Electricity Generation with Looped Transmission Networks: Bidding to an ISO

This paper uses a bi-level game to model markets for delivery of electrical power on looped transmission networks. It analyzes the effectiveness of an independent system operator (ISO) when generators (and, in some cases, retailers) with market power bid a single parameter of their linear supply (demand) functions to the ISO. The ISO, taking these bids at face value, maximizes welfare subject to transmission constraints. We find that equilibrium outcomes are sensitive to firms’ strategy spaces: 1. In the presence of transmission congestion and loop flows, supply function equilibria (SFE) are not bounded from above by Cournot equilibria, so Cournot outcomes may be more effcient than SFE, a difference that can be accentuated by increasing the number of rivals at a given node; 2. Allocation of transmission rights to generators can reduce effciency; and 3. Countervailing power on the part of buyers can lower effciency.