Bilateral contracts and the spot market for electricity: some observations on the British and the NordPool experiences

Abstract The performance of the futures and the spot market for electricity in England and Wales (EW) and in the Nordic countries have significant differences in terms of volumes traded and evolution of prices. Even though the institutional arrangements show significant differences and the data collected has important limitations we observe in EW for 1990–99 that as the coverage via bilateral contracts diminished, spot prices tended to increase, there was higher price volatility and an increasing number of plants were declared unavailable. In the NordPool, by contrast, market structure is more distributed, the bilateral contract price has tended to smooth the volatility in the spot price and a very diverse pattern behavior of prices has been observed. We interpret these observations as additional support in favor of the theoretical result by Allaz and Vila (Journal of Economic Theory 59 (1993) 1) , but hint at the possibility of strategies by the firms that can diminish the welfare enhancing properties of this new bilateral market.