Iet Paper

Published in IET Generation, Transmission & Distribution
Received on 13th January 2009

Revised on 10th September 2009
doi: 10.1049/iet-gtd.2009.0018
Special Issue selected papers on Electricity Markets:
Analysis & Operations
ISSN 1751-8687
Market power analysis in the oligopoly
electricity markets under network constraints
E. Bompard
1,
*
T. Huang
1,
W. Lu
2
1
Dipartimento di Ingegneria Elettrica Industriale, Politecnico di Torino, Turin 10129, Italy
2
PetroChina West East Gas Pipeline & Sales Company, Shanghai 200122, Peoples Republic of China
*
CERIS-CNR (Institute for Economic Research on Firms and Growth of the National Research Council),Moncalieri (TO) 10024,
Italy
Department of Electrical Engineering, Shanghai Jiao Tong University, Shanghai 200240, Peoples Republic of China
E-mail: ettore.bompard@polito.it
Abstract: Market power (MP) analysis under network constraints is a specic feature of electricity markets and, as
well, one of the major concerns of the regulators. The goal, in the analysis, is to assess the impacts of network
constraints on the market outcomes because of the strategic behaviour of the producers that may or may not
take advantage of the knowledge of the network structure and of the constraints. In this work, different factors
to the MP that can be used by the strategies of the producers are studied and the impacts of the network
constraints in providing additional opportunities to exert MP are considered. The ex-ante analysis of the market
is undertaken resorting to a supply function equilibrium (SFE) for which the authors propose a new approach for
deriving the best slope for slope bidding strategy by an equivalent intercept iteration method. A set of indices,
specically devised for considering network impacts, are proposed to assess the MP of the producers in a
constrained market. The application of the proposed approach is shown and tested on an IEEE 30 bus system.
Nomenclature
The symbols and abbreviations used in this paper are listed
below:
g index for generators
M
g
marginal cost for producer g
c
g
m
intercept of the linear marginal cost curve
h
g
m
reciprocal of the slope of the marginal cost curve
P
g
power of producer g
r
g
price of producer g
c
g
intercept of the offer curve of producer g
h
g
reciprocal of the slope of the supply function of
producer g
d index for loads
D
d
power for load d
v
d
price for load d
d
d
0
load quantity for zero price
d
d
k
price sensitivity of load d
D set of loads f1, 2, . . . , N
D
g
G set of generators f1, 2, . . . , N
G
g, G P<

P
P set of active upper-bounded generators f1, 2,
. . . , Gg, G N
G
P set of active unbounded generators

N set of buses, f1, 2, . . . , Ng
H set of lines, f1, 2, . . . , N
L
g
Z set of congested lines, f1, 2, . . . , Zg, Z# H
G
i
set of generators at bus i, G
i
# G
D
i
set of loads at bus i, D
i
# D
i, j, h, k, r, o index for buses, i, j, h, k, r, o [ N
n reference bus
l, m indexes for lines
S
Y
system surplus
h(
.
) power equality constraint
l Lagrange multiplier associated with the
equality constraints
244 IET Gener. Transm. Distrib., 2010, Vol. 4, Iss. 2, pp. 244256
& The Institution of Engineering and Technology 2010 doi: 10.1049/iet-gtd.2009.0018
www.ietdl.org

g
l
(
.
) inequality constraints of the congested line
l that is congested in a positive direction,
l fh, kg [ Z
F
l
power ow in line l, l fh, kg [ H
F
l
M
line ow limit on line l
m
l
Lagrange multipliers vector associated with

inequality constraints of the positive
congested line l fh, kg [ Z# H
g
l
2
(
.
) inequality constraints of the congested line l
that is congested in a negative direction,
l fh, kg [ Z
m
l
2
g
l
(
.
), l fh, kg [ Z# H
g
g
max
(
.
) inequality constraints for the maximum power
of generator g
P
g
max
maximum power for producer g
m
g
g
max
g
(), g [ P
g
g
max
(
.
) inequality constraints for the minimum power
of generator g
b
l
admittance of line l
a
hj
, a
kj
elements of the auxiliary matrix A, in a DC
power ow calculation
l
i
nodal price at bus i
S
g
G
producer surplus of producer g;
c
l
1
, c
l
2
limits on c
g
because of power ow
c
g
1
, c
g
1
limits on c
g
because of generator capacity
h
g
(q21)
reciprocal of the slope of producer g in the
(q 21)th iteration
c
g
(q)
best intercept of producer g in the qth iteration
P
g
(q)
best quantity of producer g in the qth iteration
r
g
(q)
best price of producer g in the qth iteration
h
g
(q)
reciprocal of the slope of producer g in the qth
iteration
l
weighted average price,
i[N
l
i
_
g[G
i
P
g

d[D
i
D
d
_ _ _
=
_
g[G
P
g

d[D
D
d
_
N
g
index to reect the impact of congestion on S
g
G
N
l
index to reect the impact of congestion on

l
K
g
a
index to reect the impact of
unconstrained bidding market power (UBMP)
on S
G
g
K
l
a
index to reect the impact of UBMP on

l
K
g
b
index to reect the impact of constrained
bidding market power (CBMP) on S
G
g
K
l
b
index to reect the impact of CBMP on

l
K
g
index to reect the impact of total market
power on S
G
g
K
l
index to reect the impact of total market
power on

l
T
g
index to reect the total impact of congestion
and market power on S
G
g
T
l
index to reect the total impact of congestion
and market power on

