Crampes, Claude and Renault, Jérôme (2021) Imperfect competition in electricity markets with partially flexible technologies. TSE Working Paper, n. 21-1198, Toulouse

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Abstract

The producers of electricity using dispatchable plants rely on partially flexible technologies to match the variability of demand and intermittent renewables. We analyse flexibility in a two-stage decision process where production decided at the last moment is more costly than if it is planned in advance. We first determine the first best outputs, prices and gains. We then consider a model where two partially flexible firms compete in quantities to supply a random residual demand. We determine the subgame perfect equilibria corresponding to two market designs: one where all trade occurs in a spot
market with known demand, the other where a day-ahead market with random demand is added to the ex-post market, first in a general setting, then using a quadratic specification. We show that when all trade occurs ex post, the least flexible firm is not necessarily disadvantaged. We also show that adding a day-ahead market makes consumers better off and firms worse off by increasing total output. It increases welfare but it also transfers risks from firms to consumers.