Supply Function Equilibrium in Electricity Spot Markets with Contracts and Price Caps

E. J. Anderson and H. Xu
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E. J. Anderson: University of New South Wales
H. Xu: University of Southampton

Journal of Optimization Theory and Applications, 2005, vol. 124, issue 2, No 1, 257-283

Abstract: 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 generator’s 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 generators’ maximal expected profit.

Keywords: Electricity markets; supply functions; contracts; price caps; Nash equilibrium (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (23)

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DOI: 10.1007/s10957-004-0924-2

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