Crampes, Claude and Renault, Jérôme (2021) Supply Flexibility and risk transfer in electricity markets. TSE Working Paper, n. 22-1350, Toulouse School of Economics

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Abstract

The producers of electricity using dispatchable plants rely on partially flexible technologies to match the variability of both demand and production from renewables. We analyse upward and downward flexibility in a two-stage decision process where firms compete in quantities produced ex ante at low cost and ex post at high cost to supply a random residual demand. We first compute the first best and competitive outcomes,
then 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 being inflexible can be more profitable than being flexible. We also show that adding a day-ahead market tothe spot market increases welfare but transfers risks from firms to consumers.