Nash Equilibria in Electricity Markets with Fixed Prices Points

Abstract

In this paper we analyse the equilibrium structure for an electricity market in which two generators offer electricity into a pool. Each generator has a fixed set of possible prices and chooses the quantities to offer at each price. This reflects the behaviour of the Australian electricity market in which prices are set for 24-hours at a time but different quantities can be offered within each half-hour period. Generators are centrally dispatched, with cheapest offers used first. The pool price is determined as the highest priced offer dispatched, and both generators are paid this price for all the electricity they provide. We suppose that the demand for electricity is drawn from a probability distribution known to both players. We consider the structure of a Nash equilibrium for the one-shot game in which each player aims to maximise their expected profit. We discuss both the existence and the stability of a Nash equilibrium. We show that, under certain circumstances, if the equilibrium offers are sufficiently close to the generators’ marginal costs, then the equilibrium will be stable.

The work of this author was carried out while he was working with the first author in the Australian Graduate School of Management, University of New South Wales, Sydney UNSW 2052, Australia as a postdoctoral research fellow.