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Another Step Towards Equilibrium Offers in Unit Commitment Auctions with Nonconvex Costs: Multi-Firm Oligopolies

Abstract:
There are two uniform-price-auction formats - centrally and self-committed - that are used commonly in wholesale electricity markets. Both formats are operated by an independent third-party market operator, which solicits supply offers from generators and determines how much energy they produce to serve customer demand. In centrally committed markets, generators submit complex offers that convey all of their non-convex operating costs and constraints. Conversely, generators submit simple offers in self-committed markets that specify only the price at which they are willing to supply energy. Thus, generators must internalize their non-convex costs and other operating constraints in submitting offers in a self-committed market. Centrally committed markets include also a provision that each generator is made whole on the basis of its submitted offers. No such guarantees exist in self-committed markets. This paper builds on the work of Sioshansi and Nicholson (2011) and studies the energy-cost ranking and incentive properties of the two market designs in a multi-firm oligopoly setting. We derive Nash equilibria under both market designs. We find that equilibrium offer behavior across the two market designs is qualitatively similar to the duopoly model when demand is high. However, when demand is low, cost equivalence between the two market designs breaks down. This is because inframarginal generators are able to earn positive profits in certain states of low demand in self-committed markets, whereas all generators are constrained to earn zero profits in low-demand states in the centrally-committed market design.

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Keywords: Electricity market, Market design, Unit commitment, Nash equilibrium, Non-convex cost

DOI: 10.5547/01956574.40.6.jdug

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Published in Volume 40, Number 6 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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