A Structural Characterization of Market Power in Electric Power Networks

TL;DR

This paper analyzes how market power affects prices and efficiency in electric power networks, providing bounds on price markups and efficiency loss, and exploring the impact of network structure on market outcomes.

Contribution

It introduces a theoretical framework for understanding market power in transmission-constrained power markets, including bounds on efficiency loss and price markups, and characterizes conditions for paradoxical effects.

Findings

Bounds on allocative efficiency loss at Nash equilibrium.

Upper bounds on locational marginal price markups.

Conditions for Braess-like paradox in power networks.

Abstract

We consider a market in which capacity-constrained generators compete in scalar-parameterized supply functions to serve an inelastic demand spread throughout a transmission constrained power network. The market clears according to a locational marginal pricing mechanism, in which the independent system operator (ISO) determines the generators' production quantities to minimize the revealed cost of meeting demand, while ensuring that network transmission and generator capacity constraints are met. Under the stylizing assumption that both the ISO and generators choose their strategies simultaneously, we establish the existence of Nash equilibria for the underlying market, and derive an upper bound on the allocative efficiency loss at Nash equilibrium relative to the socially optimal level. We also characterize an upper bound on the markup of locational marginal prices at Nash equilibrium above their perfectly competitive levels. Of particular relevance to ex ante market power monitoring, these bounds reveal the role of certain market structures---specifically, the \emph{market share} and \emph{residual supply index} of a producer---in predicting the degree to which that producer is able to exercise market power to influence the market outcome to its advantage. Finally, restricting our attention to the simpler setting of a two-node power network, we provide a characterization of market structures under which a Braess-like paradox occurs due to the exercise of market power---that is to say, we provide a necessary and sufficient condition on market structure under which the strengthening of the network's transmission line capacity results in the (counterintuitive) increase in the total cost of generation at Nash equilibrium.