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Supply function equilibrium in electricity spot markets with contracts and price caps

Supply function equilibrium in electricity spot markets with contracts and price caps
Supply function equilibrium in electricity spot markets with contracts and price caps
In electricity wholesale markets, generators often sign long term contracts with purchasers of power in order to hedge risks. In this paper, we consider a market where demand is uncertain, but can be represented as a function of price together with a random shock. Each generator offers a smooth supply function into the market and wishes to maximize his expected profit, allowing for his contract position. We investigate supply function equilibria in this setting, using a model introduced by Anderson and Philpott. We study first the existence of a unique monotonically increasing supply curve that maximizes the objective function under the constraint of limited generation capacity and a price cap, and discuss the influence of the generatorrsquos contract on the optimal supply curve. We then investigate the existence of a symmetric Nash supply function equilibrium, where we do not have to assume that the demand is a concave function of price. Finally, we identify the Nash supply function equilibrium which gives rise to the generatorsrsquo maximal expected profit.
electricity markets, supply functions, contracts, price caps, Nash equilibrium
0022-3239
257-283
Anderson, E.J.
2d462166-fa03-4704-b2f8-e011b5a6472b
Xu, Huifu
d3200e0b-ad1d-4cf7-81aa-48f07fb1f8f5
Anderson, E.J.
2d462166-fa03-4704-b2f8-e011b5a6472b
Xu, Huifu
d3200e0b-ad1d-4cf7-81aa-48f07fb1f8f5

Anderson, E.J. and Xu, Huifu (2005) Supply function equilibrium in electricity spot markets with contracts and price caps. Journal of Optimization Theory and Applications, 124 (2), 257-283. (doi:10.1007/s10957-004-0924-2).

Record type: Article

Abstract

In electricity wholesale markets, generators often sign long term contracts with purchasers of power in order to hedge risks. In this paper, we consider a market where demand is uncertain, but can be represented as a function of price together with a random shock. Each generator offers a smooth supply function into the market and wishes to maximize his expected profit, allowing for his contract position. We investigate supply function equilibria in this setting, using a model introduced by Anderson and Philpott. We study first the existence of a unique monotonically increasing supply curve that maximizes the objective function under the constraint of limited generation capacity and a price cap, and discuss the influence of the generatorrsquos contract on the optimal supply curve. We then investigate the existence of a symmetric Nash supply function equilibrium, where we do not have to assume that the demand is a concave function of price. Finally, we identify the Nash supply function equilibrium which gives rise to the generatorsrsquo maximal expected profit.

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More information

Published date: 2005
Keywords: electricity markets, supply functions, contracts, price caps, Nash equilibrium
Organisations: Operational Research

Identifiers

Local EPrints ID: 29661
URI: http://eprints.soton.ac.uk/id/eprint/29661
ISSN: 0022-3239
PURE UUID: 97fe5313-7837-4949-81d0-007d1d8c8024
ORCID for Huifu Xu: ORCID iD orcid.org/0000-0001-8307-2920

Catalogue record

Date deposited: 10 May 2006
Last modified: 26 Nov 2019 01:48

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Contributors

Author: E.J. Anderson
Author: Huifu Xu ORCID iD

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