Electricity derivative trading: private information and supply functions for contracts

Edward Anderson
University of Sydney

We consider the use of forward contracts to reduce risk for firms operating in a spot market. Firms partly trade to hedge their risks and partly to maximize their profit from the private information they have with respect to the future distribution of prices in the spot market. We investigate a form of supply function equilibrium in which two firms each offer a supply function and the clearing price and quantity for the forward contracts are determined from the intersection. In this context a firm can use the offer of the other player to augment its own information about the future price. It is interesting that this sophisticated strategy is likely to produce worse outcomes for both firms in comparison with a simpler strategy that does not try to learn from the other player's behaviour.

Presentation (PDF File)

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