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Hilton Atlanta, 303
Transportation and Public Utilities Group
Saturday, Jan. 5, 2019 2:30 PM - 4:30 PM
- Chair: Frank A. Wolak, Stanford University
Dynamic Competition and Arbitrage in Electricity Markets: The Role of Financial Traders
AbstractAs in most commodities markets, deregulated electricity markets allow the participation of purely financial traders to enhance informational and productive efficiency. The presence of financial players is expected, among other things, to help eliminate predictable pricing gaps between forward and spot prices, which may arise in the presence of market power and are linked to productive inefficiency. However, we find that the impact of financial players on reducing pricing gaps has been limited, even using credibly exogenous variation in financial activity to address potential endogeneity. A forward premium persists. We show that financial traders effect on the premium was limited by two barriers. First, arbitrageurs do not have unlimited access to capital. Trading was reduced during the financial crisis, when capital availability was restricted. The second is regulation, as high transaction costs imposed by the regulator restricted arbitrage. Moreover, during this period we observe that some financial players appear to be betting in exactly the opposite direction of the pricing gap, sustaining large losses while doing so. We find evidence consistent with participants using forward market bids to affect congestion and thus increase the value of their Financial Transmission Rights (FTR), i.e. these financial players incur losses with one financial instrument to make larger profits with another, introducing artificial congestion to the system.
Who Benefits from Ratepayer-funded Auctions of Transmission Congestion Contracts? Evidence from New York
AbstractTransmission congestion contracts are derivative products that electricity retailers can use to change their future wholesale electricity price exposure to a different location. U.S. Congress is concerned by financial trader profits in auctions for these derivatives because the payouts are funded by ratepayers, not willing counterparties. I study firm-level positions in the New York Wholesale Electricity Market to investigate the causes of this concern. I find a small set of financial traders earn large, systematic profits on products that electricity retailers tend to avoid. However, trader participation can improve price signals on these and related products. Policy implications are discussed.
Measuring the Impact of Purely Financial Participants on Wholesale and Retail Market Performance: The Case of Singapore
AbstractIn April 2015, Singapore introduced an anonymous futures market for wholesale electricity to increase competition faced by the vertically-integrated incumbent retailers. Four independent retailers subsequently entered. Using data on prices and other observable characteristics of all competitive retail contracts signed from October 2014 to March 2016, a larger average quantity of open futures contracts that clear during the term of the retail contract before the retail contract starts predicts a lower price for the retail contract. This outcome is consistent with increased futures market purchases by independent retailers causing lower retail prices. Consistent with the logic in Wolak (2000) that a larger volume of fixed-price forward contract obligations leads to offer prices closer to the supplier’s marginal cost of production, a larger volume of futures contracts clearing against short-term wholesale prices predicts lower half-hourly wholesale prices. Both empirical results support introducing purely financial players to improve both retail and wholesale market performance.
- Q4 - Energy
- Q5 - Environmental Economics