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

TL;DR

This paper models two-stage electricity markets with market power mitigation policies, proposing an intercept bidding mechanism to ensure stable equilibria and analyzing the effects of day-ahead and real-time policies on market power and demand allocation.

Contribution

It introduces an intercept function bidding approach and analyzes its impact on market stability and power mitigation in two-stage electricity markets.

Findings

Day-ahead MPM policy fully mitigates generator market power.

Real-time MPM policy shifts demand to real-time market.

Intercept bidding affects demand allocation and market stability.

Abstract

Electricity markets typically operate in two stages, day-ahead and real-time. Despite best efforts striving efficiency, evidence of price manipulation has called for system-level market power mitigation (MPM) initiatives that substitute noncompetitive bids with default bids. Implementing these policies with a limited understanding of participant behavior may lead to unintended economic losses. In this paper, we model the competition between generators and inelastic loads in a two-stage market with stage-wise MPM policies. The loss of Nash equilibrium and lack of guarantee of stable market outcome in the case of conventional supply function bidding motivates the use of an alternative market mechanism where generators bid an intercept function. A Nash equilibrium analysis for a day-ahead MPM policy leads to a Stackelberg-Nash game with loads exercising market power at the expense of generators. A comparison of the resulting equilibrium with the standard market (not implementing any MPM policy) shows that a day-ahead policy completely mitigates the market power of generators. On the other hand, the real-time MPM policy increases demand allocation to real-time, contrary to current market practice with most electricity trades in the day-ahead market. Numerical studies illustrate the impact of the slope of the intercept function on the standard market.