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Nonlinear inverse demand curves in electricity market modeling

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  • Wan, Yi
  • Kober, Tom
  • Densing, Martin

Abstract

In large-scale energy market models, the price–demand relationship is usually represented by a linear function. In this paper, nonlinear demand functions are fitted to electricity market bid data; in particular, exponential and polynomial (cubic) functions are estimated from EPEX day-ahead data (i.e. Central Western European market area). The corresponding game-theoretic, large-scale electricity models were successfully solved using the Extended Mathematical Programming framework after a suitable adaptation for conjectural variations. Additionally, sufficient conditions for the existence of equilibrium solutions are tested. Numerical results show that nonlinear demand curves lead to an improved modeling especially in high price (peak) load periods and to lower levels of implied market power, which can be considered to be more realistic for markets that have strong transparency measures.

Suggested Citation

  • Wan, Yi & Kober, Tom & Densing, Martin, 2022. "Nonlinear inverse demand curves in electricity market modeling," Energy Economics, Elsevier, vol. 107(C).
    • Handle: RePEc:eee:eneeco:v:107:y:2022:i:c:s0140988322000020
    DOI: 10.1016/j.eneco.2022.105809
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    Cited by:

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    2. Tavasoli, Ali & Fazli, Mehrdad & Ardjmand, Ehsan & Young, William A. & Shakeri, Heman, 2023. "Competitive pricing under local network effects," European Journal of Operational Research, Elsevier, vol. 311(2), pages 545-566.

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    More about this item

    Keywords

    Electricity market modeling; Nonlinear inverse demand curve; Market power; Extended Mathematical Programming (EMP);
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other

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