Could forward markets stabilize capacity cycles in electricity markets? An experimental study

Abstract

Stabilization of electricity markets has become increasingly important to ensure investments and thereby security of supply. After deregulation, many electricity markets have shown long-term tendencies to cycles, affecting the market’s reserve margin, and thus creating significant fluctuation in the price for consumers and return for investors. Forward markets have been discussed as a mechanism to damp these long-term fluctuations and create more stable prices and returns. We use a decision-making experiment in the laboratory to test these theories to understand the effect of the introduction of a forward market compared to having only a spot market. The results show that a forward market reduces the tendency of cycles the market as well as reduces prices.