Mitigating Market Incompleteness with Minor Market Distortions: The Case of Negative Spot Prices for Electricity
Year: 2026
Type: article
Abstract: How should policymakers mitigate investment risk in renewable electricity markets without undermining the efficiency of spot markets? Risk mitigation instruments can foster investment in financially incomplete markets but may distort operating incentives, contributing, for example, to increasingly frequent negative electricity prices. In Mitigating Market Incompleteness with Minor Market Distortions: The Case of Negative Spot Prices for Electricity, Ibrahim Abada and Andreas Ehrenmann develop a bi-level programming framework that explicitly incorporates these distortions when addressing market incompleteness. At the lower level, risk-averse agents make investment and operating decisions in an incomplete electricity market. At the upper level, a central planner optimally designs contracts for difference and price markups to maximize social welfare. The paper establishes an existence result, develops an algorithm for finding a solution, and applies the framework to a detailed numerical simulation inspired by the French power system. The results show that carefully designed risk mitigation instruments can enhance welfare while substantially limiting market distortions and the prevalence of negative prices.
Source: Operations Research
Authors: Ibrahim Abada, Andreas Ehrenmann
Institutions: Grenoble Ecole de Management, Engie (Belgium)
Language: English
Subfield: Electrical and Electronic Engineering
Field: Engineering
Domain: Physical Sciences
Open Access status: green
OpenAlex ID: W6887921153
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