The Economics of Electricity Markets

16Market Power and Network Congestion

Chapter 15 explored the issues of market power in the absence of network congestion. Importantly, network congestion interacts strongly with market power. As we will see, network congestion may either enhance or reduce the potential to exercise market power. At the same time, the exercise of market power may either alleviate or exacerbate network congestion.

16.1 The Exercise of Market Power by a Single Generator in a Radial Network

Let us focus first on simple radial networks. In addition, we will focus on the case where a single generator is acting alone (rather than acting jointly with another generator at another location).

We have seen that when a generator attempts to withhold capacity in order to increase the local market price, the impact on the local market price depends on the willingness and ability of other generators in the market to increase their output in response to the withdrawal, together with the willingness and ability of loads to reduce their demand.

In Section 15.4, we saw that when other generators in the market are operating at their physical limit, they no longer have the ability to offset the withdrawal of capacity – this tends to increase the market power of the generator in question.

In exactly the same way, transmission constraints can serve to limit the ability of generators at other locations to increase their output in response to a generator exercising market power at a particular location. This tends to ...