MARKET∗

We discuss the impact of long-term contracts on price competition in the UK spot market for electricity. The price mechanism is mod-elled as an auction, and we demonstrate that forward contracts, or "contracts for differences " will tend to put a downward pressure on spot market prices. In addition we identify a ’strategic commitment’ motive for selling a large number of contracts; a generator may thereby commit itself to bidding low prices into the pool, in order to ensure that it will be despatched with its full capacity. In the resulting asymmetric equilibrium the generator which has not contracted forward bids high, in order to ensure high prices, but sells less output. ∗This paper is a revised version of an earlier paper entitled "Long-Term Contract