Electricity markets are highly dynamic due to the simultaneous interaction of endogenous and exogenous factors within the sector. As a result, the price signal provided by the system may exhibit significant volatility, a characteristic typically viewed as a source of risk for market participants. In this context, one of the tools that emerge to mitigate risk is contracts, which allow agents to limit their exposure to spot market variability and stabilize long-term financial cashflows, thus enabling risk-sharing among different agents and facilitating investment decisions, such as in new generating plants or the installation or expansion of large consumer loads.
However, despite presenting notable benefits, the use of long-term contracts may also have potentially negative effects that must be addressed properly. Among such effects, one of the most significant is the potential reduction of competitiveness due to the capture of the consumer market by incumbent generators, given the reduction in market size for new competitors over considerable periods, a phenomenon known as the lock-in effect. Furthermore, the decrease in available supply for other consumers, associated with the obligation to contract due to eventual regulatory framework impositions, may favor incumbent generators in exercising market power, a phenomenon known as buyer-to-buyer externality. Finally, since contracts are often used as a tool to ensure systemic reliability by different regulators, especially in the Latin American context, regulations established in a different paradigm but still in force may have the opposite effect, inhibiting the entry of new competitors into the market and encouraging concentration among existing generators. In [1], the Peruvian regulatory framework is specifically analyzed, raising the possibility that its current state may facilitate the use of market power by the largest generators in the system.
In this context, this work seeks to quantitatively analyze the interactions between multiple agents in a Wholesale Electricity Contract Market, with a special focus on the analysis and quantification of the potential Market Power exercised by the agents. The impact of different regulatory frameworks applied to wholesale electricity systems is analyzed, quantifying their impacts on the mitigation or intensification of market power. As a case study, the proposed model is applied to the Peruvian Market, studying the impact of different regulatory measures on contract equilibrium and market concentration, such as (i) the obligation to back up consumer consumption in long-term contracts, (ii) the level of exposure allowed to the spot market, and (iii) separate or joint contracting of energy and capacity products. To this end, an optimization model is proposed, that determines based on market equilibrium principles, the prices and quantities negotiated in contracts between generators and consumers. The optimization model takes into account the inherent uncertainties of energy markets, such as those related to hourly renewable generation and hydraulic inflows. Finally, the impact of transaction costs on market equilibrium is analyzed by introducing a friction factor into the optimization model.