Welfare Impact of Virtual Trading on Wholesale Electricity Markets

We use welfare analysis to evaluate the efficiency impact of virtual trading by financial participants on wholesale electricity markets. We use a stylized model to determine the optimal bidding strategy under different scenarios of market outcomes for financial participants. A welfare comparison between scenarios with and without optimal bidding shows that the main impacts of virtual trading by financial participants are welfare transfers between consumers and producers, while the impact on total surplus is limited. JEL Classification: D44 – Auctions; D47 – Market Design; D61 – Allocative Efficiency; Cost-Benefit Analysis; G14 – Information and Market Efficiency; Event Studies; Insider Trading; L94 – Electric Utilities; Q48 – Energy: Government Policy.