Abstract: In this paper, the market power inhibiting effects of contracts for differences are studied. Due to oligopolistic characters owned by the electricity market, it is of great importance to focus on methods that could help restricting the market power of generators. The contract for differences is considered an effective way to control market power according to former researches, but the model we propose has the following characters that make our research special and creative. First of all, it is based on Bertrand model, which is properly applied in the electricity market, without adding any exogenous factors suggesting the relationship between the bidding price and the electricity quantity. It provides conditions that guarantee positive profit of generators. Secondly, Lerner index is introduced to the model for assessing market power. The main parts of this paper include the Nash equilibrium of generators in an identical duopoly electricity market (which is gained by analyzing the best responses of each generator), the superior limit of both equilibrium price and Lerner index, the conditions to guarantee positive profit and illustration of identical duopoly electricity market by data simulation. Finally, the conclusion that the absolute electric quantity contract for difference has inhibiting effect on market power in an identical duopoly electricity market is drawn through the movement of the superior limit of Lerner index. This research provides a tool for other researches that consider using Bertrand model for analyzing contractual problems in electricity market, which is not often used in former researches due to the zero profit of classical Bertrand model, though it actually matches the electricity market.

Key words: contract for difference, Lerner index, electricity market, Bertrand game, market power