Abstract
In many countries and regions, deregulated electricity industries are characterized by oligopolistic ownership structures. Such industries are vulnerable to price manipulation by strategic generating companies. Particularly, a dominant firm, often a large incumbent generator, may exert market power not only in electricity markets but also in related markets such as emission permit markets. This chapter extends the models without any dominant firm in the previous chapter to elaborate on oligopolistic electricity markets subject to cap-and-trade environmental regulation. We first present the framework of the Cournot model based on the Nash equilibrium concept in game theory. A Nash–Cournot equilibrium of the electricity market can be obtained either by a mixed-complementarity problem resulting from each participant’s optimization problem or by an equivalent single quadratic program. Next, we discuss the model of Stackelberg leader–follower oligopoly in the context of electricity markets. The structure of a Stackelberg leader firm with other follower firms that behave à la Cournot is represented by a bi-level problem. It is then recast as a mathematical program with equilibrium constraints, which is further transformed into a mixed-integer quadratic program. The equilibrium outcomes of Cournot and Stackelberg oligopoly under cap-and-trade regulation are illustrated by the numerical examples of three nodes and three firms with ten generating units. We demonstrate how the exercise of market power would have an impact on the electricity price, the permit price, and overall social welfare under different oligopolistic market structures.
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Notes
- 1.
For brevity, we here ignore the forced outage rate, \(FOR_{fih}\), which is used in the previous chapter, or we assume \(FOR_{fih} = 0\).
- 2.
- 3.
- 4.
The results can be obtained by setting a sufficiently large emission cap, \(\overline{E}\), such that the total CO\(_2\) emission constraint is not binding.
- 5.
Reference [23] consider piecewise linear gross benefit functions constructed by stepwise bidding curves of consumers and also assume price-taking follower firms in the lower-level problem. As the lower level can be formulated as a linear programming problem, the MPEC in [23] can be finally transformed into an MILP. By contrast, our model assumes more general non-linear, concave gross benefit functions and the existence of strategic Cournot followers, leading to an MIQP. Thus, our formulation can be regarded as an extension of [23].
- 6.
Monopsony/oligopsony power is market power of the demand side. A monopsony/oligopsony purchaser of some good attempts to withhold its quantity demanded in order to suppress the price of the good.
- 7.
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Chen, Y., Siddiqui, A.S., Tanaka, M. (2020). Analysis of Power System Operations with a Dominant Firm and an Oligopolistic Industry. In: Analysis of Environmental Policy in the Power Sector. International Series in Operations Research & Management Science, vol 292. Springer, Cham. https://doi.org/10.1007/978-3-030-44866-0_5
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