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A Comparison of Electricity Market Designs in Networks

Judge Business School, University of Cambridge, Cambridge, United Kingdom
Faculty of Economics, University of Cambridge, Cambridge, United Kingdom
andreas.ehrenmann{at}gmail.com
karsten.neuhoff{at}econ.cam.ac.uk

In Europe, two market designs are discussed for electricity trade and transmission. We argue that their performance in the presence of market power can be represented by two models from the literature. In contrast to examples for simple two-node networks, we show that in more complex networks a general ranking of both designs is not possible. Hence, computational models are required to evaluate the designs for realistic parameter assumptions. We extend existing formulations of both models to represent them as equilibrium problems with equilibrium constraints (EPEC) with equivalent representation of demand, fringe generation, and strategic generators. In a numerical simulation for the Northwestern European network, the integrated market design performs better. This difference illustrates the impact of small assumptions on the outcome of strategic models.

Subject classifications: regulation; noncooperative games; complementarity programming.
History: Received August 2003; revision received July 2007; accepted March 2008.