Market Power and Welfare Effects in Two-stage Electricity Models with Transmission Constraints: A Stochastic Equilibrium Approach

R. Ivanic, P.V. Preckel, and Z. Yu (USA)


Equilibrium, MCP conditions, stochastic load processes, transmission constraints and pricing.


A two-stage model with Cournot-Nash interaction among market participants in both contract and spot markets is presented. Nodal demand is assumed to be random and a Stochastic Programming technique is used to relate the contract market and the spot market. The model is formulated as a mixed complementarity problem (MCP) with a DC power flow approximation and line losses. Market power and welfare effects are measured using a simplified Indiana electric grid model. We find that stochastic demand coupled with physical constraints on the network and market power of the participants can lead to significant changes in electricity prices and changes in consumer welfare. Availability of a day-ahead contract market can improve consumers' welfare and erode producer profitability. Network physical constraints tend to magnify these effects.

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