advertisement

Comments on: "Forward market integration", by Thomas Tangeras Thomas-Olivier Léautier Toulouse School of Economics June 2014 Léautier (TSE) Forward integration 06/14 1 / 11 Outline of the article Initial observation: introducing a forward market is procompetitive in a single market when producers compete à la Cournot (Allaz and Vila, 1993) Léautier (TSE) Forward integration 06/14 2 / 11 Outline of the article Initial observation: introducing a forward market is procompetitive in a single market when producers compete à la Cournot (Allaz and Vila, 1993) Research question: What is the impact of introducing a single forward market in a set of multiple spot markets? Léautier (TSE) Forward integration 06/14 2 / 11 Outline of the article Initial observation: introducing a forward market is procompetitive in a single market when producers compete à la Cournot (Allaz and Vila, 1993) Research question: What is the impact of introducing a single forward market in a set of multiple spot markets? Policy application: zonal pricing of electricity. Single day-ahead market vs. multiple nodal real-time markets Léautier (TSE) Forward integration 06/14 2 / 11 Policy application: zonal pricing (1/2) Unconstrained (day ahead) dispatch Léautier (TSE) Forward integration 06/14 3 / 11 Policy application: zonal pricing (2/2) Constrained (real-time) dispatch Léautier (TSE) Forward integration 06/14 4 / 11 Separate spot and forward markets Forward contract: producers l in market m produces qlm at cost cm , sells klm at the forward price f and (qlm klm ) at the spot price P (Qm ) = am bQm . Pro…ts are π Léautier (TSE) = (P (Qm ) = (P (Qm ) cm ) (qlm klm ) + klm (f cm ) cm ) qlm + klm (f P (Qm )) Forward integration (1) 06/14 5 / 11 Separate spot and forward markets Forward contract: producers l in market m produces qlm at cost cm , sells klm at the forward price f and (qlm klm ) at the spot price P (Qm ) = am bQm . Pro…ts are π = (P (Qm ) = (P (Qm ) cm ) (qlm klm ) + klm (f cm ) cm ) qlm + klm (f P (Qm )) (1) Equilibrium output is qlm Léautier (TSE) 1 = L+1 am cm b Forward integration + Lklm ∑ kim i 6 =l ! 06/14 5 / 11 Separate spot and forward markets Forward contract: producers l in market m produces qlm at cost cm , sells klm at the forward price f and (qlm klm ) at the spot price P (Qm ) = am bQm . Pro…ts are π = (P (Qm ) = (P (Qm ) cm ) (qlm klm ) + klm (f cm ) cm ) qlm + klm (f P (Qm )) (1) Equilibrium output is qlm 1 = L+1 am cm b + Lklm ∑ kim i 6 =l ! No arbitrage in the forward market: f = P (Qm ) ) π = (P (Qm ) Léautier (TSE) Forward integration cm ) qlm 06/14 5 / 11 Separate spot and forward markets Forward contract: producers l in market m produces qlm at cost cm , sells klm at the forward price f and (qlm klm ) at the spot price P (Qm ) = am bQm . Pro…ts are π = (P (Qm ) = (P (Qm ) cm ) (qlm klm ) + klm (f cm ) cm ) qlm + klm (f P (Qm )) (1) Equilibrium output is qlm 1 = L+1 am cm b ∑ kim + Lklm i 6 =l ! No arbitrage in the forward market: f = P (Qm ) ) π = (P (Qm ) cm ) qlm Equilibrium forward market volume is A Km = Léautier (TSE) 1 1+ L +1 L (L 1 ) Forward integration am cm b 06/14 5 / 11 Integrated forward market (separate spot markets) Forward contract: producers l in market m produces qlm at cost cm , sells klm at the forward price f and (qlm klm ) at the spot price P (Qm ) Léautier (TSE) Forward integration 06/14 6 / 11 Integrated forward market (separate spot markets) Forward contract: producers l in market m produces qlm at cost cm , sells klm at