Electrical Power and Energy Systems 27 (2005) 480–487

www.elsevier.com/locate/ijepes

An auction game model for pool-based electricity markets

Deqiang Gana,*, Jianquan Wanga, Donald V. Bourcierb
a
College of Electrical Engineering (Yuquan Campus), Zhejiang University, Hangzhou, Zhejiang, People’s Republic of China
b
ISO New England, Inc., 1 Sullivan Road, Holyoke, MA 01040, USA
Received 19 March 2003; revised 14 April 2004; accepted 28 May 2004

Abstract

A single-period auction game model for analyzing strategic behavior in pool-based electricity markets is introduced in the paper. We study
the Nash equilibrium in a pure strategy sense of such games. First an equilibrium existence lemma is proved. Equilibrium characterization
under tight capacity constraints is provided. Then it is demonstrated that an auction game does not possess a pure strategy Nash equilibrium
under a wide range of market conditions. The paper provides a characterization of equilibrium under weak capacity constraints. We apply the
introduced results to analyze market power indices presented in our earlier work and in related reports. Applications to actual market
analysis, as well as limitations of the introduced model are provided.
q 2005 Elsevier Ltd. All rights reserved.

Keywords: Power system; Electricity market; Game theory; Optimization

1. Introduction equilibrium models [12,13], are only a few examples.

Electricity markets are emerging in many parts of the
world. The real world market models lie between two
extremes—the bilateral model and the pool-based model
[1,2]. The micro-features of both bilateral and pool models
are being continuously enhanced, debated, and studied [3].
A concern of increasing interest is the development of
analytical tools for studying electricity markets [29].
Several approaches are reported in the literature: empirical,
experimental [4–6], general competitive market [7,8], and a
game-theoretic approach.
This paper focuses on the development of a game-
theoretic model. Of particular interest is a characterization
of the pure strategy game equilibrium. We study a market
auction game for a basic trading period (say, an hour). The
unit commitment issue is not considered.
A number of game-theoretic models have been suggested
in the literature. The classic Cournot models [9,10],
Bertrand models [11], and the recent supply function
* Corresponding author. Tel.: C86 571 8795 1831; fax: C86 571 8795
2591.
E-mail addresses: dgan2000@yahoo.com (D. Gan), dgan@zju.edu.cn
(J. Wang), dbourcie@iso-ne.com (D.V. Bourcier).
0142-0615/$ - see front matter q 2005 Elsevier Ltd. All rights reserved.
doi:10.1016/j.ijepes.2005.06.001
More examples can be found in [14–18] and references cited
therein. A related problem is the optimal bidding issue in
electricity markets [19,20].
In a pool-based electricity market, a supplier aims to
maximize its profit, but the independent system operator (ISO)
always selects least expensive generators to supply power.
Therefore a power supplier faces a bi-level optimization
problem [21]. This important characteristic of an auction game
is recognized in several recent works [22–24].
The game model suggested in this paper follows the
aforementioned concept. In contrast to existing models, bid
prices, instead of generation output, are assumed to be the
strategic variable in the proposed model. We take a case-by-
case-study approach, as is often the situation in game-
theoretic studies. We also adopt a zonal transmission model,
which is widely used by utilities, including NEPOOL
[25,26]. We are able to obtain certain analytical, versus
computational, results. Notably, we characterized the
equilibria of the game under tight and weak capacity
constraints. We introduce the concept of quasi-equilibrium
for the study of market performance under some market
conditions. In a companion paper we present equilibrium
analysis results which are based on the assumption that all
generators in the market under study have identical cost
structures [33]. This assumption is not needed in the results
presented here.
 D. Gan et al. / Electrical Power and Energy Systems 27 (2005) 480–487
The related work, to the best of our knowledge, is
presented in reference [11]. Our results distinguish those of
[11] in several aspects. First, we provide equilibrium
analysis results which are computable, not just of
‘existence’ nature as those in [11]. Second, we explicitly
model the impact of capacity constraints on market behavior
and present market power indices that can be conveniently
used in applications.
2. Electricity auction game
Like most of the game models reported in the literature,
the proposed model is intended for a single-period auction
game. Unit commitment is not considered in this paper. In
this section we will first describe the auction and pricing
structure, then define the auction game.
2.1. The single-period auction in electricity markets
Let s be the bid prices of generators and P be the
power dispatch vector. The power dispatch and pricing
solution is then obtained from the following optimization
problem [1]:
Min sT ,P (1.1)
P rZ
S:T: eT ðP K LÞ Z 0;