l
1 Introduction
Deregulation of electricity markets throughout the world
requires that markets be constructed so as to insure low
prices and high efciencies. However, the electricity
markets are always oligopoly markets rather than being
perfect competitive ones because of the special features of
the power system such as a limited number of producers,
large size of the investment (barrier to entry), transmission
constraints which may isolate consumers from some
generators, and transmission losses which may discourage
consumers from purchasing from distant suppliers. In the
oligopoly markets, the MP exists and the players can
exercise it to maximise their own prots. In an evolving
marketplace, there is a need to monitor behaviours of
market participants in order to detect their attempts to take
unfair advantages.
Market power (MP) [1] is the ability of a rm to raise its
price signicantly above the competitive price level and to
maintain this high protable price for a considerable
period. This ability is usually linked to the size of the
companies with respect to the whole market, which is
known as market concentration [2]. The Herndahl
Hirschman index [3], the four-rm and eight-rm
concentration ratio and entropy coefcient [2] are indices
for measuring the concentration of the market. Although
the concentration indices are widely used in practice, it is
too rough to detect the exercise of the MP. In [4], the
authors discussed the weaknesses of concentration measures
and proposed an alternative method based on market
simulations of the strategic behaviour of rms in the market.
The manifestation of MP abuse is usually associated with a
higher price above cost, which can be measured by the Lerner
index [5] and the pricemarginal cost index [6]. There can
also be production inefciencies and a redistribution of
income from consumers to suppliers. Other indices, such as
the must-run ratio [7], the must-run share, the nodal
must-run share [8], the relative concentration, the relative
capacity [9] and the demand/supply ratio [5], are given in
the literature to analyse the MP in electricity markets.
However, MP can also appear as a consequence of a
number of factors such as topology, congestion, low
elasticity of the demand, typical contractual arrangements
and the process for establishing prices. Many models have
been developed to analyse MP in electricity markets [10,
11]. Generally, empirical models based on the actual
IET Gener. Transm. Distrib., 2010, Vol. 4, Iss. 2, pp. 244256 245
doi: 10.1049/iet-gtd.2009.0018 & The Institution of Engineering and Technology 2010
www.ietdl.org

market outcome (ex post) [10, 12], looking for the actual
exercise of MP, or simulation models (ex ante) [1315],
looking for potential for MP, are used in the MP analysis.
Twomey et al. [16] surveyed the denitions, strategies and
methods of mitigating MP from structural and behavioural
indices to various simulation approaches. They also
reviewed the market monitoring and analysis in practice.
In [17], the author discussed the sources of MP in
generation markets, methods of mitigation in the United
States and the requirement for optimal MP mitigation
design. Based on the single-rm model [14], formulated as
a mathematical program with equilibrium constraints with
a parameter-dependent spatial price equilibrium problem as
the inner problem, a strategic gaming model for analysing
the MP is presented. The bidding strategy for the player is
based on manipulating the intercept rather than the slope
of the bidding curve. Borenstein [18] tried to clarify the
meaning of MP and showed how it can be distinguished
from competitive pricing in markets with signicant
short-run supply constraints. Twomey and Neuhoff [19]
discussed the benets from MP in a mixture marketplace
of conventional and intermittent generators. The benets
for intermittent generation are always less than those for
the conventional generation, and although forward
contracts or option contracts reduce the level of MP, the
bias against intermittent generators persists. In [20], the
factors that allow the exercise of MP in electricity markets
and the issues relevant to designing and implementing
an effective market monitoring function are identied.
However in [21], the methodology based on the use of
relative hedging position ratios is proposed to be used to
screen and discriminate nancial transmission rights with
the MP of some price-marker participants. In [22], the
ability of the process modelling approach to study the
interaction of markets for power, transmission and tradable
emission in the presence of MP is illustrated. In [23], the
typical market gaming strategies and the ways to mitigate
the strategies are discussed.
Transmission constraints usually create MP opportunities
for the market players, especially those who locate in the
load pocket and who can withhold the capacity and induce
congestion to create an uncompetitive situation for residual
demand. In [24], the authors provided a feasibility index to
identify pivotal supplies and competitive path and apply
it to the California independent system operator (ISO)
network. In [25, 26], the ability of market participants
to make strategic use of the transmission network to
deliberately induce congestion to increase their own MP is
studied though maximising the simultaneous interchange
capability, which is a measure of the amount of power that
can be imported into a particular load pocket. Awad et al.
[27] summarised an application to a possible transmission
expansion of Path 26 in California and showed how
a substantial portion of the benets of transmission
reinforcements can derive from their mitigation of MP.
Neuhoff et al. [15] compared the differences in the results
of four various Cournot model approaches or conjectured
the supply function (SF) to relate those differences to the
assumptions made. Some of the approaches considered
the transmission impacts on the equilibria such as the
transmission reaction to generation, transmission contracts.
In this paper, we propose a method based on the SF in
which the producers bid the slope of the SF to simulate the
strategic bidding behaviour of producers under the network
constraints with a DC power ow model. Different
situations will be considered in order to analyse the different
impacts on producer surplus and average weighted prices in
network constrained electricity markets: the perfect
competition without network constraints, the perfect
competition with network constraints, the oligopoly
condition with network constraints in which the line ow
limit is unknown to producers when they bid strategically,
and the oligopoly condition with network constraints in
which the line ow limit is known to producers when they
bid strategically. MP from the capacity concentration and
MP from congestion are obtained by comparing the prots
of producers and the average weighted price under these cases.
The paper is organised as following: in Section 3, the
strategic bidding model is proposed, while in Section 4, the
method to assess the congestion and MP is presented. In
Section 5, the methods proposed are applied to the IEEE
30 bus test system and the results are discussed. In Section
6, some conclusions are drawn.
2 Market model under network
constraints
We consider a market based on a pool model, in which the ISO
maximises the system surplus (Social surplus may be computed
on the basis of the aggregate marginal cost and benet curves.
Since in the market no player is obliged to reveal the costs, the
actual social surplus may not be computed and, instead of it, a
system surplus may be dened on the basis of the offers and
bids submitted.) according to the offers from the producers
and the bids from the consumers, taking into consideration
the transmission constraints; the producers are willing to
maximise their own producer surpluses by increasing their
offers above marginal costs. The two optimisation problems
are nested. In choosing their offers, the producers would
consider the impact on the maximisation of the system
surplus for determining their own producer surpluses. The
bidding process modelled through an iterated process in
which each producer decides its optimal bid in terms of the
SF with the best slope in turn, till equilibrium is reached; at
the equilibrium, the metrics for assessing the market
performances are computed.
2.1 Market model
In our model, all the producers will bid linear SF curves to the
day-ahead market in order to maximise their own producer
surpluses, while the demand from customers is represented
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by xed linear curves. The ISO will maximise the system
surplus taking the line ow limits and the capacity limits of
producers into consideration. Hence, we consider a nested
optimisation problem: the ISO wants to maximise the
system surplus, according to the offer curves from the
producers and the given demand curves, taking network
constraints into consideration, whereas the producer aims
to maximise his/her own producer surplus considering the
output of the market.
We dene the marginal cost of producer g as
M
g
c
m
g

