Electricity markets rank among the most complex of all marketplaces operated at present. The institutions that set the framework for power generation, transportation and retail delivery must be designed in a way to ensure that the three main goals of energy supply can be met: environmental sustainability, economic efficiency and security of supply. Simultaneously, technical reliability requirements, as well as transmission and unit commitment constraints must be taken into account. These requirements have resulted in the development of several interrelated markets, such as power exchanges, balancing power markets, and markets for emission allowances, among others. The ensemble of these interrelated markets has to be analyzed together if advice for good market design is to be derived. The analysis of markets in the electricity sector is further complicated by the presence of few dominating and vertically integrated firms. Models that assume perfect competition are inappropriate for representing this oligopoly of bidders in a realistic manner. While many theoretical approaches assume that market participants will bid competitively, and only interact once, wholesale electricity markets involve an oligopoly of bidders who trade repeatedly. This constellation encourages strategic bidding. Players seek to ameliorate their bidding strategies continually, based on their experience gained in previous trading days. Thus, realistic electricity modeling must account for strategic bidding by dominant players, learning from daily repeated interaction, and the dynamics stemming from multiple interrelated markets. In this context, the question arises which market rules or which regulatory framework is most appropriate to ensure efficient market outcomes.
KeywordsElectricity Market Electricity Sector Bidding Strategy Emission Allowance Perfect Competition
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