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Flow trading brings transparent and efficient pricing to electricity markets
Two papers propose innovative market designs to improve efficiency and transparency in financial and energy markets. One paper models electricity market dynamics using a regime-switching model to simulate realistic price distributions and explore hedging strategies. The other paper introduces "Flow Trading," a novel market design that allows for portfolio trading, continuous-scaled limit orders, and frequent batch auctions, demonstrating its computational feasibility and addressing several weaknesses of existing systems. A third source suggests a forward energy market that aligns participant incentives with social welfare, enhancing competition and resilience and potentially replacing capacity markets. These papers collectively explore how market design can improve resource allocation and risk management.
Electricity requires a delicate balance of supply and demand every second. The system operator guides this behavior with the energy price—the reward for generators and the cost for wholesale consumers. The system operator optimizes the market participants' preferences to maximize as-bid social welfare subject to network and resource constraints. The problem is nontrivial as the startup of generating units introduces nonconvexities, and there are significant fluctuations in supply and demand due to weather, outages, and other factors. Price is the sole means to guide behavior to achieve the critical real-time balance. Despite the average energy price hovering around $25/MWh, the system's resilience depends on real-time prices fluctuating from -$100 to $9000/MWh—orders of magnitude more volatile than equities and bonds.
Budish, Eric, Peter Cramton, Albert S. Kyle, Jeongmin Lee, and David Malec, “Flow Trading,” University of Maryland Working Paper, March 2023. Revise and resubmit at American Economic Review.
Cramton, Peter, Simon Brandkamp, Hung-po Chao, Jason Dark, Darrell Hoy, Albert S. Kyle, David Malec, Axel Ockenfels, and Chris Wilkens, “A Forward Energy Market to Improve Reliability and Resiliency” University of Maryland Working Paper, February 2025.
Simon Brandkamp, Cramton, Peter, Jason Dark, Darrell Hoy, David Malec, and Chris Wilkens, “Hedging electricity price spikes with forwards and options,” University of Maryland Working Paper, February 2025.
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By Peter CramtonTwo papers propose innovative market designs to improve efficiency and transparency in financial and energy markets. One paper models electricity market dynamics using a regime-switching model to simulate realistic price distributions and explore hedging strategies. The other paper introduces "Flow Trading," a novel market design that allows for portfolio trading, continuous-scaled limit orders, and frequent batch auctions, demonstrating its computational feasibility and addressing several weaknesses of existing systems. A third source suggests a forward energy market that aligns participant incentives with social welfare, enhancing competition and resilience and potentially replacing capacity markets. These papers collectively explore how market design can improve resource allocation and risk management.
Electricity requires a delicate balance of supply and demand every second. The system operator guides this behavior with the energy price—the reward for generators and the cost for wholesale consumers. The system operator optimizes the market participants' preferences to maximize as-bid social welfare subject to network and resource constraints. The problem is nontrivial as the startup of generating units introduces nonconvexities, and there are significant fluctuations in supply and demand due to weather, outages, and other factors. Price is the sole means to guide behavior to achieve the critical real-time balance. Despite the average energy price hovering around $25/MWh, the system's resilience depends on real-time prices fluctuating from -$100 to $9000/MWh—orders of magnitude more volatile than equities and bonds.
Budish, Eric, Peter Cramton, Albert S. Kyle, Jeongmin Lee, and David Malec, “Flow Trading,” University of Maryland Working Paper, March 2023. Revise and resubmit at American Economic Review.
Cramton, Peter, Simon Brandkamp, Hung-po Chao, Jason Dark, Darrell Hoy, Albert S. Kyle, David Malec, Axel Ockenfels, and Chris Wilkens, “A Forward Energy Market to Improve Reliability and Resiliency” University of Maryland Working Paper, February 2025.
Simon Brandkamp, Cramton, Peter, Jason Dark, Darrell Hoy, David Malec, and Chris Wilkens, “Hedging electricity price spikes with forwards and options,” University of Maryland Working Paper, February 2025.