
Hedging and vertical integration in electricity markets
Chemla, Gilles; Porchet, Arnaud; Aïd, René; Touzi, Nizar (2011), Hedging and vertical integration in electricity markets, Management Science, 57, 8, p. 1438-1452
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Type
Article accepté pour publication ou publiéDate
2011Journal name
Management ScienceVolume
57Number
8Publisher
INFORMS
Pages
1438-1452
Metadata
Show full item recordAbstract (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 marketSubjects / Keywords
Spot and vertical integration; Retailers; Producers; Hedging; Electricity marketsJEL
D21 - Firm Behavior: TheoryG13 - Contingent Pricing; Futures Pricing
G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
I11 - Analysis of Health Care Markets
I51
I94
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