1
h
m
g
P
g
(1)
the SF of the producer g as
r
g
c
g

1
h
g
P
g
(2)
and the demand curve of consumers as
D
d
d
0
d
d
k
d
n
d
(3)
The optimisation problem of the ISO can be expressed as
max S
Y
d[D
d
0
d
d
k
d
D
d

1
2d
k
d
D
2
d
_ _
g[G
c
g
P
g

1
2h
g
P
2
g
_ _
(4)
s:t: h()
d[D
D
d

g[G
P
g
0 $l (5)
g
l
():F
l
F
M
l
0, l {h, k} [ Z $ m
l
(6)
g
l
(): F
l
F
M
l
0, l {h, k} [ Z $ m
l
(7)
g
max
g
():P
g
P
max
g
0 $ m
g
(8)
g
min
g
():0 P
g
0 (9)
In (6) and (7), the line ows can be expressed with a DC
power ow model as
F
l
b
l
i[N
i=n
a
hi
g[G
i
P
g

d[D
i
D
d
_
_
_
_
_
_
i[N
i=n
a
ki
g[G
i
P
g

d[D
i
D
d
_
_
_
_
_
_
(10)
For the sake of simplicity, we do not consider the power
limits from the demand side.
The objective function of the optimisation problem is
concave and its constraints are linear; hence, the
KarushKuhnTucker optimality conditions can provide
the global optimum. We solve the problem analytically and
nd the expressions of P
g
, D
d
, l, m
l
, m
l
2
, m
g
and, at the
same time, the nodal price l
i
(Appendix). It is noticeable
that all of them are linear functions with respect to c
g
. The
minimum power constraint (9) cannot be binding since the
producers bid to maximise their producer surpluses and
hence can be ignored.
The objective of producer g is to maximise his/her
producer surplus (Appendix)
max S
G
g
where
S
G
g