TðP K LÞ% F; 0% P% P

(1.2)
where P
is the high operating limit vector, e is a vector
with all ones, and L is the load vector. The vector F

contains certain transmission limits. Eq. (1.2) describe the
feasible set of the dispatch problem. The above power
dispatch and pricing model is assumed to be loss-less.
In Eq. (1.2), matrix T contains the configuration data of a
transmission network that is represented by a zonal model
[3]. Each zone is subject to an import limit. For example,
suppose there are three generators in a zone, the zonal
import constraint is represented as follows:
KP1 K P2 K P3 C L% F

The variations of this zonal model, which can accommodate
common transmission constraints [25,26], are being
followed in several real world markets (e.g., Australia,
Nordic Pool). Zones do not intersect with each other but can
be nested, therefore T has a simple structure. For example, a
small zone consists of generator A, B, and C. This small
zone can be included in a larger zone, which consists of
generator A, B, C, and D. The information of flows between
two zones is not explicit in the model. In many markets
where metering is insufficient to support nodal pricing (e.g.,
New York and New England), using the above zonal trans-
mission model is the only choice for settlement purposes.
The elements of the matrix are equal to 0, 1 or K1.
481
The Lagrangian function of the above optimization
problem is as follows:
G Z sT ,P C leT ðP K LÞ C gT ½TðP K LÞ K F


C aT ðP K PÞ

K bT P (2)
where the bold Greek characters l, g, a, and b represent
Lagrangian multipliers. These Lagrangian multipliers and
the dispatch P must satisfy the so-called Kuhn-Tucker
optimality conditions.
Exactly four alternatives of the auction problem (1) can
be seen. They are: (i) the problem is unbounded; (ii) the
problem is infeasible; (iii) the problem has a unique optimal
solution; and, (iv) the problem has multiple optimal
solutions. Under very weak conditions, we will show that
the first two alternatives can be excluded from consideration
throughout this paper. We are then left with the third and
fourth alternatives.
When the auction problem (1) has a unique optimal
solution, the spot price of electricity in a zone is equal to the
marginal cost of supplying one unit of electricity to that
zone. Following the Envelope Theorem [7], the spot prices
in zones are computed by differentiating with respect to load
as follows:
vG
Z Kle K gT T (3)
vL
If the problem (1) has multiple optimal solutions, it implies
that the bid prices of some units are the same and these
generators set clearing price. Under such circumstances,
these generators are dispatched in proportion to their bid-in
quantities. This widely accepted method is important in this
paper, and therefore is presented mathematically (for
illustration, in the following equation we assume that the
bid prices of two generators are the same):
P
P

P1 Z
1
L;^ P2 Z
2
L^ (4)
P1 C P2 P 1 C P2
where L^ is the residual load that the two generators supply
(see Fig. 1).
Price
L̂
CP
Load
Quantity
Fig. 1. Residual load when two generators bid the same price (CP: Clearing
^ residual load as defined in the figure). For interpretation of the
Price; L:
references to colour in this figure legend, the reader is referred to the web
version of this article.
482 D. Gan et al. / Electrical Power and Energy Systems 27 (2005) 480–487
2.2. The equilibrium model
The following assumptions are made in this paper.
First, we assume that eT ðPK
LÞR 0 and TðPK
LÞ% F.

This ensures there are feasible solutions to the auction
problem.
Second, each unit has constant marginal cost, which is
publicly known. This assumption is only approximately
satisfied in the real world since the generator types and fuel
costs are public information. Since the purpose of the game
model is to study qualitative pricing behavior, with an
emphasis on analyzing the impact of capacity constraints,
this assumption is believed to be acceptable.
Third, all generators are subject to a price cap, s
.
Fourth, a generator is allowed to bid one quantity block
only. This assumption is not critical to the results of this
work. It is needed only for ease of explanation. If a
generator is allowed to bid two blocks with the same width,
one can obtain the same results described in the paper. This
is because the generator can be viewed as two generators
owned by the same supplier; as will become clear, the main
results of the paper accommodate the situation where a
supplier owns multiple generators.
Fifth, there are at least two suppliers, each of which owns
generators with non-zero capability.
Sixth, the marginal costs of generators are not identical.
In subsequent work, we study the same auction game
under the assumption that generator marginal costs are
identical [33].
The payoff function of the game is assumed to be the
profit of the supplier. If ck represents the costs of generators
of the k-th supplier, the profit of the k-th supplier is:
pk ðsk ; sKk Þ Z ðr K ck ÞT Pk Z ðKle K gT T K ck ÞT Pk
The problem that the k-th player faces is to choose a price
vector, sk, so as to maximize his profit, assuming that the