the forward price f and (qlm klm ) at the spot price P (Qm ) Equilibrium pro…t hence output unchanged Léautier (TSE) Forward integration 06/14 6 / 11 Integrated forward market (separate spot markets) Forward contract: producers l in market m produces qlm at cost cm , sells klm at the forward price f and (qlm klm ) at the spot price P (Qm ) Equilibrium pro…t hence output unchanged No arbitrage in the forward market delivery price f = 1 M M ∑ P (Qm ) m =1 ) π = (P (Qm ) Léautier (TSE) cm ) qlm + klm Forward integration 1 M M ∑ P (Qi ) i =1 P (Qm ) ! 06/14 6 / 11 Integrated forward market (separate spot markets) Forward contract: producers l in market m produces qlm at cost cm , sells klm at the forward price f and (qlm klm ) at the spot price P (Qm ) Equilibrium pro…t hence output unchanged No arbitrage in the forward market delivery price f = 1 M M ∑ P (Qm ) m =1 ) π = (P (Qm ) 1 M cm ) qlm + klm M ∑ P (Qi ) i =1 P (Qm ) ! Equilibrium forward market volume is KI = Léautier (TSE) 1 1+ L +1 ML (L 1 ) ∑M m = 1 ( am b Forward integration cm ) 06/14 6 / 11 Impact of forward markets integration Higher forward sales KI M ∑ m =1 Léautier (TSE) A = Km L (L 1 ) L +1 + M 1 M L (L 1 ) 1 M L +1 Forward integration ∑M m = 1 ( am b +1 cm ) 0 06/14 7 / 11 Impact of forward markets integration Higher forward sales KI M ∑ m =1 A = Km L (L 1 ) L +1 + M 1 M L (L 1 ) 1 M L +1 ∑M m = 1 ( am b +1 cm ) 0 Lower average price cost markup (Proposition 1) Léautier (TSE) Forward integration 06/14 7 / 11 Application to zonal pricing Day-ahead supply-demand equilibrium per zone Léautier (TSE) Forward integration 06/14 8 / 11 Application to zonal pricing Day-ahead supply-demand equilibrium per zone Within each zone, nodal rebalancing between day-ahead and real-time to meet transmission constraints Léautier (TSE) Forward integration 06/14 8 / 11 Application to zonal pricing Day-ahead supply-demand equilibrium per zone Within each zone, nodal rebalancing between day-ahead and real-time to meet transmission constraints Related to previous problem: single forward (day-ahead) price, multiple possible real-time (nodal) prices Léautier (TSE) Forward integration 06/14 8 / 11 Application to zonal pricing Day-ahead supply-demand equilibrium per zone Within each zone, nodal rebalancing between day-ahead and real-time to meet transmission constraints Related to previous problem: single forward (day-ahead) price, multiple possible real-time (nodal) prices Zonal pricing is shown to have desirable e¢ ciency properties (Propositions 2 and 3) Léautier (TSE) Forward integration 06/14 8 / 11 Observations and suggestions for further work De…nition of the single forward contract in multiple markets Léautier (TSE) Forward integration 06/14 9 / 11 Observations and suggestions for further work De…nition of the single forward contract in multiple markets Representation of countertrading in zonal pricing Léautier (TSE) Forward integration 06/14 9 / 11 De…nition of the single contract in multiple markets 1 Physical contract Léautier (TSE) Forward integration 06/14 10 / 11 De…nition of the single contract in multiple markets 1 Physical contract Pro…t π = (P (Q m ) Léautier (TSE) cm ) (qlm Forward integration klm ) + klm (f cm ) 06/14 10 / 11 De…nition of the single contract in multiple markets 1 Physical contract Pro…t π = (P (Q m ) cm ) (qlm klm ) + klm (f cm ) What is the delivery point of the forward contract? Market m? If so, no arbitrage would imply P (Qm ) = f . Mix of di¤erent markets, consistent with f = M1 ∑M m =1 P (Qm )? If so, how does a producer guarantee delivery in other markets? Léautier (TSE) Forward integration 06/14 10 / 11 De…nition of the single contract in multiple markets 1 Physical contract Pro…t π = (P (Q m ) cm ) (qlm klm ) + klm (f cm ) What is the delivery point of the forward contract? Market m? If so, no arbitrage would imply P (Qm ) = f . Mix of di¤erent markets, consistent with f = M1 ∑M m =1 P (Qm )? If so, how does a producer guarantee delivery in other markets? 