1
2
P
max
g
(l
i
m
g
c
m
g
) (l
i
m
g
) c
m
g

P
max
g
h
m
g
_ _ _ _ _ _
,
g [P>G
i
S
G
g

1
2
P
g
(l
i
c
m
g
) l
i
c
m
g

P
g
h
m
g
_ _ _ _ _ _
, g [P>G
i
_
_
(11)
The search for market equilibrium is undertaken by
considering one player upon a turn who chooses the SF with
slope bidding which maximises his/her surplus, taking the
bids of the competitors as given. The iteration process keeps
going on till no player is willing to change his/her SF and,
hence, the equilibrium is reached. In the real marketplace,
some producers may own more than one unit or game in the
market in collusion with other players. These situations are
beyond the scope of this paper. For focusing on the
methodology of choosing the SF for each unit, we assume
that each player owns only one unit and no collusions in the
game.
2.2 Strategic behaviour of producers
The decision variables that each player g can choose in order
to maximise his/her producer surplus are c
g
and h
g
and they
determine the optimal SF for each producer [28]. The
necessary condition of the supply function equilibrium
(SFE) for a producer is that each producer needs to change
the slope of the SF, keeping the intercept xed to the value
that corresponds to the marginal cost value (c
g
c
g
m
) [29, 30].
However, from an analytical point of view, it is simpler
to change the intercept c
g
, keeping the slope xed [31]; the
expressions of P
g
, D
d
, l, m
l
, m
l
2
, m
g
and l
i
are linear
functions of c
g
and the objective function (11) is quadratic
(or linear) w.r.t. c
g
. Nevertheless, the choice of c
g
will affect
the congestion states of the network and consequently in
turn will affect the value of the objective function (11).
The constraints in the rst optimisation problem can be
transferred to the second optimisation problem resorting to
the analytic expressions of the market results (see
Appendix), which only contain variable c
g
of the active
player. The market outcomes such as line ows, capacity
limitations and so on can be used to distinguish the
boundary of c
g
in the following equations (13) (16). The
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optimisation problem for each producer can hence be
reformulated as
max S
G
g
(12)
s:t: c
1
l
c
g
c
2
l
, l [ Z (13)
or c
2
l
c
g
, l [ Z (14)
or c
g
c
1
l
, l [ Z (15)
c
1
g
c
g
c
2
g
(16)
c
m
g
c
g
(17)
The constraints onthe line owlimits (6) and(7) are transferred
to (13), (14) or (15) that represent, respectively, the three
possible states of a line l: un-congested, congested in one
direction (positive) or congested in the other direction
(negative). As mentioned in Section 2.1, each player, upon a
turn, chooses the SF with slope bidding in order to maximise
his/her surplus, taking the bids of the competitors as given.
Then the output of him/her is determined by the players SF
along with the demand curve and hence determines the
power ow on the line. The player needs to consider (13)
(15), respectively, so as to calculate the maximum prots and
choose the corresponding SF as the bid. Constraints (8) and
(9) on the generator capacity limits are transferred to (16),
assuring that the active generator is within its capacity limits
since it would not be protable to be up-bounded
(Appendix). It is assured by (17) that c
g
will not be lower than
the value corresponding to the marginal cost curve. Since all
the constraints (5)(9) are linear functions of c
g
, the ranged
value of c
g
in the optimisation problem of each producer can
be determined easily and fast.
The objective function (11) is not a quadratic function of h
g
and its convexity cannot be proved easily, while the constraints
of (5) (9) are non-linear with respect to h
g
. For these reasons,
the solution of the optimisation problem assuming h
g
as a
decision variable is much more complicated than assuming
c
g
and cannot take the advantage of the analytical expression
that we can use in the second case.
To take the analytical advantage of intercept bidding
and quadratic (linear) optimisation for each supplier over
the non-linear non-quadratic optimisation of the reciprocal
while assuring the SFE by bidding the slope, keeping
intercept as the marginal cost curve, we propose an
approach in which we exploit a slope bidding strategy
resorting to an equivalent intercept bidding strategy to
obtain the SF and prove their equivalence.
We nd the SFE by cooperatively and iteratively changing
intercept c
g
. At each iteration, the active producer will change
his/her intercept c
g
to maximise his/her producer surplus at
each move and nd the optimisation point; then he/she
will nd his/her SF by connecting the two points: the
intercept of his/her marginal cost and the optimisation
point. The process is shown in Fig. 1.
The method is exactly the same as bidding slopes, because at
each iteration, no matter how the active player bids the slope or
the intercept, the optimisation point will be the same since it is
the point that maximises his/her prot, taking the bidding
curves of his/her rivals as given. Meanwhile, the solution
of the active producer also determines the optimal market
outcomes at the iteration. When we change the slope
according to the optimisation point of the bidding intercept
and the intercept of the marginal cost of the active player,
the slope of the new bidding curve is just the best slope that
the producer wants to choose when he/she bids a slope to
maximise his/her surplus since the new curve goes through
his/her maximisation point. In this way, we can easily nd
the SF by bidding the best slope with the help of the
changing intercept.
The game starts using all the marginal costs as SFs. At
each iteration, a player in turn will maximise his/her
surplus by taking the last offers of the competitors as given,
letting the slope of his/her offer curve to be xed to the
slope of his/her SF in the last iteration, and choosing the
best intercept c
g
to nd the intersection point that can
let his/her surplus be maximised. Then he/she determines
his/her SF at the iteration by connecting the intercept of
his/her marginal cost and the optimisation point.
Let us suppose that the SF of the player g at the beginning
of the q iteration during the game will be
r
g
c
(q)
g

1
h
(q1)
g
P
g
(18)
After optimisation, the player will change his/her SF as
r
g
c
m
g

1
h
(q)
g
P
g
(19)
Figure 1 qth iteration for player g during the bidding
process
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h
(q)
g

