Repeated games in electricity spot and forward markets - An equilibrium modeling and computational framework

It has long been recognized that repeated interactions among strategic firms can lead to tacit collusion, a form of market power abuse that can cause more market inefficiencies than in a static game. Harrington et al. formulated the tacit collusion model into a nonlinear optimization problem, and Liu extended the collusion model into electricity markets with transmission constraints. This paper presents another extension of the collusion model into a marketplace consisting of the repetition of a forward and a spot market, such as two-settlement system (a day-ahead and a real-time market) in some deregulated electricity markets. This paper is to establish an optimization model to study firms´ strategies when they engage in tacit collusion in both forward and spot markets. A numerical example based on the modeling approach is presented and the results show that repetition of forward markets can help firms sustain collusion, which is contrary to the common belief that forward markets can increase market efficiency. In addition, the numerical results indicate that market power abuse is intensified when firms can take long position in forwards than just taking short positions.