Could forward markets stabilize capacity cycles in electricity markets?: An experimental study

Karla C. Álvarez-Uribe; Santiago Arango-Aramburo; Shayne Gary; Erik Reimer Larsen

doi:10.1016/j.tej.2023.107268

Could forward markets stabilize capacity cycles in electricity markets? An experimental study

Karla C. Álvarez-Uribe, Santiago Arango-Aramburo^*, Shayne Gary, Erik Reimer Larsen

^*Corresponding author af dette arbejde

Institut for Virksomhedsledelse

Publikation: Bidrag til tidsskrift/Konferencebidrag i tidsskrift /Bidrag til avis › Tidsskriftartikel › Forskning › peer review

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Abstract

Stabilization of electricity markets has become increasingly important to ensure investments and thereby security of supply. After deregulation, many electricity markets have shown long-term tendencies to cycles, affecting the market's reserve margin, and thus creating significant fluctuation in the price for consumers and return for investors. Forward markets have been discussed as a mechanism to damp these long-term fluctuations and create more stable prices and returns. We use a decision-making experiment in the laboratory to test these theories to understand the effect of the introduction of a forward market compared to having only a spot market. The results show that a forward market reduces the tendency of cycles the market as well as reduces prices.

Originalsprog	Engelsk
Artikelnummer	107268
Tidsskrift	The Electricity Journal
Vol/bind	36
Nummer	4
Antal sider	14
ISSN	1040-6190
DOI	https://doi.org/10.1016/j.tej.2023.107268
Status	Udgivet - maj 2023

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10.1016/j.tej.2023.107268Licens: CC BY-NC-ND

Alvarez_Uribe_2023_Could_forward_markets_stabilizeForlagets udgivne version, 3,89 MBLicens: CC BY-NC-ND

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abstract = "Stabilization of electricity markets has become increasingly important to ensure investments and thereby security of supply. After deregulation, many electricity markets have shown long-term tendencies to cycles, affecting the market's reserve margin, and thus creating significant fluctuation in the price for consumers and return for investors. Forward markets have been discussed as a mechanism to damp these long-term fluctuations and create more stable prices and returns. We use a decision-making experiment in the laboratory to test these theories to understand the effect of the introduction of a forward market compared to having only a spot market. The results show that a forward market reduces the tendency of cycles the market as well as reduces prices.",

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T2 - An experimental study

AU - Álvarez-Uribe, Karla C.

AU - Arango-Aramburo, Santiago

AU - Gary, Shayne

AU - Larsen, Erik Reimer

PY - 2023/5

Y1 - 2023/5

N2 - Stabilization of electricity markets has become increasingly important to ensure investments and thereby security of supply. After deregulation, many electricity markets have shown long-term tendencies to cycles, affecting the market's reserve margin, and thus creating significant fluctuation in the price for consumers and return for investors. Forward markets have been discussed as a mechanism to damp these long-term fluctuations and create more stable prices and returns. We use a decision-making experiment in the laboratory to test these theories to understand the effect of the introduction of a forward market compared to having only a spot market. The results show that a forward market reduces the tendency of cycles the market as well as reduces prices.

AB - Stabilization of electricity markets has become increasingly important to ensure investments and thereby security of supply. After deregulation, many electricity markets have shown long-term tendencies to cycles, affecting the market's reserve margin, and thus creating significant fluctuation in the price for consumers and return for investors. Forward markets have been discussed as a mechanism to damp these long-term fluctuations and create more stable prices and returns. We use a decision-making experiment in the laboratory to test these theories to understand the effect of the introduction of a forward market compared to having only a spot market. The results show that a forward market reduces the tendency of cycles the market as well as reduces prices.

KW - Capacity cycles

KW - Electricity markets

KW - Experiments

KW - Forward markets

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DO - 10.1016/j.tej.2023.107268

M3 - Journal article

SN - 1040-6190

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JO - The Electricity Journal

JF - The Electricity Journal

IS - 4

M1 - 107268

ER -

Could forward markets stabilize capacity cycles in electricity markets? An experimental study

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