511 Laboratoire d'Economie de Dauphine [LEDa]
Chemla, Gilles
1032 Dauphine Recherches en Management [DRM]
Porchet, Arnaud
Touzi, Nizar
89626 Centre de Mathématiques Appliquées - Ecole Polytechnique [CMAP]
Type
Article accepté pour publication ou publié
Abstract (EN)
This paper analyzes the interactions between competitive (wholesale) spot, retail, and forward markets and vertical integration in electricity markets. We develop an equilibrium model with producers, retailers, and traders to study and quantify the impact of forward markets and vertical integration on prices, risk premia, and retail market shares. We point out that forward hedging and vertical integration are two separate mechanisms for demand and spot price risk diversification that both reduce the retail price and increase retail market shares. We show that they differ in their impact on prices and firms' utility because of the asymmetry between production and retail segments. Vertical integration restores the symmetry between producers' and retailers' exposure to demand risk, whereas linear forward contracts do not. Vertical integration is superior to forward hedging when retailers are highly risk averse. We illustrate our analysis with data from the French electricity market.

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