price vectors of the other suppliers sKk are given. Notice that
P and r are single-valued implicit functions of s. In other
words, if s is given, P and r can be determined from
Eqs. (1)–(4). Let us denote this function as P($) and r($),
respectively. Now the profit maximization problem can be
re-formulated as follows:
  
Max pk ðsk ; sKk Þ Z ½rðsk ; sKk Þ K ck T Pk ðsk ; sKk Þ
sk
S:T: ck % sk % s
k
 possesses an equilibrium.
In the above optimization problem, sKk is viewed as a
parameter. If this parameter changes, then the optimization
solution changes. Therefore the k-th supplier’s best
response, s k, is in general a multi-valued function
(correspondence, or point-to-set map) of his rival’s
strategies, sKk. Let rk($) denote this multi-valued function;
it follows that:
sk 2rk ðsKk Þ; k Z 1; 2; :::; Nsupplier
If the k-th supplier’s best response sk is a single-valued
function of his rival’s strategies sKk, then the above
relationship reduces to:
sk Z rk ðsKk Þ; k Z 1; 2; .; Nsupplier (7.2)
It is convenient to re-write (7.1) into compact matrix form as
s2r(s) or sZr(s). The intersection(s) of the graph of these
correspondences rk($), kZ1,2,.,Nsuppliers, is Nash equili-
brium [7]. In the case of rk($) being single-valued functions,
this is to say, the solution of the simultaneous Eq. (7.2) is the
Nash equilibrium of the game. In other words, the reaction
correspondence or function, r(s), possesses a fixed point.
Having constructed the auction game model, the first
question concerns whether a game possesses an equilibrium.
The following result provides a partial answer to this
question.
Lemma 1. (Existence of Equilibrium) In a two-generator
market, if the payoff functions pk(sk), kZ1,2, in Eq. (6) are
continuous in sk, then the auction game has an equilibrium.
Proof The graph of payoff function pk(sk) is illustrated in
Fig. 3. Notice that, as sk increases, pk(s) either jumps down
at a point, or is non-decreasing.
By the additional hypothesis pk(sk) being continuous, the
payoff function can only be non-decreasing. This indicates
that pk(s), kZ1,2, is quasi-concave in sk [7, page 933].
The quasi-concavity of pk(sk) and the fact that the
feasible set of (6), that is, the set fs : c% s% s
g is convex
imply that the reaction correspondence, r(s), is convex
valued [34, page 402].
Because the set fs : c% s% s
g is closed and the payoff
function pk(sk) is continuous in sk, by the Theorem of
(5) Maximum [7, page 963], the reaction correspondence, r(s),
is non-empty and upper semi-continuous.
Apparently, r(s) maps the compact, convex set fs :
c% s% s
g into itself.
All the conditions required by the Kakutani Fixed Point
Theorem [7, page 953] are satisfied, so r(s) has a fixed point.
The proof is complete. ,
As an example, suppose in a two-generator system the
condition eT ðPK
LÞZ 0 holds, this means that the
generators are all needed in order to meet the load. There
(6.1) is then no discontinuity introduced by the tie situation
illustrated in Fig. 1. As a result, the payoff functions pk(sk),
kZ1,2, in Eq. (6) are continuous in sk. Therefore, the
(6.2) conditions required by Lemma 1 are satisfied, and the game
In general, conditions of Lemma 1 are excessively
restrictive. As an example, the result does not extend to a
two-supplier multi-generator market since quasi-concavity
of pk(s) would not be guaranteed.
It is apparent that a complete study of equilibrium
existence of the introduced auction game is analytically
difficult, not to mention a complete characterization. The
(7.1) strategy of this paper is to characterize equilibrium in
 D. Gan et al. / Electrical Power and Energy Systems 27 (2005) 480–487
a case-by-case manner, as in many (perhaps most) game-
theoretic studies. Though the results of such investigation
are incomplete, the expectation is that they provide useful
insights into market performance. We will study market
behavior under two conditions: those under tight capacity
constraints, and those under weak capacity constraints.
3. Market under tight capacity constraints
In this section, we look at equilibrium of the auction
game under tight capacity constraints. When the capacity
constraint is very tight, the clearing price at equilibrium is
likely to be high because essentially all suppliers are needed
and large suppliers therefore can raise the clearing price.
Fig. 2 illustrates such a situation, where a large supplier
(owns the shaded generators) has an incentive to offer its
capacity at a price equal to the price cap.
Proposition 1 characterizes such situations. In this
proposition, we assume that transmission constraints can
be neglected. The impact of transmission constraints will be
discussed later.
Proposition 1 (equilibrium under tight capacity con-
straints) Suppose there exists a supplier A and c
R is the
marginal cost of the most expensive generator of A’s
rival(s). Consider the following bidding-dispatch
configuration:
(1) Supplier A bids at the price cap for all his generators
and the other suppliers bid marginal costs. Let the dispatch
be P 00 , the index set of A’s accepted generators be A 00 .
Suppose in configuration (1) generators of A’s rival(s)
are all dispatched at full capacity and:
X X
ð
s K cj ÞPj00 O ðc
R K cj ÞP
j (8)
j2A 00 j2A
Configuration (1) is at an equilibrium. Furthermore, the
equilibrium clearing price (CP) r Z s
.
Proof. First, notice that in configuration (1), the CP is equal
to the price cap because generators of A’s rival(s) are all
dispatched at full capacity. Therefore supplier A’s rival(s)
achieves maximum profit so he (they) has no incentive to
deviate from his strategy in (1).
Obviously, in configuration (1), A does not desire to
re-set clearing price to a point between c
R and s
. Supplier A
does not have an incentive to undercut his rival(s) either
Price
Must-run Gen Load
Load Quantity
Fig. 2. Competition under tight capacity constraints.
483
because,
P if he does so, the best he would be able to earn
is