P
(q)
g
r
(q)
g
c
m
g
(20)
The owchart of the game is depicted in Fig. 2.
A Nash equilibrium is reached when none of the players
can do any additional move to increase his/her surplus if
the others do not change their moves. The SFs under the
Nash equilibrium are the only SFEs for producers.
The existence of a Nash equilibrium is assumed and
veried ex post according to the approach widely used in
the literature [3234]. In the extensive set of simulations
that we have undertaken, the Nash equilibrium was always
found, no matter which line is the constrained line and
which one is its ow limit. There also exists the possibility
of nding multi-equilibria with sequential game under
imperfect and incomplete information. In our model, the
game is of perfect and complete information with a xed
sequence of active players; besides, the optimisation
problem for each player is quadratic or linear. All of these
lead to the only equilibrium, if it exists. This statement is
also supported by the fact that in the extensive simulations,
only one equilibrium can be found.
3 Indices for MP assessment
As we already mentioned, MP [1] is the ability of a rm
to raise its price signicantly above the competitive price
and to maintain it for a considerable period. The MP is
reected not only by the price but also by the reduction in
the market efciency (social surplus) and by a redistribution
of welfare from consumers to suppliers.
The specicity of the electricity market with respect to
other commodity markets is related to the network that
poses strict physical and operational constraints. Those
constraints may affect the market performances regardless
of the different bidding attitudes of the market players.
Even without any bidding strategy, that is if all the market
players bid their marginal cost, the surplus allocation and
prices are affected by the network constraints, even if we
cannot speak about MP in this case. If we bring in
the strategic behaviour of the producers, the network
constraints may affect the market performances and provide
additional opportunities to the producers to exert MP. Two
different bidding contexts may be considered. In the rst
case, the producers behave strategically without considering
or even without knowing the network structure and
constraints; hence, the MP is due to the superposition of
an unconstrained bidding, because of, for example, the
concentration on a constrained network [unconstrained
bidding market power (UBMP)]. In the second case, the
producers know the network structure and constraints and
can exploit the constraints for a strategic constrained
bidding in order to maximise their surpluses [constrained
bidding market power (CBMP)].
We consider a set of different contexts as the reference
cases for MP assessment:
S0: Perfect competition without network constraints. It is an
ideal case, taken as a benchmark for dening MP indices.
S1: Pure network constraints effects. The producers do not
act strategically (i.e. bid at marginal costs), the MP is zero
and there are only the impacts of congestion on the market
outcomes.
S2: Concentration effects under network constraints. In this
case, the producers suppose there is a network constraint, but
they do not have the information; hence, they act just as
they would in a concentrated market. Thus, congestion and
UBMP affect the market outcomes together.
S3: Strategic effect of the network constraints. In this case, the
producers take advantage, at the same time, of the concentration
of the market and of the network constraints. Congestion,
UBMP and CBMP affect the market outcomes together.
The MP arises only in cases S2 and S3. In S2, we can
measure the traditional MP because of concentration while
in S3, the network constraint effects on the MP arising are
also considered.
Comparing S1 with S0, we obtain the impact of the
pure network constraints; comparing S2 with S1, we obtain
the impact of the MP from concentration (UBMP); and
comparing S3 with S2, we obtain additional market power
from congestion (CBMP). The total impact of the MP is
provided by comparing S3 with S1, and the total impact of
the three factors is obtained when we compare S3 with S0.
Figure 2 Strategic bidding model
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The individual producer surplus and the average price are
the objective market outcomes used for assessing the three
factors: the congestion effect, the UBMP and the CBMP.
Suppose S
G
g
(S0) represents the producer surplus
of producer g in case S0, and the same can be supposed for
S
G
g
(S1), S
G
g
(S2) and S
G
g
(S3) for the other cases; the average
prices are also dened similarly as l(S0), l(S1), l(S2) and
l(S3) in different cases.
The indices to reect the impact of congestion on the
producer surplus S
G
g
and the average weighted price l are
dened as
N
g

S
G
g
(S1) S
G
g
(S0)
S
G
g
(S0)
(21)
N
l

l(S1) l(S0)
l(S0)
(22)
The indices to reect the impact of the UBMP on the
producer surplus S
G
g
dened as
K
a
g

S
G
g
(S2) S
G
g
(S1)
S
G
g
(S0)
(23)
K
a
l

l(S2) l(S1)
l(S0)
(24)
The indices to reect the impacts of the CBMP on the
producer surplus S
G
g
dened as
K
b
g

S
G
g
(S3) S
G
g
(S2)
S
G
g
(S0)
(25)
K
b
l

l(S3) l(S2)
l(S0)
(26)
and the total effects of MP are measured by
K
g
K
a
g
K
b
g

S
G
g
(S3) S
G
g
(S1)
S
G
g
(S0)
(27)
K
l
K
a
l
K
b
l

l(S3) l(S1)
l(S0)
(28)
The global impact of the three different effects we considered
can be assessed by
T
g
N
g
K
g

S
G
g
(S3) S
G
g
(S0)
S
G
g
(S0)
(29)
T
l
N
l
K
l

l(S3) l(S0)
l(S0)
(30)
4 Test case
In this section, we will illustrate the approach proposed for
the ex-ante MP analysis of a network constrained electricity
market on a standard IEEE 30 bus system (Appendix).
Line 1, from bus 1 to bus 2; Line 6, from bus 2 to bus 6;
and Line 10, from bus 6 to bus 8, will be considered as the
lines with line ow limits. These three lines have different
conditions when the line ow limit on them is changing
according to the line conditions [7] dened as
Congested condition: the Lagrangian multiplier m
l
related to
the line ow limit constraints is not equal to zero.
Transition condition: m
l
equals to zero, in which the strategic

bidding of the producers causes a power ow on the lines
exactly equal to its line ow limit when the players do their
bidding, considering the system to be unconstrained.
Un-congested condition: m
l
equals to zero but the line ow

limit cannot be exploited by the producers for acting
strategically since the line ow limit is large enough.
Figs. 311 show Lagrange multiplier m
l
and different
indices with the change of the line ow limit of the three
lines.
From Figs. 3, 6 and 9, we can see the difference of line
conditions for different lines. For Line 1, there is no
congested condition and the line is under transition
condition at the very beginning because m
1
in S3 reaches
zero at the very beginning. When the line ow limit is
greater than 0.4, the un-congested condition begins, which
can also be reected by the indices in Figs. 4 and 5. For
Line 6, when the line ow limit is from 0 to 0.13, the line
is under the congested condition because m
6
in S1, S2 and
S3 are not zero. When the line ow limit is from 0.13 to
0.35, it is under the transition condition because although
m
6
in S3 is equal to zero, but m

6
in S1 is not zero. This is

because the producers bid strategically making the line look
un-congested and the line will be congested denitely
Figure 3 Lagrange multiplier m
1
with the line ow limit of

