The competitive effects of linking electricity markets across space

Authors

Thomas Tangeras, Frank A. Wolak

Abstract

Major barriers to adoption of an efficient wholesale electricity market design are the perceived distributional effects of charging consumers different short-term prices depending on their location in the network. Forward financial contracts for wholesale electricity in locational marginal pricing markets typically settle against a quantity-weighted average of short-term prices, and customers are often charged a quantity-weighted average of shortterm prices for their short-term market purchases. We evaluate the competitive effects of such forward and short-term pricing mechanisms in locational pricing markets. In particular, short-term markets are more efficient under regional compared to forward contracts that clear against local prices.