The Role Of Demand And Transparency In Strategic And Hedging Motives To Sell Forward In Electricity Market

Electricity market has always been a hot topic of economists. Since1980s, electricity industry has experienced a series of industry changes. In order to improve industrial efficiency and social welfare, the highly integrated structure of electricity industry was broken. In some countries, electricity forward trading has been established. From the traditional point of view, the main reason for enterprises to participate in forward transactions is to hedge risk. However, with the gradual improvement of the theory, Allaz and Vila (1993) state that except the function of hedging risks, another reason encouraging enterprises to participate in forward trading is strategic consideration. In our paper, I prove the existence of both incentives. Our paper focuses on the role of demand growth and transparency of the market on these incentives.Starting from the theoretical analysis, this paper argues, in order to solve China’s electricity market supply, changes in unexpected market demand, the establishment of long-term trading or futures trading market is an effeictive way. Futures market not only has the role of price regulation, while most of the ouput of firms trade in the futures market. This enhances the stability of market supply, weakens the impact of demand changes and decreases the ability of companies to manipulate market. However, at the same time, we must focus on improving the transparency of the market, higher degree of completeness of information results in higher competition level in the market, and improving the rate of forward transactions.