Simulating equilibrium prices in oligopoly power markets

One of the main objectives of deregulation has been to achieve more efficient power systems. Exercise of market power can significantly increase prices in the power market thereby reducing the efficiency. This makes it important for regulatory bodies to survey and intervene if the market is malfunctioning. In hydropower systems this is extra difficult to reveal because the resource for the supply side is stochastic in its nature. In this paper a method for simulation of the price establishment in power systems is suggested. The characteristics of this model are discussed using the English power market as a case. The ability to transfer electrical energy is often limited due to bottlenecks in the transmission system. These can lead to a potential for local and time limited market power also in systems with a relatively low concentration in the supply side. From this it follows that the power market cannot always be treated as a single market. One possibility for extending the one area market simulator for use in power systems that use zonal pricing is suggested in the paper. The extended model is then tested on real data for the NordPool system. Based on the results from the two cases the principles are discussed and related to two practical issues. What is the use of such model? Can the method be included in existing models?