![Page 1: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/1.jpg)
Retail Competition and Electricity Contracts
Richard Green
University of Hull and CEPR
![Page 2: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/2.jpg)
The issue
• Retail competition is spreading– UK since 1999– Nordic countries since mid-1990s– some US states– EU draft directive
• Does this reduce suppliers’ incentive to contract?
• Would that affect electricity prices?
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The model
• Two generators
• Regional incumbent retailers
• Non-strategic customers & entrant retailers
• Stage 1: long-term contracts
• Stage 2: annual wholesale market
• Stage 3: retail market
![Page 4: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/4.jpg)
The annual wholesale market
£/MWh
MWh
Marginal Cost
Industry Demand
Profit
Rival’sSales
![Page 5: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/5.jpg)
The annual wholesale market
£/MWh
MWh
Marginal Cost
Industry Demand
Profit
Rival’sSales
![Page 6: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/6.jpg)
The annual wholesale market
£/MWh
MWh
Marginal Cost
Industry Demand
Profit
Rival’sSales
![Page 7: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/7.jpg)
The annual wholesale market
£/MWh
MWh
Marginal Cost
Industry Demand
Rival’sSales Forward
Sales
![Page 8: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/8.jpg)
The annual wholesale market
£/MWh
MWh
Marginal Cost
Industry Demand
Rival’sSales Forward
Sales
![Page 9: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/9.jpg)
The annual wholesale market
£/MWh
MWh
Marginal Cost
Industry Demand
Profit
Rival’sSales Forward
Sales
![Page 10: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/10.jpg)
The annual wholesale market
£/MWh
MWh
Marginal Cost
Industry Demand
Profit
Rival’sSales Forward
Sales
![Page 11: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/11.jpg)
The annual wholesale market
£/MWh
MWh
Marginal Cost
Industry Demand
Profit
Rival’sSales Forward
Sales
![Page 12: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/12.jpg)
The annual wholesale market
£/MWh
MWh
Marginal Cost
Industry Demand
Rival’sSales
Profit
ForwardSales
![Page 13: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/13.jpg)
The annual wholesale market
£/MWh
MWh
Marginal Cost
Industry Demand
Rival’sSales
Profit
ForwardSales
![Page 14: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/14.jpg)
The annual wholesale market
£/MWh
MWh
Marginal Cost
Industry Demand
Rival’sSales
Profit
ForwardSales
![Page 15: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/15.jpg)
Forward sales depend upon
• Rival’s forward sales (ve)
• Forward annual price premium (+ve)
• Impact of extra sales on this premium (ve)
![Page 16: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/16.jpg)
The retail market(s)
£/MWh
MWh
Industry Demand
Small customers
Large customers
![Page 17: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/17.jpg)
The retail market(s)
£/MWh
MWh
Industry Demand
Small customers
Large customers
Annual wholesale price
![Page 18: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/18.jpg)
Regulated incumbents
£/MWh
MWh
Industry Demand
Small customers
Large customers
Annual wholesale price
Regulatedprice
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Regulated incumbents
Profits
Annualprice
Forwardprice
Average cover
![Page 20: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/20.jpg)
Regulated incumbents
Profits
Annualprice
Forwardprice
Average cover
More cover
![Page 21: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/21.jpg)
Regulated incumbents
Profits
Annualprice
Forwardprice
Average cover
More cover
Less cover
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The regulated firm
• Likes profits
• Dislikes risk
- Utility = mean (profits) ½ variance (profits)
• Tends to buy the average level of cover
• Would buy more if the forward price is less than the expected annual price
(it won’t be)
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Competing incumbents
£/MWh
MWh
Industry Demand
Small customers
Large customers
Annual wholesale price
Entrants’ sales
![Page 24: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/24.jpg)
Competing incumbents
£/MWh
MWh
Industry Demand
Small customers
Large customers
Annual wholesale price
Entrants’ sales
Profits
Retailprice
![Page 25: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/25.jpg)
Competing incumbents
£/MWh
MWh
Industry Demand
Small customers
Large customers
Annual wholesale price
Entrants’ sales
Profits
Retailprice
![Page 26: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/26.jpg)
Competing incumbents
Profits
Annualprice
Forwardprice
No cover
![Page 27: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/27.jpg)
Competing incumbents
Profits
Annualprice
Forwardprice
No cover
Forward cover
![Page 28: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/28.jpg)
The competing firm
• Will only buy contracts if their price is less than the expected annual price
• Buys fewer contracts than the regulated firm
• Faces a higher annual price
• Might face a lower forward price
- if risk aversion is great enough
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Calibrating the model
• Use values reflecting early-90s England
• Marginal Cost £20/MWh
• Equilibrium (no contracts) £30/MWh
• Equilibrium (no risk-aversion) £26/MWh
• Variance of the annual price 5.76(annual average Pool price, 90-
01)
![Page 30: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/30.jpg)
The impact of risk and competition
25.5
26
26.5
27
27.5
28
0 0.1 0.2 0.3
Avg Price, £/MWh
2.6 4.7 8.3 11.4
Regulation
Competition
(% change in profits needed to offset 10% point rise in c.v.)
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Conclusions
• Firms are buying & selling in annual markets
• Retail competition does reduce long-term contracting
• Risk aversion probably not great enough for this to have a very large impact
• Results may be sensitive to model design
• Impact of contracts on entry not studied
![Page 32: Retail Competition and Electricity Contracts Richard Green University of Hull and CEPR](https://reader030.vdocument.in/reader030/viewer/2022032704/56649d7d5503460f94a5f9a5/html5/thumbnails/32.jpg)