j2A ðc
R K cj ÞPj , which is not maximum according
to Eq. (8).
The above analysis shows that neither A nor his rival(s)
has an incentive to change his strategy in (1). Thus (1) is
indeed an equilibrium. This completes the proof. ,
To extend the above result to a zonal market, first let us
posit the following properties of zonal prices.
1. The clearing price in a zone Z is higher than or equal to
that of the system. The system-clearing price is equal to
Kl, but zonal prices are equal to KleKgTT. Because
T%0, gR0, so KleKgTTRKle.
2. The clearing price in a zone Z equals the bid price of the
last accepted generator in the zone Z.
3. Zonal clearing prices are between c and s
.
Since we adopt a zonal transmission model, which
possesses the above pricing properties, it is natural to argue
that zonal prices would go up if the capacity margin in a
zone is tight, following the same logic in Proposition 1. The
only difference between this argument and that in
Proposition 1 is that, here, the net zonal load is reduced
by the zone’s import limit.
4. Quasi-equilibrium in markets with weak capacity
constraints
In this section we show that the auction game may not
possess an equilibrium but rather a weaker form of
equilibrium, termed quasi-equilibrium, exists.
To demonstrate the idea, let us consider a two-supplier
two-generator power system where each of the generators,
A and B, can individually meet the load itself. Let us assume
that cAOcB. The best strategy for supplier A would be to bid
marginal cost sAZcA. If supplier B bids sB0 Z cA , his profit
would be (the isolated point in Fig. 3):
P

pB0 Z
B
ðcA K cB ÞL
P A C PB
π (sB)
π 'B
cB cA s sB
Fig. 3. Payoff function in the 2-generator example (cA,cB: cost of suppliers
A and B, respectively; sB: bid price of supplier B; s
: price cap; pB: profit of
supplier B).
484 D. Gan et al. / Electrical Power and Energy Systems 27 (2005) 480–487
sB
A’s quasi reaction correspondence
cA
B’s reaction correspondence
45º
cA sA
Fig. 4. The point at which the correspondences of A and B across is the
quasi-equilibrium in the two-generator auction game (sA, sB: bid prices of
suppliers A and B, respectively; cA: cost of supplier A).
If supplier B bids a price sB00 ; sB00 ! sA Z cA , his profit would
be:
pB00 Z fmax ðsB00 K cB ÞL; s:t: sB00 ! sA g
The above optimization problem does not have a solution.
The profit function, pB(sB), (see Fig. 3) is not upper-semi
continuous. Note that this portion of the profit function
pB(sB) is increasing (When sBOsA, generator B is not
selected to supply, so pB(sB)Z0).
However, the problem does have a quasi-optimal
solution in the following sense:
p 00 Z ðsA K cB K 3ÞL^ Z ðcA K cB K 3ÞL;
^ 3O 0; 3/ 0
00 0
Apparently p Op , because:
 
