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Financial derivatives are important hedging tool for asset’s manager. Electricity is by its very nature the most volatile commodity, which creates big incentive to share the risk among the market participants through financial contracts. But, even if volume of derivatives contracts traded on Power Exchanges has been growing since the beginning of the restructuring of the sector, electricity markets continue to be considerably less liquid than other commodities. This paper tries to quantify the effect of this insufficient liquidity on power exchange, by introducing a pricing equilibrium model for power derivatives where agents can not hedge up to their desired level. Mathematically, the problem is a two stage stochastic Generalized Nash Equilibrium and its solution is not unique. Computing a large panel of solutions, we show how the risk premium and player’s profit are affected by the illiquidity.

Carbon leakage in this pape ris the phenomenon whereby Electricity Intensive Industries subject to harsh environmental standards move their activity or part of it to more environmentally lenient regions. Carbon leakage has been mentioned as a possible outcome of the EU Emission Trading Scheme. Different studies are underway to assess the reality of the phenomenon and to devise policies to mitigate its possible impact. One remedy, proposed by the Energy Intensive Industries is to combine free emission allowances with a pricing of electricity whereby energy émissions and transmission costs are bundled and sold on an average cost basis. The paper attempts to model this proposal. We cast the problem in a spatial model of the power sector where generators can develop new capacities, the transmission system is organized on a flowgate basis, emission allowances are auctioned, except possibly for industries, and traded. The consumer market is decomposed in two segments. Industries purchase electricity according to some form of average cost price, the rest of the market is supplied at marginal cost. These equilibrium models are non convex. We present the models and discuss their properties. Companion papers report policy implications.

This paper outlines a methodology for implementing cost of service regulation in retail market for electricity in India when wholesale market is liberalised and operates through an hourly spot market. As in a developing country context political considerations make tariff levels more important than supply security, satisfying the earmarked level of demand takes a back seat. Retail market regulators are often forced by politicians to keep the retail tariff at suboptimal level. This imposes budget constraint on distribution companies to procure electricity that it requires to meet the earmarked level of demand. This is the way demand response is introduced in the system and has its impact on spot market prices. We model such a situation of not being able to serve the earmarked demand as disutility to the regulator which has to be minimised and we compute associated equilibrium. This results in systematic mechanism for cutting loads. We find that even a small cut in ability of the distribution companies to procure electricity from the spot market has profound impact on the prices in the spot market. Refereed/Peer-reviewed