Market Power Mitigation in Two-stage Electricity Market with Supply Function and Quantity Bidding

TL;DR

This paper analyzes the effects of market power mitigation policies in two-stage electricity markets, revealing that certain policies can destabilize market equilibrium and favor loads over generators, suggesting markets function better without these policies.

Contribution

The paper models the strategic interactions in two-stage markets with MPM policies, showing their potential to cause equilibrium loss and favor loads, which is a novel equilibrium analysis in this context.

Findings

Real-time MPM policies lead to no stable market equilibrium.

Day-ahead MPM policies create a Stackelberg-Nash game favoring loads.

Markets perform better without implementing these mitigation policies.

Abstract

The main goal of a sequential two-stage electricity market -- e.g., day-ahead and real-time markets -- is to operate efficiently. However, the price difference across stages due to inadequate competition and unforeseen circumstances leads to undesirable price manipulation. To mitigate this, some Independent System Operators (ISOs) proposed system-level market power mitigation (MPM) policies in addition to existing local policies. These policies aim to substitute noncompetitive bids with a default bid based on estimated generator costs. However, these policies may lead to unintended consequences when implemented without accounting for the conflicting interest of participants. In this paper, we model the competition between generators (bidding supply functions) and loads (bidding quantity) in a two-stage market with a stage-wise MPM policy. An equilibrium analysis shows that a real-time MPM policy leads to equilibrium loss, meaning no stable market outcome (Nash equilibrium) exists. A day-ahead MPM policy, besides, leads to a Stackelberg-Nash game with loads acting as leaders and generators as followers. In this setting, loads become winners, i.e., their aggregate payment is always less than competitive payments. Moreover, comparison with standard market equilibrium highlights that markets are better off without such policies. Finally, numerical studies highlight the impact of heterogeneity and load size on market equilibrium.