Market power analysis in electricity markets using supply function equilibrium model

Tao Li, Mohammad Shahidehpour, and Ali Keyhani
Illinois Institute of Technology, Chicago, IL, and Ohio State Univ., Columbus, OH, USA ;

This paper appeares in : IMA Journal of Management Mathematics
Volume: 15
No.: 4
Date: 2004

---

Abstract:
This paper presents a surveillance method based on the game theory which is used by the ISO to find whether a power supplier in an electricity market has market power. The paper uses the supply function equilibrium model to analyse the generation suppliers' bidding behaviour and models the ISO's market power monitoring problem as a bi-level multi-objective problem. The outer sub-program is a multi-objective problem which manimizes suppliers' payoffs, while the inner one is the ISO's market clearing problem based on the locational marginal mechanism. A discrete method is adopted to find 'good enough' solutions, in a continuous bidding strategy space, which are the intersection of all suppliers' optimal response spaces according to Nash equilibrium. The paper utilizes the IEEE 118-bus system to illustrate the application of the proposed method with three suppliers as price setters in the energy market and the other generators as price takers. The numerical results show that the transmission congestion may enhance the suppliers' ability to exercise market power. Likewise, suppliers' gaming behaviour could relieve the transmission congestion. It is shown that applying price caps is an efficient way of mitigating market power.