Competition, Contracts, and Entry in the Electricity Spot Market

The supply function model of the English electricity spot market is extended to include a contract market and contestable entry, both of which have dramatic effects on the determination of equilibrium. I present an analytically tractable model that can be solved with contracts, variable numbers of competitors, and capacity constraints. In the case of constant marginal costs and linear demand, two outcomes are possible: if new plant is the same as existing plant and incumbents have insufficient capacity, entry will occur, but if new plant has lower variable costs then incumbents can invest to deter entry.