An Ex Ante Probabilistic Study of Market Power with Emphasis on the Transmission Constraints

Abstract: After the deregulation, the electricity markets have been restructured in a way to draw an end to “natural monopoly” of the players. However, by the virtue of the especial nature of electricity market, it gives the players instincts to exercise the market power. As a result of these market power exercise, electricity market becomes inefficient. The presence of market power can change the dispatch order of generators, pressure to over-build transmission networks in order to relieve load pockets in a market. Perhaps most importantly, the exercise of market power results in power price rises and substantial wealth transfers between electricity customers and generators. For these reasons, electricity market regulators around the world tend to be interested in mechanisms for predicting marker power ex ante and detecting and controlling the exercise of market power ex post. At present, there are some indicators, used to predict the market power exercise ability of suppliers. These common ex-ante market power indicators however, mostly disregard power transfer distribution factor, generation and transmission constraints in electric systems and merging effect of the supplier. Moreover, these indicators usually concern static measurement of market power, when electrical power system reflects stochastic nature regarding load and wind generation capacity variation in any system. This master thesis suggests a probabilistic approach of a new market power indicator namely Transmission constrained-Pivotal Supplier Index (TC-PSI) to predict the probability of market power exercise for variation of loads and wind generations with considering generation and transmission constraints in a system.