P

p 00 K p 0 Z
A
ðcA K cB Þ K 3 LO
^ 0; as 3/ 0
PA C P B
The strategies sA and sB are depicted in Fig. 4. Note that
these two strategies intersect such that they appear to be in
an equilibrium state.
The above example suggests a new concept of
equilibrium. That is herein termed ‘quasi-equilibrium’.
Quasi-equilibrium is apparently tighter (or perhaps more
stable) than mixed strategy equilibrium. In some literature
[27, page 211–212], there is no distinction between quasi-
equilibrium and equilibrium. Many equilibrium concepts
have been reported in the literature such as strong
equilibrium and 3-equilibrium. For example, in a rather
different context reference [35] suggested an equilibrium
concept bearing the same name ‘quasi-equilibrium’.
Apparently, a Nash equilibrium is a quasi-equilibrium but
the converse is not necessarily true.
5. Market under weak capacity constraints
In subsequent text we study market performance under a
weak capacity constraint. Under such a condition, a large
supplier (see Fig. 5, the shaded generators) may not have
Price
Load Qualtity
Fig. 5. Competition under weak capacity constraints.
incentive to bid a very high price, since the non-shaded
generators alone cannot meet the load. This can happen
because a large supplier has efficient generators.
The following proposition describes quantitative con-
ditions under which no supplier has an incentive to bid high
prices.
Proposition 2 (equilibrium under weak capacity
constraints) Let c
be the marginal cost of the most
expensive generator. Suppose there exist suppliers
A1,.,Am, B1,.,Bn, mR1, nR1, mCnR2. The definition
of the suppliers is described in the following configurations:
(1) Every generator bids marginal cost. Let the dispatch be
P 0 , the accepted generators belong to A1,.,Am, the
indices of those accepted generators be A10 ; .; Am0 , and
the last accepted generator be l.
(2) Supplier Ai bids at the price cap for all his generators
and the other suppliers bid marginal costs. Let the
corresponding dispatch be P 00 i and the accepted
generators of Ai be Ai00 .
Suppose the following holds for every iZ1,2,.,m:
X X
ðcl K cj ÞPj0 O ð
s K cj ÞPj00i (9)
j2Ai0 j2Ai00
It follows then that no equilibrium exists at which r O c.


Proof. Suppose there is a equilibrium at which r O c.


Let us study the possible configurations.
(a) A generator of (say) Ai sets clearing price. Because
r O c,

Ai’s rivals would find it profitable to bid prices
lower than c.
This configuration would be at
equilibrium only if the generators of Ai’s rival are all
accepted. However, this is not acceptable to Ai because
of (9). This configuration is not at equilibrium.
(b) A generator of (say) B1 sets CP. The clearing price is
not an equilibrium CP because suppliers A1,.,Am
have incentives to undercut the CP. This configuration
is not at equilibrium.
(c) Some of the generators ask for the same price,r O c,

and set CP. To prove that this configuration is not at
equilibrium, let us consider the situation where two
generators, #1 (belongs to C) and #2 (belongs to D),
 D. Gan et al. / Electrical Power and Energy Systems 27 (2005) 480–487 485

