Antitrust authorities in Europe and the U.S. oblige dominant generators to virtually divest generation capacity as a way to mitigate market power. This paper analyzes the implementation of such a divestiture of Virtual Power Plants (VPPs), and distinguishes two types: financial VPPs, which are pure insurance contracts on the price for electricity, and physical VPPs, which are contracts for physical delivery of electricity. Our findings show that in a monopoly framework both contracts have the same outcomes whilst in an oligopoly setting both contracts have different effects on the strategic behavior of the players, affecting their competitiveness.

Allaz and Vila (1993) show that the existence of futures markets increases the efficiency of markets in a Cournot setting. This paper looks at the efficiency effect of financial options in a similar framework. It shows that the existence of financial options also makes markets more efficient; though to a smaller extent than futures. This is particularly relevant for markets with market power and costly storage, like electricity markets.

This paper derives the socially optimal transmission prices in a congested electricity network when there is imperfect competition in generation, and when the budget constraint of the network operator is binding. The results which we derive are a generalization of the standard Ramsey prices and also of the locational marginal prices (LMP). The model is illustrated with a numerical model based on the Belgian electricity data.