This paper addresses the pressing question of whether renewable generators (RGs) should participate in forward markets, traditionally used by conventional generators (CGs) to hedge against spot market risks. We develop a stylized game-theoretical model that captures hybrid generation technologies, demand and supply uncertainties, and increasing demand-side engagement in today’s electricity markets. Our analysis reveals that the forward participation of prioritized RGs intensifies competition in the forward markets but inadvertently bolsters CGs’ market power in the spot markets. This dynamic may create a “one wins, many lose” outcome, where RGs benefit at the expense of consumer surplus, social welfare, and other stakeholders. Additionally, priority dispatch incentivizes RGs to contract more aggressively than CGs. Although allowing RGs to withhold output can mitigate these adverse effects, numerical results indicate that priority dispatch ultimately yields greater social benefits. Sensitivity analysis further shows that RGs’ forward participation can reshape how market factors influence market equilibrium.
JEL Classification: C72 - Noncooperative Games; D43 - Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection; Q41 - Energy: Demand and Supply; Prices; Q48 - Energy: Government Policy
AcemogluD.KakhbodA.OzdaglarA.2017. “Competition in Electricity Markets with Renewable Energy Sources.” The Energy Journal38: 137–56.
2.
AdomP. K.2017. “The Long-run Price Sensitivity Dynamics of Industrial and Residential Electricity Demand: The Impact of Deregulating Electricity Prices.” Energy Economics62: 43–60.
3.
AflakiS.NetessineS.2017. “Strategic Investment in Renewable Energy Sources: The Effect of Supply Intermittency.” Manufacturing & Service Operations Management19 (3): 489–507.
4.
Al-GwaizM.ChaoX.WuO. Q.2017. “Understanding How Generation Flexibility and Renewable Energy Affect Power Market Competition.” Manufacturing & Service Operations Management19 (1): 114–31.
5.
AlizamirS.de VéricourtF.SunP.2016. “Efficient Feed-in-tariff Policies for Renewable Energy Technologies.” Operations Research64 (1): 52–66.
6.
AllazB.VilaJ. L.1993. “Cournot Competition, Forward Markets and Efficiency.” Journal of Economic Theory59 (1): 1–16.
7.
AndersonE. J.HuX.2008. “Forward Contracts and Market Power in an Electricity Market.” International Journal of Industrial Organization26 (3): 679–94.
8.
AngelusA.2021. “Distributed Renewable Power Generation and Implications for Capacity Investment and Electricity Prices.” Production and Operations Management30 (12): 4614–34.
9.
BabichV.LobelR.YücelŞ.2020. “Promoting Solar Panel Investments: Feed-in-tariff vs. Tax-rebate Policies.” Manufacturing & Service Operations Management22 (6): 1148–64.
10.
BaltaogluS.TongL.ZhaoQ.2018. “Algorithmic Bidding for Virtual Trading in Electricity Markets.” IEEE Transactions on Power Systems34 (1): 535–43.
11.
BessembinderH.LemmonM. L.2002. “Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets.” Journal of Finance57 (3): 1347–82.
12.
BitarE. Y.RajagopalR.KhargonekarP. P.PoollaK.VaraiyaP.2012. “Bringing Wind Energy to Market.” IEEE Transactions on Power Systems27 (3): 1225–35.
13.
BorensteinS.BushnellJ.KahnE.StoftS.1995. “Market Power in California Electricity Markets.” Utilities Policy5 (3–4): 219–36.
14.
BorensteinS.BushnellJ.KnittelC. R.1999. “Market Power in Electricity Markets: Beyond Concentration Measures.” The Energy Journal20 (4): 65–67.
15.
BreitmoserY.2013. “Increasing Marginal Costs are Strategically Beneficial in Forward Trading.” Economics Letters119 (2): 109–112.
16.
BrownD. P.EckertA.2020. “Imperfect Competition in Electricity Markets with Renewable Generation: The Role of Renewable Compensation Policies.” The Energy Journal41 (4): 61–88.
17.