set CP. Let L^ be the residual load (refer to Fig. 1). The then it is obvious that the conditions required by Proposition
profit of supplier C would be: 2 are met because (11) means the following:
X X
X P
ðcl K cj ÞPj0 O ð
s K cj ÞPj00i Z 0
p0 Z ðr K cj ÞP
j C ðr K c1 ÞL^
1
j2Ai0 j2Ai00
j2C;s !r
P 1 C P2
j P
One can therefore assert that the smaller j2Ai00 Pj00i is, the
The first term is the profit earned by C’s infra-marginal more likely the conditions of Proposition 2 are met thus
generators. This term could be zero. Now suppose the price the more likely the market clearing price at the equilibrium
of generator #1 is lowered to r*Kh, here h is a small is low.
positive number, then the profit of C would become: P P
The terms j2A00 Pj00 and j2Ai00 Pj00i were named as must-
X
p 00 Z ðr K h K cj ÞP
j C ðr K h K c1 Þ L^ run generation in our previous work [28]. This is depicted as
j2C;sj!r the must-run ratio (MRR):
P 00 P P
After simple manipulations, we have: j2A 00 Pj j Lj K


j;A Pj
0 1 MRR Z P
Z P

(12)
j2A Pj j2A Pj
X P

p 00 K p 0 Z Kh@L^ C P
j A C ðr K c1 ÞL^
2
Zonal must-run generation and zonal must-run generation
j2C;s !r
P1 C P2
j ratio can be defined likewise. A salient feature of these
Supplier C can always find an (possibly small) hO0, such indices is that they better reflect the price-controlling
that p 00 Kp 0 O0. This indicates that supplier C has an potential of individual suppliers. The conventional capacity
incentive to deviate from bidding r* for generator #1. The margin is less informative. In a market composed of only
same is true for supplier D. This proves that configuration relatively small suppliers, even if the capacity margin is
(c) is not at equilibrium. low, no supplier may have incentive to bid high prices; the
The above configurations that we have considered MRR would reflect that.
constitute all the possible configurations. This completes An alternative form of must-run-ratio is the Residual
the proof. , Supply Index (RSI). This market power index is frequently
used in California [31,32]. For supplier A, the definition of
RSI is as follows:
P P


