Simple Electricity Market Equilibrium Models

Competition has been introduced in electricity systems only at the end of the 1980s given the peculiarities of the sector. Specific models are also needed to depict market equilibria in electricity systems in the short and long run. In this chapter, several graphical and formal models are introduced to investigate the functioning of electricity markets. These models especially describe the functioning of the wholesale electricity markets under the assumption of workable competition. The first model addresses the short-term market equilibrium without any transmission constraints – it is also known as the “merit-order model”. The main outcome is that prices align on the variable cost of the marginal generation technology. A model with a very stylised, single transmission constraint is investigated next. The inclusion of linearised transmission constraints as developed in Chapter 5 provides a further extension to the short-term market equilibrium model. In this setting, so-called nodal prices may be derived. I.e. in case of congestions on some lines, prices differ between grid locations. The fourth model finally describes the long-term equilibrium in electricity markets including investments in generation capacities. This model is also sometimes referred to as the peak load pricing model, as prices in the time segment with peak load exceed short-run marginal cost.