BunnD. W.ChenD.2013. “The Forward Premium in Electricity Futures.” Journal of Empirical Finance23: 173–86.
DongL.LiuH.2007. “Equilibrium Forward Contracts on Nonstorable Commodities in the Presence of Market Power.” Operations Research55 (1): 128–45.
20.
Ghiassi-FarrokhfalY.BeloR.HesamzadehM. R.BunnD.2023. “Optimal Electricity Imbalance Pricing for the Emerging Penetration of Renewable and Low-cost Generators.” Manufacturing & Service Operations Management25 (5): 1966–83.
21.
GreenR.1999. “The Electricity Contract Market in England and Wales.” The Journal of Industrial Economics47 (1): 107–124.
22.
HildmannM.UlbigA.AnderssonG.2015. “Empirical Analysis of the Merit-order Effect and the Missing Money Problem in Power Markets with High RES Shares.” IEEE Transactions on Power Systems30 (3): 1560–70.
23.
HuS.SouzaG. C.FergusonM. E.WangW.2015. “Capacity Investment in Renewable Energy Technology with Supply Intermittency: Data Granularity Matters!”Manufacturing & Service Operations Management17 (4): 480–94.
24.
HuismanR.KoolenD.StetC.2021. “Pricing Forward Contracts in Power Markets with Variable Renewable Energy Sources.” Renewable Energy180: 1260–65.
ItoK.ReguantM.2016. “Sequential Markets, Market Power, and Arbitrage.” American Economic Review106 (7): 1921–57.
27.
JohariR.TsitsiklisJ. N.2011. “Parameterized Supply Function Bidding: Equilibrium and Efficiency.” Operations Research59 (5): 1079–89.
28.
JoskowP.TiroleJ.2006. “Retail Electricity Competition.” The RAND Journal of Economics37 (4): 799–815.
29.
JoskowP. L.2019. “Challenges for Wholesale Electricity Markets with Intermittent Renewable Generation at Scale: The US Experience.” Oxford Review of Economic Policy35 (2): 291–331.
30.
KhodadadiA.PoudinehR.2024. “Contracts for Difference-CfDs-in the Energy Transition: Balancing Market Efficiency and Risk Mitigation.” OIES Paper: EL, No. 56. The Oxford Institute for Energy Studies.
31.
KitzingL.HeldA.GephartM.WagnerF.AnatolitisV.KlessmannC.2024. “Contracts-for-Difference to Support Renewable Energy Technologies: Considerations for Design and Implementation.” Technical Report, Florence School of Regulation.
32.
KlempererP. D.MeyerM. A.1989. “Supply Function Equilibria in Oligopoly under Uncertainty.” Econometrica57 (6): 1243–77.
33.
KökA. G.ShangK.YücelŞ.2018. “Impact of Electricity Pricing Policies on Renewable Energy Investments and Carbon Emissions.” Management Science64 (1): 131–48.
34.
KökA. G.ShangK.YücelŞ.2020. “Investments in Renewable and Conventional Energy: The Role of Operational Flexibility.” Manufacturing & Service Operations Management22 (5): 925–41.
35.
KoolenD.BunnD.KetterW.2021. “Renewable Energy Technologies and Electricity Forward Market Risks.” The Energy Journal42 (4): 43–68.
36.
LundinE.TangeråsT. P.2020. “Cournot Competition in Wholesale Electricity Markets: The Nordic Power Exchange, Nord Pool.” International Journal of Industrial Organization68: 102536.
37.
MaG.LimM. K.MakH. Y.WanZ.2019. “Promoting Clean Technology Adoption: To Subsidize Products or Service Infrastructure?”Service Science11 (2): 75–95.
38.
MoralesJ. M.PinedaS.2017. “On the Inefficiency of the Merit Order in Forward Electricity Markets with Uncertain Supply.” European Journal of Operational Research261 (2): 789–99.
39.
MousavianS.ConejoA. J.SioshansiR.2020. “Equilibria in Investment and Spot Electricity Markets: A Conjectural-variations Approach.” European Journal of Operational Research281 (1): 129–40.
40.
