Analysis of Power System Operations with a Dominant Firm and an Oligopolistic Industry

In many countries and regions, deregulated electricity industries are characterized by oligopolistic ownership structures. Such industries are vulnerable to price manipulation by strategic generating companies. Particularly, a dominant firm, often a large incumbent generator, may exert market power not only in electricity markets but also in related markets such as emission permit markets. This chapter extends the models without any dominant firm in the previous chapter to elaborate on oligopolistic electricity markets subject to cap-and-trade environmental regulation. We first present the framework of the Cournot model based on the Nash equilibrium concept in game theory. A Nash–Cournot equilibrium of the electricity market can be obtained either by a mixed-complementarity problem resulting from each participant’s optimization problem or by an equivalent single quadratic program. Next, we discuss the model of Stackelberg leader–follower oligopoly in the context of electricity markets. The structure of a Stackelberg leader firm with other follower firms that behave à la Cournot is represented by a bi-level problem. It is then recast as a mathematical program with equilibrium constraints, which is further transformed into a mixed-integer quadratic program. The equilibrium outcomes of Cournot and Stackelberg oligopoly under cap-and-trade regulation are illustrated by the numerical examples of three nodes and three firms with ten generating units. We demonstrate how the exercise of market power would have an impact on the electricity price, the permit price, and overall social welfare under different oligopolistic market structures.