The role of financial instruments in a competitive electricity market
- Univ. of California, Berkeley, CA (United States)
It is generally accepted that competitive electricity markets require an active spot market that will reflect changing supply and demand conditions. However, while spot markets are useful in achieving short term efficiency they must be accompanied by forward and derivative markets that will facilitate efficiency-motivated transactions, risk management, speculation, and capital formation for investment. The formation of liquid financial markets for electric power will have a profound impact on the planning and operations of the electricity system. On the operation side, employing financial instruments to emulate efficiency-motivated contracts will have important operational implications with respect to scheduled transactions. The boundary between physical deliveries and financial settlements will be blurred in such an environment. Thus, an operator who traditionally controlled generation facilities, spinning reserves, demand side resources and dispatchable IPP`s will have to coordinate such physical resources in concert with the trading and financial settlements of `paper resources` such as forward contracts, put and call options and other types of exotic derivatives that could replace physical deliveries or mitigate the risk associated with fluctuating demand and supply. This paper focuses on the implementation of efficiency-motivated transactions taking place today between utilities and customers and between utilities and IPP`s through special supply contracts by means of standard financial instruments. The author will illustrate three examples of such transactions and the corresponding financial instruments: interruptible/curtailable service, dispatchable IPP contracts and priority service with early notification. The author demonstrates the functionality of financial instruments in achieving production efficiency through customer and producer choice and discusses the pricing of such instruments.
- Research Organization:
- Electric Power Research Inst., Palo Alto, CA (United States)
- OSTI ID:
- 254459
- Report Number(s):
- EPRI-TR--106232; CONF-960330--
- Country of Publication:
- United States
- Language:
- English
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