Strategic retailer behaviour in an electricity contract market

Generators in a wholesale electricity market can exercise market power, but the existence of forward hedging contracts between consumers and generators mitigates this market power. A question arises as to why generators are willing to enter contracts with consumers to surrender their market power. In this paper, we model the role of the consumers (retailers here) in offering hedging contracts to generators. We suppose that the retailer gives the generators economic incentives to enter into contracts, quite apart from any risk premium. Our model shows that the retailer can increase its profit in comparison with the case when there are no contracts, and that the social welfare is maximized. We also consider a situation with multiple retailers and model the contracting game between the retailers.