Peter Cramton
Emeritus Professor of Economics
University of Maryland

Abstract: We propose a forward electricity market design that enables efficient and granular hedging
in the face of growing electrification and intermittent renewables. Market participants can trade
thousands of forward contracts and European call options with a high strike price (e.g., $1,000/MWh),
each tailored to granular delivery windows spanning up to four years ahead. To implement this market,
we apply Budish et al.’s (2023) flow trading framework to electricity markets. It encourages
incremental trading and supports liquidity provision via frequent batch auctions. To illustrate our
design, we develop a twelve-year simulation of ERCOT’s day-ahead market from 2011 to 2022. We
derive demand curves for forwards and options for representative generators and load-serving
entities. Our analysis reveals that risk preferences significantly shape these demand curves. Risk
preferences determine the price-elasticity of demand for forwards and options and influence to what
extend market-clearing prices exceed arbitrage-free levels. Moreover, we find that setting a higher
option strike price reduces arbitrage positions and makes options less attractive relative to forwards.