Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 496: Strategic use of available capacity in the electricity spot market

Chloé Le Coq ()
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Chloé Le Coq: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: The literature on deregulated electricity markets generally assumes available capacities to be given. In contrast, this paper studies a model where firms precommit to capacity levels before competing in a uniform price auction. The analysis sheds light on recent empirical findings that firms use their available capacity to obtain high market prices. There exist two equilibria where at least one firm withholds its available capacity to induce the maximum price. Moreover, in one equilibrium, the inefficient firm obtains a relatively large market share.

Keywords: spot market; capacity game; auction mechanism; electricity.

JEL-codes: C72; D43; D44; L13; L94

27 pages, April 18, 2002

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