j Pj K P

6. Applications RSI Z P j2A j (13)
j Lj

ISO New England was recently required by FERC to when MRRO0, or RSI!100%, supplier A has the ability to
develop ‘bright-line test’ bid mitigation rules to monitor control the market clearing price; when MRRZ0, or
and possibly mitigate pricing behavior when the capacity RSIO100%, supplier A has little ability to control clearing
margin is low [30]. The results presented in the paper price. We have also calculated must-run ratios using
were utilized to establish numerical indices that serve NEPOOL market operation data. The results reveal that
such purposes. the must-run ratio is a better index than the commonly used
Let us study two extreme cases in Propositions 1 and 2. market power index HHI (the abbreviation for Herfindahl-
Suppose that: Hirschmann Index).
X X Since the market data of NEPOOL is not publishable for
Pj00 Z P
j (10)
some reason, let us demonstrate the superiority of MRR
j2A 00 j2A
using a simple example. First notice that the HHI of a
then it is obvious that the conditions required by Proposition market is equal to the sum of square of market share in
1 are met because (10) means the following: percentage times 10,000 [27]. Therefore if the market has
X X X only a monopoly then its HHI is equal to 10,000, if the
ð
s K cj ÞPj00 Z ð
s K cj ÞP
j O ðc
R K cj ÞP
j market has two suppliers with identical market share, then
j2A 00 j2A j2A
the HHI is equal to 5000 under certain conditions. In the
P 00
One can therefore assert that the larger j2A 00 Pj is, the example, there are two identical suppliers in an electricity
more likely the conditions of Proposition 1 are met thus the market, the HHI is therefore equal to 5000, regardless of
more likely the market clearing price at the equilibrium is how tight the capacity constraint is. It is reasonable to
high. deduce that, however, this market can be rather competitive
Similarly suppose the following holds for every i, during off-peak hours and less competitive during on-peak
iZ1,2,.,m: hours. This example demonstrates that HHI fails to reveal
X 00i the impact of capacity constraints on market performance
Pj Z 0 (11) while MMR introduced in this paper serves the purpose
j2Ai00 quite well. It is worth mentioning that the empirical work
486 D. Gan et al. / Electrical Power and Energy Systems 27 (2005) 480–487
1000
900
800
700
600
500
400
300
200
100
0 theoretic approach. We are able to identify conditions under
1
11
13
15
17
19
21
23
price mrr load_divide_100
Fig. 6. Actual Zhejiang electricity market data on July 8, 2002. For
interpretation of the references to colour in this figure legend, the reader is
referred to the web version of this article.
performed in California [31,32] also observed that RSI is a
better market power index compared with HHI.
The introduced results have been recently applied
in Zhejiang Provincial Electricity Market (in People’s
Republic China) to predict short-term, mid/long-term
market prices. In this application, a correlation analysis
was performed, the result justifies that MRR, among other
factors, is the most important factor determining market
prices. Fig. 6 shows that the market prices are closely
related to MRR of the market. Two price forcasting models,
a neural network model for short-term price forecasting, and
a linear regression model for mid/long term price
forecasting, have thus been developed. Both of the models
utilize MRR as the main input variables. The details of this
study, which are provided in reference [36], can not be
presented here because of space limitation.
The cost structure of suppliers also has an impact on
market performance based on Propositions 1 and 2. A
somewhat surprising finding is that a large supplier may not
necessarily have the incentive to raise bid prices. This is
because the supplier may have very efficient generators and
would not risk losing higher profits. The results presented in
Sections 3 and 5 also assert that the higher the price cap s
is,
the more likely the suppliers would bid aggressively.
No model is without its limitations and the equilibrium
model presented herein is no exception. The described
model is a simultaneous, complete information, infinite, and
discontinuous, model. Complete characterization on equili-
brium is not provided but rather only a characterization for
two polar cases—those under tight capacity constraints and
those under weak capacity constraints. Another limitation of
the proposed model is that it is a static model, while in
reality the electricity market auction is dynamic, and
repeated. Finally, many important market features, such as
transmission rights, reserves, unit characteristics, etc., were
not considered in this work. Further insight to the
characteristics of auction games could be gained by relaxing
these limitations.
7. Conclusions
It is a common perception that capacity margin has
significant impact on market behavior. In this paper we
show that must-run-ratio, a market power index recently
developed by the authors, is a superior index compared with
capacity margin index. Another important finding is that the
degree of cost asymmetry among suppliers is an important
market index. These findings are justified using a game-
which market-clearing price at equilibrium is high or low.
We also show that an electricity market game needs not
possess a Nash equilibrium in a pure strategy sense. Under
such situations, the introduced notion of quasi-equilibrium
offers an alternative for market studies. Despite the
limitations of the suggested game model, the main results
of this work provide an analytical foundation for construct-
