An Equilibrium Model of an Imperfect Electricity Market

Electricity generators in most deregulated markets simultaneously operate in both financial (contract) and physical (spot) markets. Decisions in each of these markets are not mutually exclusive, and in the case of imperfectly competitive scenarios generating companies can use their market power to influence spot and contract prices. A model of oligopolistic market equilibrium is presented where the relationship between physical and financial markets is based on the impact spot prices and the variance of spot prices have on contract demand. Risk averse consumers are assumed to maximise a mean-variance utility in purchasing contracts, while risk neutral generators face uncertain input costs and compete with Cournot conjectures in the physical market. Results are presented that show incentives exist for generators to amplify cost variations/uncertainties in their quantity bids, in order to extract higher contract prices out of consumers.