Hedging and vertical integration in electricity markets

René Aïd, Gilles Chemla, Arnaud Porchet, Nizar Touzi

Research output: Contribution to journalArticlepeer-review


This paper analyzes the interactions between competitive (wholesale) spot, retail, and forward markets and vertical integration in electricity markets.We develop an equilibrium model with producers, retailers, and traders to study and quantify the impact of forward markets and vertical integration on prices, risk premia, and retail market shares. We point out that forward hedging and vertical integration are two separate mechanisms for demand and spot price risk diversification that both reduce the retail price and increase retail market shares. We show that they differ in their impact on prices and firms' utility because of the asymmetry between production and retail segments. Vertical integration restores the symmetry between producers' and retailers' exposure to demand risk, whereas linear forward contracts do not. Vertical integration is superior to forward hedging when retailers are highly risk averse. We illustrate our analysis with data from the French electricity market.

Original languageEnglish (US)
Pages (from-to)1438-1452
Number of pages15
JournalManagement Science
Issue number8
StatePublished - Aug 2011


  • Asset pricing
  • Corporate finance
  • Electric-electronic
  • Financial institutions
  • Industries
  • Markets

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research


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