Line 1
www.ietdl.org

without the strategic bidding of producers. When the line
ow limit is greater than 0.35, the line is under the un-
congested condition and all the indices in Figs. 7 and 8 are
constant. For Line 10, the line is under the congested
condition when the line ow limit is from 0 to 0.4 (Fig. 9);
however, there is no transition condition and when the line
ow limit is greater than 0.4, it is under the un-congested
condition because m
10
in S1, S2 and S3 reach zero

synchronously when the line ow limit is 0.4; this can also
be reected by indices (Figs. 10 and 11). In addition, we
can see that the difference of m
l
in S2 and in S1 is very
small for all the three lines and this is because the UBMP
affects the line conditions not so much compared with
CBMP.
Figure 5 Indices of averaged weighted price with the line
ow limit of Line 1
6

Line 6
Figure 4 Indices for producer (1, 2) surplus with the line
ow limit of Line 1
Figure 7 Indices of producer (1, 22) surplus with the line
ow limit of Line 6
Figure 8 Indices of the average weighted price with the line
ow limit of Line 6
10

Line 10
www.ietdl.org

In this paper, we only list the indices for two typical
producers, and the indices of other producers are similar to
one of the two. From the gures, we can see that
congestion (N
g
), UBMP (K
g
a
) and CBMP (K
g
b
) affect each
producer differently when different lines are considered as
objective lines.
From Figs. 4, 7 and 10, we can see that generally speaking,
the effects of congestion, UBMP and CBMP decrease with
the increase of the line ow limit, although to some
producers, the impacts of MP increase with the line ow
limit at the beginning, and then reach a maximum value,
after which they begin decreasing (K
1
a
, K
1
b
in Fig. 4 and K
1
b
in Fig. 7). Some producers benet from congestion whereas
others lose their prots because of it. To some producers,
the impacts of the CBMP are such that they lose prots,
such as K
2
b
in Fig. 4 and K
22
b
in Fig. 7 but the producers
always can obtain more prots because of the UBMP (K
g
a
is
positive) and the total MP index K
g
is always positive.
As concerns the price, from Figs. 5, 8 and 11, we can see
that the UBMP affects the average weighted price very less
and K
l
a
is always very small. Congestion is always the main
aspect (N
l
) that affects the average weighted price.
From these gures, we can see that when the line
ow limit is big enough to let the line under the un-
congested condition, the index of congestion (N
g
and N
l
)
and the index of the CBMP (K
g
b
and K
l
b
) will be zero
so that K
g
and T
g
are equal to K
g
a
, and K
l
and T
l
are equal
to K
l
a
.
5 Conclusions
The MP can distort the market efciency and threaten the
prots of the market players who have no MP. The MP
analysis needs a proper model which is able to capture
the strategic behaviour of the producers under network
constraints; the market outcomes under different situations
with/without strategic bidding and with/without network
consideration can be considered and used to devise indices
in order to assess the level of MP in a given market
and operated on a given network structure. The model
proposed in this paper seems to be able to capture the
specicity of the network constrained electricity market in
providing opportunities to the players for MP exercise.
6 References
[1] BAUMOL W., BLINDER A., SCARTH W.: Economics principles
and policy (Harcourt Brace Jovanovich, Orlando, FL,
1991), p. 747
[2] Alvarado F.: Market power: a dynamic denition.
http://www.pserc.wisc.edu/ecow/get/publicatio/1998
public/paper1.pdf
[3] TIROLE J.: The theory of industrial organization (MIT,
Cambridge, MA, 1999)
[4] BORENSTEIN S., BUSHNELL J., KNITTEL C.: Market power in
electricity markets: beyond concentration measures, PWP-
059r, Univ. Calif. Energy Inst, Berkeley, CA, 1999
[5] VISUDHIPHAN P., ILIC M.: Dependence of generation
market power on the demand/supply ratio: analysis and
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[8] WANG P., XIAO Y., DING Y.: Nodal market power assessment
in electricity markets, IEEE Trans. Power Syst., 2004, 19, (3),
pp. 13731379
Figure 10 Indices of producer (1, 23) surplus with the line
ow limit of Line 10
Figure 11 Indices of the average weighted price with the
line ow limit of Line 10
www.ietdl.org

