The Role of Forward Trading in Short-term Electricity Markets with Zero-carbon Energy Resources

Forward markets are gaining increasing interest in the transition towards low-carbon electricity markets. This paper examines the role of forward markets with zero-carbon energy resources, such as solar and wind energy, hydropower, and energy storage, by studying the strategic behaviors of suppliers in both forward and spot markets. We formulate a two-stage game-theoretic model with forward and spot markets and analyze the Nash equilibrium in such systems. We prove that, in a market comprising of energy resources without inter-temporal constraints (such as only solar and wind), the presence of forward markets can lower the market price provided that a pure-strategy Nash equilibrium exists. However, numerical results show that when resources are subject to inter-temporal constraints, e.g., energy storage and reservoir hydropower, the market price can increase for some time slots while the temporal price spread decreases if the forward market is introduced. In sensitivity analysis, we find that an increased renewable energy uncertainty can encourage renewable energy suppliers to contract more in the forward market and even increase its revenue with the presence of the forward market. Moreover, an increased water budget can decrease reservoir hydropower's revenue as the forward market intensifies market competition and significantly reduces the market price.