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Quantifying the supply‐side benefits from forward contracting in wholesale electricity markets
Author(s) -
Wolak Frank A.
Publication year - 2007
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.989
Subject(s) - bidding , profit (economics) , economics , marginal cost , electricity , microeconomics , supply , electricity market , unit cost , mains electricity , production (economics) , industrial organization , econometrics , business , power (physics) , physics , quantum mechanics , electrical engineering , engineering
The assumption of expected profit‐maximizing bidding behavior in a multi‐unit, multi‐period auction with step‐function supply curves is used to estimate cost functions for electricity generation units and derive tests of expected profit‐maximizing behavior. Applying these techniques to data from the National Electricity Market in Australia reveals statistically significant evidence of output‐dependent marginal costs within and across half‐hours of the day, but no evidence against the hypothesis of expected profit‐maximizing behavior. These cost function estimates quantify the economic significance of output‐varying costs and how forward financial contract obligations impact the amount of these costs the generation unit owner incurs. This supplier's existing obligations imply average daily production costs that are 8% lower than the profit‐maximizing pattern of output with no forward contract obligations. Copyright © 2007 John Wiley & Sons, Ltd.