Contracting for the second best in dysfunctional electricity markets
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Power pools constitute a set of sometimes complex institutional arrangements for efficiency-enhancing coordination among power systems. In many developing countries, where such institutional arrangements can’t be established over the short term, there still can be scope for voluntary electricity-sharing agreements among power systems. Using a particular type of efficient risk-sharing model with no commitment we demonstrate that second-best coordination improvements can be achieved with low to moderate risks of participants leaving the agreement. In the absence of an impartial market operator who can observe production fluctuations in connected power systems, establishing quasi-markets for trading excess electricity helps to achieve some cooperation in mutually beneficial electricity sharing.
KeywordsElectricity trade Risk sharing arrangements Self-enforcing contracts
JEL ClassificationC73 L94 O13
The authors thank Javier Bustos-Salvagno, Deb Chattopadhyay, Avinash Dixit, Ethan Ligon, Romans Pancs, Paul Preckel, Vladimir Parail, Michael Pollitt, Michael Toman, two anonymous reviewers and the participants of the International Industrial Organization Annual Conference, the Royal Economic Society Annual Conference, and research seminars at the University of Alicante and the World Bank for their helpful suggestions and comments. Responsibility for the content of the paper is the authors’ alone and does not necessarily reflect the views of their institutions, or member countries of the World Bank. Financial support from the Australian Agency for International Development and from the Partnership for South Asia Regional Integration Programmatic Trust Fund is greatly acknowledged.
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