Retailers’ risk management and vertical arrangements

Summary. The failure of the asset light retailer’s economic model is indicative of the incapacity of this organizational structure to manage efficiently the combination of sourcing and market risks in the current market environnment. Because of the structural dimensions of electricity’s market risks, a retailer’s level of risk exposure is unknown ex ante and will only be revealed ex post when consumption is known. In contrast to the “textbook model” of electricity reforms, the paper demonstrates that in the current market context pure portfolios of contracts are incomplete risk management instruments compared to physical hedging. The latter is critical to overcome the asset light retailer’s curse.

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