Supply Function Equilibrium in Networked Electricity Markets

TL;DR

This paper analyzes how strategic behavior of suppliers in deregulated electricity markets affects overall efficiency, providing bounds on efficiency loss influenced by network topology.

Contribution

It introduces an analytical upper bound on efficiency loss in networked electricity markets with strategic suppliers, considering transmission network structures.

Findings

Upper bound on efficiency loss due to strategic suppliers.

Bound is tight for weakly cyclic networks.

Efficiency loss depends on network topology factors.

Abstract

We study deregulated power markets with strategic power suppliers. In deregulated markets, each supplier submits its supply function (i.e., the amount of electricity it is willing to produce at various prices) to the independent system operator (ISO), who based on the submitted supply functions, dispatches the suppliers to clear the market with minimal total generation cost. If all suppliers reported their true marginal cost functions as supply functions, the market outcome would be efficient (i.e., the total generation cost is minimized). However, when suppliers are strategic and aim to maximize their own profits, the reported supply functions are not necessarily the true marginal cost functions, and the resulting market outcome may be inefficient. The efficiency loss depends crucially on the topology of the underlying transmission network. This paper provides an analytical upper bound of the efficiency loss due to strategic suppliers, and proves that the bound is tight under a large class of transmission networks (i.e., weakly cyclic networks). Our upper bound sheds light on how the efficiency loss depends on the transmission network topology (e.g., the degrees of nodes, the admittances and flow limits of transmission lines).