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 for this work

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-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.

Original languageEnglish
Article number107268
JournalThe Electricity Journal
Volume36
Issue4
Number of pages14
ISSN1040-6190
DOIs
Publication statusPublished - May 2023

Keywords

  • Capacity cycles
  • Electricity markets
  • Experiments
  • Forward markets

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