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Supply Function Equilibrium over a Constrained Transmission Line I: Calculating Equilibria

Author

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  • Ruddell, Keith

    (Research Institute of Industrial Economics (IFN))

Abstract

Competition between oligopolist electricity generators is inhibited by transmission constraints. I present a supply function equilibrium (SFE) model of an electricity market with a single lossless, but constrained, transmission line. The market admits equilibria in which generator withhold energy in order to induce congestion, which further increases their local market power. Under appropriate assumptions on cost and demand functions, I obtain a planar autonomous system of ordinary differential equations for the SFE. Computational methods are developed to solve the system while respecting monotonicity constraints on the supply functions. Using these methods I can calculate SFE in network markets that range from fully isolated to fully integrated. I also find network markets for which the SFE is not unique.

Suggested Citation

  • Ruddell, Keith, 2018. "Supply Function Equilibrium over a Constrained Transmission Line I: Calculating Equilibria," Working Paper Series 1208, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:1208
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    More about this item

    Keywords

    Supply function equilibrium; Electricity markets; Market power; Locational pricing of electricity;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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