ing effective market power indices.
Acknowledgements
The opinions described in the paper do not necessarily
reflect those of ISO New England, Inc. The authors remain
solely responsible for errors.
References
[1] Singh H, Hao S, Papalexopoulos A. Transmission congestion
management in competitive electricity markets. IEEE Trans Power
Syst 1998;13(2):672–80.
[2] Wu FF, Varaiya P. Coordinated multilateral trades for electric power
networks: Theory and implementation. Int J Elect Power Energy Syst
1999;21(2):75–102.
[3] Gan D, Chen Q. Locational marginal pricing: New England
prospective, presentation summary for panel session flow-gate and
location based pricing approaches and their impacts, in Proceedings of
IEEE PES winter meeting, Columbus, Ohio, January 2001.
[4] Ethier R, Zimmerman R, Mount T, Schulze W, Thomas R. A Uniform
price auction with locational price adjustments for competitive
electricity markets. Int J Elect Power Energy Syst 1999;21(2).
[5] Richter CW, Sheble G. Genetic algorithm evolution of utility bidding
strategies for the competitive marketplace. IEEE Trans Power Syst
1998;13(1):256–61.
[6] Zimmerman R, Thomas R, Gan D, Murillo-Sanchez C. A Web-Based
Platform for Experimental Investigation of Electric Power Auctions,
Decision Support Systems, 24(3and4), January 1999, p. 193–205.
[7] Mas-Colell A, Whinston MD, Green JR. Microeconomic theory.
Oxford, UK: Oxford University Press; 1995.
[8] Gross G, Finlay DJ. Optimal bidding strategies in competitive
electricity markets, in Proceedings of 12th power systems compu-
tation conference, Dresden, Germany, August 1996, p. 815–23.
[9] Andersson B, Bergman L. Market structure and the price of
electricity: An Ex Ante analysis of the deregulated swedish electricity
market. Energy J 1995;16(2):97–109.
[10] Oren S. Economic inefficiency of passive transmission rights in
congested electricity systems with competitive generation. Energy J
1997;18(1):63–84.
[11] von der Fehr N-HM, Harbord D. Spot market competition in the UK
electricity industry. Econ J 1993;103:531–46.
 D. Gan et al. / Electrical Power and Energy Systems 27 (2005) 480–487
[12] Baldick R, Grant R, Kahn E. Linear Supply Function Equilibrium:
Generalizations, Applications, and Limitations, Working Paper,
University of California Energy Institute, http://www.ucei.berkeley.
edu/uceiw.
[13] Green RJ, Newbery DM. Competition in British electricity spot
market. J Political Econ 1992;100(5):929–53.
[14] Bai X, Shahidehpour SM, Ramesh VC, Yu E. Transmission
analysis by nash game method. IEEE Trans Power Syst 1997;12(3):
1046–52.
[15] Guan X, Ho Y-C, Pepyne DL. Gaming and price spikes in electric
power markets. IEEE Trans Power Syst 2001;16(3):402–8.
[16] Bialek JW. Gaming the uniform-price spot market—quantitative
analysis, submitted to IEEE Trans On Power Systems, April 26, 2001.
[17] Yu Z, Preckel PV, Nderitu G, Sparrow FT. A locational gaming model
with CO2 emission tax and limits. Int J Elect Power Energy Syst 2001;
23(6):451–7.
[18] Ilic M, Galiana F, Fink L, editors. Power systems restructuring:
Engineering and economics. Boston: Kluwer Academic Publishers;
1998.
[19] Wen F, David AK. Optimal bidding strategies and modeling of market
imperfection among competitive generators. IEEE Trans Power Syst
2001;16(1):15–21.
[20] Hao S. A study of bidding strategy in clearing price auctions. IEEE
Trans Power Syst 2000;15(3):975–80.
[21] Bard JF. Practical bilevel optimization.: Kluwer Academic Publish-
ers; 1998.
[22] Cardell JB, Hitt CC, Hogan WW. Market power and strategic
interaction in electricity networks. Recourse Energy Econ 1997;19:
109–37.
[23] Hobbs BF, Metzler C, Pang J. Strategic gaming analysis for electric
power networks: An MPEC approach. IEEE Trans Power Syst 2000;
15(2):638–45.
487
[24] Weber JD, Overbye TJ. A two-level optimization problem for analysis
of market bidding strategies, IEEE Power Engineering Society
Summer Meeting, July 1999, p 682–687.
[25] Ma X, Sun D, Cheung K. Energy and reserve dispatch in a multi-zone
electricity market. IEEE Trans Power Syst 1999;14(3):913–9.
[26] Chattopadhyay D, Gan D. Market dispatch incorporating stability
constraints. Int J Elect Power Energy Syst 2001;23(6):459–69.
[27] Tirole J. The theory of industrial organization. Cambridge, MA: The
MIT Press; 1988.
[28] Gan D, Bourcier D. Locational market power screen and congestion
management: Experience and suggestions. IEEE Trans Power Syst
2002;17(1):180–5.
[29] Kelman R, Barroso LAN, Pereira MVF. Market power assessment and
mitigation in hydrothermal systems. IEEE Trans Power Syst 2001;
16(3):354–9.
[30] NEPOOL Document, Market Rules and Procedures—Chapter 17,
November 2000, available at http://www.iso-ne.com.
[31] California ISO, Determining the Existence or Absence of Workable
Competition, July 1999, available at http://www.caiso.com.
[32] Sheffrin A. California electricity market crisis: Viewpoint of the
system operator, IEEE PES Summer Meeting, Vancouver, B.C.
Canada, July 2001.
[33] Gan D, Shen C, price A. competition model for power and reserve
market auctions. Elect Power Syst Res 2004;70(3):187–93.
[34] Zangwill WI, Garcia CB. Pathways to solutions, fixed points, and
equilibria. Englewood Cliffs, NJ: Prentice-Hall, Inc.; 1981.
[35] Podczeck K. Quasi-equilibrium and equilibrium in a large production
economy with differentiated commodities, available at http://ideas.
repec.org/p/vie/viennp/vie9811.html.
[36] Hu Z, Yu Y, Wang Z, Sun W, Gan D, Han Z. Price Prediction
Using an Integrated Approach, The International Conference on
Electric Utility Deregulation, Restructuring and Power Technologies,
Hong Kong, April 2004 (PANEL SESSION).