Electricity market equilibrium of thermal and wind generating plants in emission trading environment

Purpose – The purpose of this paper is to investigate the gaming equilibrium among fossil‐fueled generation companies (GenCos), wind generation companies, the grid company and customers participating in an emission trading (ET) market and the day‐ahead electricity market. Design/methodology/approach – The complementarity method is used in this work to obtain the Nash equilibrium. By combining the Karush‐Kuhn‐Tucker (KKT) conditions of each kind of market participants with market clearing and consistency conditions, a mixed linear complementarity problem could be established. Findings – Simulation results show that: the enforcement of ET could increase the share of generation outputs of wind generation units, and decrease the emissions from fossil‐fueled generation units; the bilateral contracts between GenCos and customers could limit the ability of exercising market power by GenCos; and when the emissions allowances allocated by the government shrink, the price of emissions allowance will increase and as the result the dispatching order of fossil‐fueled generation units will change, and the shares of generation outputs from wind generation units and combined‐cycle gas turbines increase. However, it should be mentioned that because the cost of wind generation is still very high, the increase of the share from wind generation units in the electricity market should mainly rely on cost reduction rather than the enforcement of ET. Originality/value – The original contribution and the value of this study lie in developing a model framework to explore the gaming equilibrium that thermal and wind generating plants both play in the emissions trading environment and electricity market.