[9] NICOLAISEN J., PETROV V., TESFASION L.: Market power and
efciency in a computational electricity market with
discriminatory double-auction pricing. ISU Economic
Report, No. 52, 27 August 2000; revised 24 August, 2001
[10] CHRISTIE R., WOLLENBERG R., WANGENSTEEN I.: Transmission
management in the deregulated environment, Proc. IEEE,
2000, 88, (2), pp. 170195
[11] BORENSTEIN S., BUSHENELL J., WOLAK F.: Diagnosing market
power in Californias deregulated wholesale electricity
market. PWP-064, Univ. Calif. Energy Inst., Berkeley, CA,
2000
[12] BORENSTEIN S., BUSHNELL J.: An empirical analysis of the
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[13] HOBBS B., HELMAN U., PANG J.: Equilibrium market
power modeling for large scale power systems. Power
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[14] HOBBS B., METZLER C., PANG J.: Strategic gaming analysis
for electric power systems: an MPEC approach, IEEE
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[15] NEUHOFF K., BARQUIN J., BOOTS M., ET AL.: Network-
constrained Cournot models of liberalized electricity
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[16] TWOMEY P., GREEN R., NEUHOFF K., NEWBERY D.: A review of
the monitoring of market power: the possible roles of
TSOs in monitoring for market power issues in congested
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Environmental Policy Research, UK, 2005
[17] BALDICK R., HELMAN U., HOBBS B., ONEILL R.: Design of
efcient generation markets, Proc. IEEE, 2005, 93, (11),
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[18] BORENSTEIN S.: Understanding competitive pricing
and market power in wholesale electricity markets.
CPC99-08, Univ. Berkeley, Univ. Calif. Energy Inst., NBER,
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[19] TWOMEY P., NEUHOFF K.: Market power and technological
bias: the case of electricity generation. CWPE 0532, Univ.
Cambridge, CB, UK, 2005
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of exacerbated market power due to nancial
transmission rights, IEEE Trans. Power Syst., 2005, 20, (1),
pp. 213222
[22] CHEN Y., HOBBS B.: An oligopolistic power market model
with tradable NOx permits, IEEE Trans. Power Syst., 2005,
20, (1), pp. 119129
[23] LUSAN D., YU Z., SPARROW F.: Market gaming and
market power mitigation in deregulated electricity markets.
Power Engineering Society 1999 Winter Meeting, 1999,
pp. 839843
[24] RAHI MI F. , MI NGXI A Z. , HOBBS B.: Competitive
transmission path assessment for local market power
mitigation. IEEE Power Engineering Society Meeting,
2428 June 2007, pp. 18
[25] OVERBYE T., PATTEN K.: Assessment of strategic market
power in power systems. Proc. of IEEE Power Engineering
Society 1999 Winter Meeting, 1999, pp. 297302
[26] OVERBYE T., WEBER J., PATTERN K.: Analysis and visualization
of market power in electric power systems. Proc. of 13th
Power Systems Computation Conf. (PSCC), June 1999
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transmission economic assessment methodology (TEAM):
principles and application to Path 26. Power Engineering
Society General Meeting, 2006
[28] BALDICK R., HOGAN R.: Capacity constrained supply
function equilibrium models of electricity markets:
stability, non-decreasing constraints, and function space
iterations. PWP-089, University of California Energy
Institute, Berkeley, CA, 2001
[29] BALDICK R., KAHN G.: Linear supply function equilibrium:
generalizations, application and limitations. PWP-078,
University of California Energy Institute, Berkeley, CA, 2000),
[30] XU R., YU Y.: Transmission constrained linear supply
function equilibrium in power markets: method and
example. Proc. Int. Conf. on Power System Technology,
2002, pp. 13491354
[31] BOMPARD E., LU E., NAPOLI R.: Network constraints impacts
on the competitive electricity markets under supply side
strategic bidding, IEEE Trans. Power Syst., 2006, 21, (4),
pp. 161171
[32] KLEMPERE P., MEYER M.: Supply function equilibrium in
oligopoly under uncertainty, Econometrica, 1989, 57, (6),
pp. 1243127
[33] GREEN R., NEWBERY D.: Competition in the British
Electricity spot market, J. Political Econ., 1992, 100, (5),
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electric power systems: an MPEC approach, IEEE Trans.
Power Syst., 2000, 15, (2), pp. 638645
www.ietdl.org

7 Appendix
7.1 Formulations for dispatch problems
Suppose that in the linear model, the producers will bid linear
SF, that is
r
g
c
g

1
h
g
P
g
(31)
and the demand curve of consumers are also linear as
D
d
d
0
d
d
k
d
n
d
(32)
To solve the optimisation problem from (4) to (10), let us
assume that G generators and Z lines can be constrained.
For the sake of simplicity, we suppose that all the
congested lines are congested in their positive directions,
that is, to each congested line m
l
=0 while m
l
2
0, but
the result is general. Hence, the Lagrange function is
L() S
Y
lh()
l [Z
m
l
g
l
()
g[P
m
g
g
max
g
()
m
l
0, m
g
0
(33)
Suppose l {h, k} [ Z, m {r, o} [ Z. According to
KarushKuhnTucker optimality conditions, we obtain
P
g
, l, m
l
, m
g
, as (see (34))
l
i
l
l [Z
(m
l
b
l
(a
hi
a
ki
)) (35)
P
g
h
g
l

l [Z
(m
l
b
l
(a
hi
a
ki
)) c
g
_ _
, g [(P>G
i
)
P
g
P
max
g
, g [(P>G
i
)
_
_
(36)
D
d
d
0
d
d
k
d
l
l [Z
(m
l
b
l
(a
hi
a
ki
))
_ _
, d [D
i
(37)
m
l
can be obtained from the linear equation set

M
11
M
12
M
1Z
M
21
M
22
M
2Z

M
Z1
M
Z2
M
ZZ
_
_
_
_
_
_
m
1
b
1
m
2
b
2

m
Z
b
Z
_
_
_
_
_
R
1
R
2

R
Z
_
_
_
_
_
_
(38)
(see (39) and (41))
7.2 Producers do not want to let their
generation capacities bounded when
they change the intercept of their
SFs to maximise their prots
Fig. 12 depicts the supplier surplus, the shadow area, which is
decided by the clearing price and the marginal cost function.
To nd the intersection point, without losing generality, we
assume that the supplier chooses the SF of the bidding
intercept while keeping the reciprocal as the marginal cost
l
l [Z
m
l
b
l
i[N
i=n
d[D
i
d
k
d

g[(P>G
i
)
h
g
_ _
(a
hi
a
ki
)
_ _

g[
P
h
g
c
g

g[P
P
max
g

d[D
d
0
d
_ _
d[D
d
k
d

g[P
h
g
(34)
M
lm
M
ml

i[N
i=n
(a
hi
a
ki
)(a
ri
a
oi
)
d[D
i
d
k
d

g[(P>G
i
)
h
g
_
_
_
_
_
_
_
_
i[N
i=n
(a
hi
a
ki
)

d[D
i
d
k
d

g[(P>G
i
)
h
g
_ _ _ _ _ _

i[N
i=n
(a
ri
a
oi
)

