Forward contracting and spot trading in electricity markets

Climate change and the transition to renewable energy generation have led to unstable electricity supply and demand and soaring prices. In the power industry, spot market is crucial to balance fluctuating supply and demand, while future market can alleviate price fluctuations and coordinate supply chain. This paper compares two general market structures-spot market only versus future and spot market, so as to identify the optimal market structure from government's perspective. We also investigate power generators' market targeting strategy and contract choice: wholesale price contract or contract for difference. We find out that the future market can reduce both wholesale and retail prices, increase the amount of electricity, and improve supply chain profits and consumer surplus. To be specific, wholesale price contract is always beneficial for the retailer, but it can hurt generators' profits in a competitive future market. When spot trading is cost-effective for retailer and future market is less competitive for generators, contract for difference can make retailer worse off and generators better off. By revealing the effects of information structure (i.e., uncertainties of demand and supply cost, inaccuracy of the generators' signal) and forward contracts on supply chain performance, a regulation method for optimal allocation of renewable energy and non-renewable energy generation is proposed.