NovanK.WangY.2024. “Estimates of the Marginal Curtailment Rates for Solar and Wind Generation.” Journal of Environmental Economics and Management124: 102930.
41.
OggioniG.MurphyF. H.SmeersY.2014. “Evaluating the Impacts of Priority Dispatch in the European Electricity Market.” Energy Economics42: 183–200.
42.
OliveiraF. S.RuizC.2021. “Analysis of Futures and Spot Electricity Markets under Risk Aversion.” European Journal of Operational Research291 (3): 1132–48.
43.
OliveiraF. S.RuizC.ConejoA. J.2013. “Contract Design and Supply Chain Coordination in the Electricity Industry.” European Journal of Operational Research227 (3): 527–37.
44.
ParkerG. G.TanB.KazanO.2019. “Electric Power Industry: Operational and Public Policy Challenges and Opportunities.” Production and Operations Management28 (11): 2738–77.
PeuraH.BunnD. W.2021. “Renewable Power and Electricity Prices: The Impact of Forward Markets.” Management Science67 (8): 4772–88.
47.
QiL.LinX.ShiX.ZhangY.PanH.SharpB.2023. “Feed-in Tariffs and the Carbon Emission Trading Scheme under China’s Peak Emission Target: A Dynamic CGE Analysis for the Development of Renewable Electricity.” Journal of Environmental Management335: 117535.
48.
RitzR. A.2016. “How Does Renewables Competition Affect Forward Contracting in Electricity Markets?”Economics Letters146: 135–39.
49.
SchlechtI.MaurerC.HirthL.2024. “Financial Contracts for Differences: The Problems with Conventional CfDs in Electricity Markets and How Forward Contracts Can Help Solve Them.” Energy Policy186: 113981.
50.
SensfußF.RagwitzM.GenoeseM.2008. “The Merit-order Effect: A Detailed Analysis of the Price Effect of Renewable Electricity Generation on Spot Market Prices in Germany.” Energy Policy36 (8): 3086–94.
51.
Sichuan Energy Internet Research Institute Tsinghua University. 2023. “Current Situation and Strategy Analysis of Renewable Energy Enterprises Represented by Solar PV Participating in the Electricity Spot Market, Zhiyun Fei.”Accessed March 4, 2025. https://mp.weixin.qq.com/s/jm4ySNn9zuLYFlztl_EYbA.
52.
SiddiquiA. S.TanakaM.ChenY.2019. “Sustainable Transmission Planning in Imperfectly Competitive Electricity Industries: Balancing Economic and Environmental Outcomes.” European Journal of Operational Research275 (1): 208–223.
53.
SioshansiR.OrenS.2007. “How Good Are Supply Function Equilibrium Models: An Empirical Analysis of the ERCOT Balancing Market.” Journal of Regulatory Economics31 (1): 1–35.
54.
SunarN.BirgeJ. R.2019. “Strategic Commitment to a Production Schedule with Uncertain Supply and Demand: Renewable Energy in Day-ahead Electricity Markets.” Management Science65 (2): 714–34.
55.
VentosaM.BaílloA.RamosA.RivierM.2005. “Electricity Market Modeling Trends.” Energy Policy33 (7): 897–913.
56.
WillemsB.RumiantsevaI.WeigtH.2009. “Cournot versus Supply Functions: What Does the Data Tell Us?”Energy Economics31 (1): 38–47.
57.
WolakF. A.2003. “Measuring Unilateral Market Power in Wholesale Electricity Markets: The California Market, 1998–2000.” American Economic Review93 (2): 425–30.
58.
WuO. Q.KapuscinskiR.SureshS.2023. “On the Distributed Energy Storage Investment and Operations.” Manufacturing & Service Operations Management25 (6): 2277–97.
59.
ZhouY.Scheller-WolfA.SecomandiN.SmithS.2019. “Managing Wind-based Electricity Generation in the Presence of Storage and Transmission Capacity.” Production and Operations Management28 (4): 970–89.
Supplementary Material
Please find the following supplemental material available below.
For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.
For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.