d[D
i
d
k
d

g[(P>G
i
)
h
g
_
_
_
_
_
_
_
_
_
_
_
_
_
_
d[D
d
k
d

g[P
h
g
(39)
R
l

F
M
l
b
l
i[N
i=n
(a
hi
a
ki
)
g[(P>G
i
)
h
g
c
g

g[(P>G
i
)
(P
max
g
)
d[D
i
d
0
d
_
_
_
_
_
_
_
_
g[P
c
g
h
g

g[P
(P
max
g
)
d[D
d
0
d
_ _

i[N
i=n
(a
hi
a
ki
)

d[D
i
d
k
d

g[(P>G
i
)
h
g
_ _ _ _ _ _
d[D
d
k
d

g[P
h
g
(40)
m
g
c
g

P
max
g
h
g
l
l [Z
(m
l
b
l
(a
hi
a
ki
)) 0, g [ G
i
(41)
www.ietdl.org

function. Actually, the SF of the bidding reciprocal will
obtain the same results for intersecting the demand curve at
the same intersection point.
The payoff of a constrained generator is
S
G
g

1
2
P
g
((l
i
c
m
g
) (c
g
c
m
g
)) (42)
Figure 12 SF and supplier surplus
Table 1 Information about the offer and load for IEEE-30 test system
Bus no. Generator Load Bus no. Generator Load
c
g
m
h
g
m
P
g
max
d
0
d
d
d
k
c
g
m
h
g
m
P
g
max
D
0
d
d
d
k
1 0.4110 1.2165 0.8 17 0.1800 0.0230
2 0.3596 1.3903 0.8 0.4340 0.0574 18 0.0640 0.0081
3 0.0480 0.0063 19 0.1900 0.0239
4 0.1520 0.0197 20 0.0440 0.0056
7 0.4560 0.0586 21 0.3500 0.0449
8 0.6000 0.0771 22 0.2055 0.3893 0.5
10 0.1160 0.0149 23 0.6166 0.9732 0.3 0.0640 0.0083
12 0.2240 0.0290 24 0.1740 0.0224
13 0.6165 0.9732 0.4 26 0.0700 0.0090
14 0.1240 0.0158 27 0.6679 2.9313 0.8
15 0.1640 0.0210 29 0.0480 0.0062
16 0.0700 0.0090 30 0.2120 0.0268
Table 2 Parameter of lines
i j x
ij
i j x
ij
i j x
ij
i j x
ij
1 2 0.0600 6 10 0.5600 18 19 0.1300 25 26 0.3800
1 3 0.1900 9 11 0.2100 19 20 0.0700 25 27 0.2100
2 4 0.1700 9 10 0.1100 10 20 0.2100 28 27 0.4000
3 4 0.0400 4 12 0.2600 10 17 0.0800 27 29 0.4200
2 5 0.2000 12 13 0.1400 10 21 0.0700 27 30 0.6000
2 6 0.1800 12 14 0.2600 10 22 0.1500 29 30 0.4500
4 6 0.0400 12 15 0.1300 21 22 0.0200 8 28 0.2000
5 7 0.1200 12 16 0.2000 15 23 0.2000 6 28 0.0600
6 7 0.0800 14 15 0.2000 22 24 0.1800
6 8 0.0400 16 17 0.1900 23 24 0.2700
6 9 0.2100 15 18 0.2200 24 25 0.3300
i,j are the two buses connected to the line, and x
ij
is the reactance of the line
www.ietdl.org

The derivative of (33) w.r.t. P
g
is
@L
@P
g
0 )
P
g
h
g
c
g
l
i
0 8g [

P
P
g
h
g
c
g
l
i
m
max
g
0 8g [ P
P
g
h
g
c
g
l
i
m
min
g
0 8g [ P
0
_
_
(43)
Thus, the supplier surplus can be analytically expressed as
S
G
g

1
2
P
max
g
(l
i
m
g
c
m
g
) (l
i
m
g
) c
m
g

P
max
g
h
g
_ _ _ _ _ _
,
g [P>G
i
S
G
g

1
2
P
g
(l
i
c
m
g
) l
i
c
m
g

P
g
h
g
_ _ _ _ _ _
, g [P>G
i
_
_
(44)
From (41), we obtain
S
G
g

1
2
P
max
g
c
g
P
max
g
h
g
c
m
g
_ _
(c
g
c
m
g
)
_ _
, g
^
I
G
i
(45)
c
g
l
l [Z
m
l
b
l
(a
hi
a
ki
)
P
max
g
h
g
, g [G
i
(46)
S
g
G
is a linear function of c
g
with a unit slope and will attain
its maximum when c
g
reaches its maximum value. Therefore it
will be not protable for a producer to bid in such a way so
as to let his/her generator being upper bounded (see
Fig. 12). On the other hand, we can ensure that the dispatch
of ISO happens without upper-bounded generators because of
the restriction we pose on c
g
by constraint (17) in the
optimisation problemof producer g to maximise his/her surplus.
7.3 Input data
The input data of the test case are reported in Tables 1 and 2
(per unit, S
base
100 MW).
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Published in IET Generation, Transmission & Distribution

Received on 13th January 2009

P set of active unbounded generators

Lagrange multipliers vector associated with

weighted average price,

equals to zero, in which the strategic

equals to zero but the line ow

in S3 is equal to zero, but m

in S1 is not zero. This is

with the line ow limit of

in S1, S2 and S3 reach zero

with the line ow limit of

with the line ow limit of

can be obtained from the linear equation set

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