The impact of uncertainty on incentives to collude in electricity markets

Market power in any market can result in higher prices than in a truly competitive market. Electricity markets pose unique problems to detection of market power due to the properties of electricity: it cannot be stored, which implies that the amount of energy supplied must always equal the amount demanded, and it must obey the laws of physics. A group of generators may exercise market power through tacit collusion, all raising prices together without communicating their intentions. Generators will use their expectations of market conditions to choose a competitive (low) bid, or a noncompetitive (high) bid. We use expected residual demand to describe market conditions, and calculate threshold levels where a generator would decide to change from low to high bid. We examine the effects of uncertainty in load and competitor behavior on collusion decisions in both uniform price and discriminatory price auctions.