2 Financial contract Léautier (TSE) Forward integration 06/14 10 / 11 De…nition of the single contract in multiple markets 1 Physical contract Pro…t π = (P (Q m ) cm ) (qlm klm ) + klm (f cm ) What is the delivery point of the forward contract? Market m? If so, no arbitrage would imply P (Qm ) = f . Mix of di¤erent markets, consistent with f = M1 ∑M m =1 P (Qm )? If so, how does a producer guarantee delivery in other markets? 2 Financial contract Pro…t π = = (P (Q m ) (P (Q m ) cm ) qlm + klm (f cm ) (qlm y) klm ) + klm (f cm ) + klm (P (Qm ) y) where y is the delivery price of the underlying Léautier (TSE) Forward integration 06/14 10 / 11 De…nition of the single contract in multiple markets 1 Physical contract Pro…t π = (P (Q m ) cm ) (qlm klm ) + klm (f cm ) What is the delivery point of the forward contract? Market m? If so, no arbitrage would imply P (Qm ) = f . Mix of di¤erent markets, consistent with f = M1 ∑M m =1 P (Qm )? If so, how does a producer guarantee delivery in other markets? 2 Financial contract Pro…t π = = (P (Q m ) (P (Q m ) cm ) qlm + klm (f cm ) (qlm y) klm ) + klm (f cm ) + klm (P (Qm ) y) where y is the delivery price of the underlying Additional basis risk (P (Qm ) y ) compared to equation (1) Léautier (TSE) Forward integration 06/14 10 / 11 Di¤erences between the model and practice Counter trading is pay-as-bid. Pro…t of …rm l in market m that has o¤ered klm in the unconstrained (day ahead) market and is constrained to qlm in the constrained (real time) market is π = (P (Qm ) cm ) qlm + (z cm ) (klm qlm ) which appears di¤erent from equation (5) in the article π = (P (Qm ) Léautier (TSE) cm ) qlm + (z Forward integration P (Qm )) klm 06/14 11 / 11 Di¤erences between the model and practice Counter trading is pay-as-bid. Pro…t of …rm l in market m that has o¤ered klm in the unconstrained (day ahead) market and is constrained to qlm in the constrained (real time) market is π = (P (Qm ) cm ) qlm + (z cm ) (klm qlm ) which appears di¤erent from equation (5) in the article π = (P (Qm ) cm ) qlm + (z P (Qm )) klm Possible extension: counter trading is determined by available transmission capacity. Equilibrium in each market requires supply plus net imports (often, transmission capacity constraint) equals demand Léautier (TSE) Forward integration 06/14 11 / 11 Di¤erences between the model and practice Counter trading is pay-as-bid. Pro…t of …rm l in market m that has o¤ered klm in the unconstrained (day ahead) market and is constrained to qlm in the constrained (real time) market is π = (P (Qm ) cm ) qlm + (z cm ) (klm qlm ) which appears di¤erent from equation (5) in the article π = (P (Qm ) cm ) qlm + (z P (Qm )) klm Possible extension: counter trading is determined by available transmission capacity. Equilibrium in each market requires supply plus net imports (often, transmission capacity constraint) equals demand Desirability of zonal pricing weakened by the inc-dec game (Holmberg and Lazarczyk, 2014) Léautier (TSE) Forward integration 06/14 11 / 11