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Electricity Generation with Looped Transmission Networks: Bidding to an ISO

Author

Listed:
  • Hu, X.
  • Ralph, D.
  • Ralph, E.K.
  • Bardsley, P.
  • Ferris, M.C.

Abstract

This paper uses a bi-level game to model markets for delivery of electrical power on looped transmission networks. It analyzes the effectiveness of an independent system operator (ISO) when generators (and, in some cases, retailers) with market power bid a single parameter of their linear supply (demand) functions to the ISO. The ISO, taking these bids at face value, maximizes welfare subject to transmission constraints. We find that equilibrium outcomes are sensitive to firms’ strategy spaces: 1. In the presence of transmission congestion and loop flows, supply function equilibria (SFE) are not bounded from above by Cournot equilibria, so Cournot outcomes may be more effcient than SFE, a difference that can be accentuated by increasing the number of rivals at a given node; 2. Allocation of transmission rights to generators can reduce effciency; and 3. Countervailing power on the part of buyers can lower effciency.

Suggested Citation

  • Hu, X. & Ralph, D. & Ralph, E.K. & Bardsley, P. & Ferris, M.C., 2004. "Electricity Generation with Looped Transmission Networks: Bidding to an ISO," Cambridge Working Papers in Economics 0470, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0470
    Note: CMI, IO
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    File URL: http://www.econ.cam.ac.uk/electricity/publications/wp/ep65.pdf
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    References listed on IDEAS

    as
    1. Berry, Carolyn A. & Hobbs, Benjamin F. & Meroney, William A. & O'Neill, Richard P. & StewartJr, William R., 1999. "Understanding how market power can arise in network competition: a game theoretic approach," Utilities Policy, Elsevier, vol. 8(3), pages 139-158, September.
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    4. Gilbert, Richard & Neuhoff, Karsten & Newbery, David, 2002. "Mediating Market Power in Electricity Networks," Department of Economics, Working Paper Series qt04h2h4hp, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    5. Denton, Michael J. & Rassenti, Stephen J. & Smith, Vernon L., 2001. "Spot market mechanism design and competitivity issues in electric power," Journal of Economic Behavior & Organization, Elsevier, vol. 44(4), pages 435-453, April.
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    Citations

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    Cited by:

    1. Willems, Bert & Rumiantseva, Ina & Weigt, Hannes, 2009. "Cournot versus Supply Functions: What does the data tell us?," Energy Economics, Elsevier, vol. 31(1), pages 38-47, January.
    2. Spiridonova, Olga, 2016. "Transmission capacities and competition in Western European electricity market," Energy Policy, Elsevier, vol. 96(C), pages 260-273.
    3. Bjørndal, Mette & Gribkovskaia, Victoria & Jörnsten, Kurt, 2014. "Market Power in a Power Market with Transmission Constraints," Discussion Papers 2014/29, Norwegian School of Economics, Department of Business and Management Science.
    4. Robert Wilson, 2008. "Supply Function Equilibrium in a Constrained Transmission System," Operations Research, INFORMS, vol. 56(2), pages 369-382, April.
    5. repec:kap:netspa:v:17:y:2017:i:2:d:10.1007_s11067-016-9336-8 is not listed on IDEAS
    6. Hu, X. & Ralph, R., 2006. "Using EPECs to model bilevel games in restructured electricity markets with locational prices," Cambridge Working Papers in Economics 0619, Faculty of Economics, University of Cambridge.

    More about this item

    Keywords

    electricity market; nodal pricing; locational marginal pricing; supply function equilibria; bilevel game; bilevel program;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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