Market power analysis in electricity markets using supply function equilibrium model

This paper presents a surveillance method based on the gametheory which is used by the ISO to find whether a power supplierin an electricity market has market power. The paper uses thesupply function equilibrium model to analyse the generationsuppliers’ bidding behaviour and models the ISO's marketpower monitoring problem as a bi-level multi-objective problem.The outer sub-problem is a multi-objective problem which maximizessuppliers’ payoffs, while the inner one is the ISO's marketclearing problem based on the locational marginal pricing mechanism.A discrete method is adopted to find ‘good enough’solutions, in a continuous bidding strategy space, which arethe intersection of all suppliers’ optimal response spacesaccording to Nash equilibrium. The paper utilizes the IEEE 118-bussystem to illustrate the application of the proposed methodwith three suppliers as price setters in the energy market andthe other generators as price takers. The numerical resultsshow that the transmission congestion may enhance the suppliers’ability to exercise market power. Likewise, suppliers’gaming behaviour could relieve the transmission congestion.It is shown that applying price caps is an efficient way ofmitigating market power.